Free to Choose
Knightian Uncertainty
Cass Sunstein
Harvard Working Paper, December 2023
Abstract:
In 1921, John Maynard Keynes and Frank Knight independently insisted on the importance of making a distinction between uncertainty and risk. Keynes referred to matters about which “there is no scientific basis on which to form any calculable probability whatever.” Knight claimed that “Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated.” Knightian uncertainty exists when people cannot assign probabilities to imaginable outcomes. People might know that a course of action might produce bad outcomes A, B, C, D, and E, without knowing much or anything about the probability of each. Contrary to a standard view in economics, Knightian uncertainty is real. Dogs face Knightian uncertainty; horses and elephants face it; human beings face it; in particular, human beings who make policy, or develop regulations, sometimes face it. Knightian uncertainty poses challenging and unresolved issues for decision theory and regulatory practice. It bears on many problems, potentially including those raised by artificial intelligence. It is tempting to seek to eliminate the worst-case scenario (and thus to adopt the maximin rule), but serious problems arise if eliminating the worst-case scenario would (1) impose high risks and costs, (2) eliminate large benefits or potential “miracles,” or (3) create uncertain risks.
The Impact of Commercial Real Estate Regulations on U.S. Output
Fil Babalievsky et al.
NBER Working Paper, November 2023
Abstract:
Commercial real estate accounts for roughly 20% of the U.S. fixed asset stock, and commercial land use is highly regulated. However, little is known about the quantitative impact of these regulations on economic activity or consumer welfare. This paper develops a spatial general equilibrium model of the U.S. economy that includes commercial real estate regulations and congestion effects, the latter of which provide a rationale for such regulations. The model is tailored to exploit the near-universe of CoreLogic's commercial, parcel-level, property tax records to construct a quantitative index of commercial real estate regulations for nearly every commercial property. We use the model to evaluate the positive and normative impacts of commercial land use deregulations. Moderately relaxing commercial regulations across all U.S. cities yields large allocative efficiency effects, with output gains of about 3 percent to 6 percent and welfare gains of about 3 percent to 9 percent of lifetime consumption. We also find significant positive and normative gains from deregulation with 40 percent of the labor force working remotely.
Credit for me but not for thee: The effects of the Illinois rate cap
Brandon Bolen, Gregory Elliehausen & Thomas Miller
Public Choice, December 2023, Pages 397-420
Abstract:
On March 23, 2021, Illinois imposed an all-in rate cap of 36% APR. We use credit bureau data for Illinois and its neighboring state, Missouri, a state without any legislated interest-rate cap, to estimate the effects of the Illinois rate cap on unsecured installment loans. Using difference-in-differences-in-differences estimation, we find that the interest-rate cap decreased the number of loans to subprime borrowers by 38% and increased the average loan size to subprime borrowers by 35%. Responses to a survey of small-dollar-credit borrowers in Illinois who lost credit access suggest the interest-rate cap worsened the financial well-being of many of these borrowers. Legislators motivated by genuine public interest rationales might not recognize the harmful consequences of their actions for these higher-risk borrowers with few credit alternatives. Legislators might also be motivated by the benefits of the interest-rate cap for lower-risk borrowers. The interest-rate cap increased the number of loans to prime borrowers by 16% and the average loan size to prime borrowers by 7%.
Market Power and Innovation in the Intangible Economy
Maarten De Ridder
American Economic Review, January 2024, Pages 199-251
Abstract:
This paper offers a unified explanation for the slowdown of productivity growth, the decline in business dynamism, and the rise of market power. Using a quantitative framework, I show that the rise of intangible inputs, such as software, can explain these trends. Intangibles reduce marginal costs and raise fixed costs, which gives firms with high-intangible adoption a competitive advantage, in turn deterring other firms from entering. I structurally estimate the model on French and US micro data. After initially boosting productivity, the rise of intangibles causes a decline in productivity growth, consistent with the empirical trends observed since the mid-1990s.
Does Political Partisanship Affect Housing Supply? Evidence from US Cities
Fernando Ferreira & Joseph Gyourko
NBER Working Paper, December 2023
Abstract:
We study the relationship between housing supply and political partisanship in US cities using a new database of mayoral elections combined with local housing permits since 1980. Endogeneity of which party holds the mayoral office is addressed via a regression discontinuity design that relies on closely contested races between Republicans and Democrats. We find that partisanship has no effect on the supply of single and multifamily housing despite recent increases in extreme partisanship, corroborating that US cities follow the median voter. This indicates that solutions to housing affordability will not be dependent upon the political party in power at the local level.
The timber wars: The endangered species act, the northwest forest plan, and the political economy of timber management in the Pacific northwest
Luke Petach
Public Choice, forthcoming
Abstract:
This paper evaluates the extent to which public interest or public choice rationales explain timber industry regulation in the Pacific Northwest. Two key regulations are examined: the listing of the Northern Spotted Owl (NSO) under the Endangered Species Act (ESA) in 1990, and the implementation of the Northwest Forest Plan (NWFP) in 1994. Support for the public interest theory of regulation relies on the assumption that (A) demand for environmental protection is driven by local populations directly impacted by regulation, (B) declining timber production is driven by technological factors unrelated to environmental policy, and (C) prevention of logging under timber regulations is effective at supporting ecological diversity and endangered populations. I argue there is little evidence to support any of these propositions. In contrast, evidence suggests that various interest groups benefitted significantly from the reduction in federal timber output resulting from environmental regulation, including owners of private timberlands -- particularly institutional investors such as timberland investment management organizations (TIMOs) and timberland real-estate investment trusts (REITs) -- and Southern timber producers, suggesting a “bootleggers and Baptists” explanation that fits within the public choice framework. Finally, I argue that even if one accepts the public interest rationale for timber regulation, regulation of the timber industry suffers from both knowledge and incentive problems that make it unlikely to succeed.
Impacts of the Jones Act on U.S. Petroleum Markets
Ryan Kellogg & Richard Sweeney
NBER Working Paper, December 2023
Abstract:
We study how the Jones Act -- a 100-year-old U.S. regulation that constrains domestic waterborne shipping -- affects U.S. markets for crude oil and petroleum products. We collect data on U.S. Gulf Coast and East Coast fuel prices, movements, and consumption, and we estimate domestic non-Jones shipping costs using freight rates for Gulf Coast exports. We then model counterfactual prices and product movements absent the Jones Act, allowing shippers to arbitrage price differences between the Gulf and East Coasts when they exceed transport costs. Eliminating the Jones Act would have reduced average East Coast gasoline, jet fuel, and diesel prices by $0.63, $0.80, and $0.82 per barrel, respectively, during 2018–2019, with the largest price decreases occurring in the Lower Atlantic. The Gulf Coast gasoline price would increase by $0.30 per barrel. U.S. consumers’ surplus would increase by $769 million per year, and producers’ surplus would decrease by $367 million per year.
Dynamic Pricing and Organic Waste Bans: A Study of Grocery Retailers’ Incentives to Reduce Food Waste
Robert Evan Sanders
Marketing Science, forthcoming
Abstract:
I analyze the welfare effects of two potential solutions to excess grocery-retail food waste: dynamic pricing and organic waste landfill bans. I use a structural econometric model with sales, perishability, and marginal cost data from a grocery chain’s artisanal bread category. My analysis of these counterfactuals shows that dynamic pricing Pareto-dominates an organic waste ban: Dynamic pricing reduces waste by 21% while increasing the chain’s gross margins and consumer surplus by 3% and 0.3%, respectively. In contrast, an organic waste ban, simulated by a ten-fold increase in disposal costs, reduces waste by only 4% and decreases profits and consumer surplus. Therefore, if regulators want to reduce grocery-store waste, they should incentivize chains to adopt dynamic pricing over imposing organic waste bans.
The formality effect
Elizabeth Linos et al.
Nature Human Behaviour, forthcoming
Abstract:
This paper documents the existence of a ‘formality effect’ in government communications. Across three online studies and three field experiments in different policy contexts (total N = 67,632), we show that, contrary to researcher and practitioner predictions, formal government communications are more effective at influencing resident behaviour than informal government communications. In exploring mechanisms, we show that formality operates as a heuristic for credibility and importance. Recipients view the source of a formal letter as more competent and trustworthy, and view the request itself as more important to take action on, despite no evidence of change in comprehension or in perceived ease of taking action. These findings have immediate implications for government communicators and open the door for a renewed focus on how the design and presentation of information impacts behaviour.
Burden or benefit: Is retail marijuana facility siting influenced by LULU- or gentrification-related neighbourhood characteristics?
Dwayne Marshall Baker
Urban Studies, forthcoming
Abstract:
As legal marijuana is emerging as an important component of cities across the United States, it is important to understand the factors that contribute to legal marijuana facility siting. Although land use and zoning are expected to determine where commercial marijuana facilities are located, if residential characteristics also enter siting considerations, some neighbourhoods may either bear the burden of undesired facilities or reap the benefits of legal marijuana, underscoring equitable considerations in marijuana facility siting. Thus, this study examines how neighbourhood change associated with locally unwanted land uses and gentrification influences the amount of retail marijuana facilities across three US cities: Denver, Colorado; Portland, Oregon; and Seattle, Washington. Using a series of Poisson-related regressions, this study finds that neighbourhood residential characteristics influence retail marijuana facilities in ways exceeding siting restrictions alone, like zoning. Notably, quantitative results suggest that there are fewer retail marijuana facilities in neighbourhoods experiencing locally unwanted land use-related change than non-locally unwanted land use neighbourhoods in Denver and Seattle; and more retail marijuana facilities in gentrified compared to non-gentrified neighbourhoods in Denver. Overall, these findings advance understanding of the connection between legal marijuana and neighbourhood changes and aim to influence guidelines for integrating legal marijuana facilities into communities.
Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior
Raymond Kluender
Review of Financial Studies, forthcoming
Abstract:
Pay-as-you-go contracts reduce minimum purchase requirements, which may increase market participation. This paper randomizes the introduction and price(s) of a novel pay-as-you-go contract to the California auto insurance market, where 17% of drivers are uninsured. The pay-as-you-go contract increases take-up by 10.8 p.p. (89%) and days with coverage by 4.6 days over the 3-month experiment (27%). Demand is relatively inelastic, and pay-as-you-go increases insurance coverage in part by relaxing liquidity requirements: most drivers’ purchasing behavior is consistent with a cost of credit in excess of payday lending rates, and 19% of drivers have a purchase rejected for insufficient funds.