Intervention
Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?
James Bessen
Boston University Working Paper, May 2016
Abstract:
Since 1980, US corporate valuations have risen relative to assets and operating margins have grown. The possibility of sustained economic rents has raised concerns about economic dynamism and inequality. But rising profits could represent growing returns to corporate investments in intangibles instead of returns to political rent seeking. Using new data on Federal regulation and data on lobbying, campaign spending, R&D, and organizational capital, this paper finds that both intangibles and political factors account for a substantial part of the increase in profits, but since 2000 much of the rise in profits is caused by growing political rent seeking.
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Crowdsourcing City Government: Using Tournaments to Improve Inspection Accuracy
Edward Glaeser et al.
NBER Working Paper, March 2016
Abstract:
Can open tournaments improve the quality of city services? The proliferation of big data makes it possible to use predictive analytics to better target services like hygiene inspections, but city governments rarely have the in-house talent needed for developing prediction algorithms. Cities could hire consultants, but a cheaper alternative is to crowdsource competence by making data public and offering a reward for the best algorithm. This paper provides a simple model suggesting that open tournaments dominate consulting contracts when cities have a reasonable tolerance for risk and when there is enough labor with low opportunity costs of time. We also illustrate how tournaments can be successful, by reporting on a Boston-based restaurant hygiene prediction tournament that we helped coordinate. The Boston tournament yielded algorithms - at low cost - that proved reasonably accurate when tested "out-of-sample" on hygiene inspections occurring after the algorithms were submitted. We draw upon our experience in working with Boston to provide practical suggestions for governments and other organizations seeking to run prediction tournaments in the future.
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The Real Effects of Mandatory Dissemination of Non-Financial Information through Financial Reports
Hans Bonde Christensen et al.
University of Chicago Working Paper, February 2016
Abstract:
We examine the real effects of mandatory, non-financial disclosures, which require SEC-registered mine owners to disseminate their mine-safety records through their financial reports. These safety records are already publicly available elsewhere, which allows us to examine the incremental effects of disseminating information through financial reports. Comparing mines owned by SEC-registered issuers to those mines that are not, we document that including safety records in financial reports decreases mining-related citations and injuries by 11 and 13 percent, respectively, and reduces labor productivity by approximately 0.9 percent. Additional evidence suggests that increased dissemination, rather than unobservable factors associated with regulatory intervention, drive these effects. We also provide evidence that feedback effects from equity markets are a potential mechanism through which the dissemination of information leads to real effects. Overall, our results illustrate that disseminating non-financial information through financial reports can have real effects - even if the content of that disclosure is already publicly available.
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Knowing When to Quit: Default Choices, Demographics and Fraud
Robert Letzler et al.
Economic Journal, forthcoming
Abstract:
We study defaults in a novel setting where the optimal choice is clear: the decision to escape from fraud. A government lawsuit created a natural experiment whereby some consumers enrolled in a fraudulent subscription programme were cancelled by default, while others had to actively cancel. We find that cancelling subscriptions by default increased cancellations to 99.8%, 63.4 percentage points more than requiring active cancellation. We also find that consumers residing in poorer, less-educated Census blocks were more likely than average to cancel prior to the lawsuit, but were less likely to actively cancel when notified they could do so.
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Gregory Rodgers & Sarah Garland
Journal of Consumer Policy, June 2016, Pages 223-240
Abstract:
Before 1987, when handheld hair dryers were not required to protect against water immersion electrocutions, there were almost 16 such electrocutions annually in the USA. This article presents a retrospective evaluation of the benefits and costs of the 1987 and 1991 immersion protection requirements of the voluntary hair dryer safety standard in the USA. The benefits are based on estimates of the reduced risk of electrocution resulting from the requirements, and the valuation of the reduced risk derived from willingness to pay studies of the "value of statistical life" found in the economics literature. The costs were defined as the incremental costs associated with incorporating the immersion protection technology into handheld hair dryers. The study found that the requirements were highly effective and may have reduced the immersion-related mortality rate by almost 97%. The expected present value of the estimated benefits of the requirements amounted to about $4.56 per dryer in 2014 dollars and substantially exceeded the costs of about $2 per dryer. The primary outcome measure, the expected net benefits (i.e., benefits minus costs) of the requirements, amounted to an average of about $2.56 per hair dryer, over the hair dryer's expected product life. Given sales of about 23 million handheld hair dryers annually, the present value of the expected net benefits associated with 1 year's production would have amounted to about $58.9 million. A sensitivity analysis showed that the major findings were robust with respect to changes in the underlying parameters of the analysis. The study also discusses the factors leading to a high rate of effectiveness estimated for the immersion protection requirements.
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Science Use in Regulatory Impact Analysis: The Effects of Political Attention and Controversy
Mia Costa, Bruce Desmarais & John Hird
Review of Policy Research, May 2016, Pages 251-269
Abstract:
Scholars, policy makers, and research sponsors have long sought to understand the conditions under which scientific research is used in the policy-making process. Recent research has identified a resource that can be used to trace the use of science across time and many policy domains. U.S. federal agencies are mandated by executive order to justify all economically significant regulations by regulatory impact analyses (RIAs), in which they present evidence of the scientific underpinnings and consequences of the proposed rule. To gain new insight into when and how regulators invoke science in their policy justifications, we ask: does the political attention and controversy surrounding a regulation affect the extent to which science is utilized in RIAs? We examine scientific citation activity in all 101 economically significant RIAs from 2008 to 2012 and evaluate the effects of attention - from the public, policy elites, and the media - on the degree of science use in RIAs. Our main finding is that regulators draw more heavily on scientific research when justifying rules subject to a high degree of attention from outside actors. These findings suggest that scientific research plays an important role in the justification of regulations, especially those that are highly salient to the public and other policy actors.
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The Economics of "Radiator Springs:" Industry Dynamics, Sunk Costs, and Spatial Demand Shifts
Jeffrey Campbell & Thomas Hubbard
NBER Working Paper, May 2016
Abstract:
Interstate Highway openings were permanent, anticipated demand shocks that increased gasoline demand and sometimes shifted it spatially. We investigate supply responses to these demand shocks, using county-level observations of service station counts and employment and data on highway openings' timing and locations. When the new highway was close to the old route, average producer size increased, beginning one year before it opened. If instead the interstate substantially displaced traffic, the number of producers increased, beginning only after it opened. These dynamics are consistent with Hotelling-style oligopolistic competition with free entry and sunk costs and inconsistent with textbook perfect competition.
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Market Structure and Competition in Airline Markets
Federico Ciliberto, Charles Murry & Elie Tamer
Harvard Working Paper, May 2016
Abstract:
We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions in oligopolistic markets while allowing for correlations between unobserved fixed costs, marginal costs, and demand shocks. Firms' decisions to enter a market are based on whether they will realize positive profits from entry. We use our framework to quantitatively account for this selection problem in the pricing stage. We estimate this model using cross-sectional data from the US airline industry. We find that not accounting for endogenous entry leads to overestimation of demand elasticities. This, in turn, leads to biased markups, which has implications for the policy evaluation of market power. Our methodology allows us to study how firms optimally decide entry/exit decision in response to a change in policy. We simulate a merger between American and US Airways and we find: i) the price effects of a merger can be strong in concentrated markets, but post-merger entry mitigates these effects; ii) the merged firm has a strong incentive to enter new markets; iii) the merged firm faces a stronger threat of entry from rival legacy carriers, as opposed to low cost carriers.
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Assessing Firm Behavior in Carve-out Markets: Evidence on the Impact of Carve-out Policy
Philip Gayle & Tyson Thomas
Journal of Economic Behavior & Organization, August 2016, Pages 178-194
Abstract:
Airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). While cooperation may yield benefits, it can also have anti-competitive effects in markets where partners competed prior to receiving ATI. A carve-out policy forbids ATI partners from cooperating in markets policymakers believe will be most harmed by anti-competitive effects. We examine carve-out policy applications to three ATI partner pairings, and find evidence more consistent with cooperative pricing in carve-out markets in spite of the policy, calling into question the effectiveness of the policy in achieving intended market outcomes.
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Protecting Buyers from Fine Print
Elena D'Agostino & Daniel Seidmann
European Economic Review, forthcoming
Abstract:
Buyers typically do not read the fine print in contracts, providing an incentive for a monopolist to draft terms which are unfavorable to buyers. We model this problem, proving that trade must then be inefficient. We show that regulation which mandates efficient terms raises welfare. More interestingly, regulations which prohibit the least efficient terms may reduce welfare by inducing the monopolist not to offer favorable terms. We extend these results to markets in which some buyers are naive, showing that prohibiting the least efficient terms may also harm the naive buyers.
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Crowd-Out or Affordability? The Lifeline Expansion's Effect on Wireless Service Spending
Thomas Conkling
Consumer Financial Protection Bureau Working Paper, April 2016
Abstract:
Public subsidization of private goods often leads to crowd-out, reducing private spending. This effect is intended for a policy like the 2008 Lifeline phone subsidy expansion, which aimed to increase affordable access to services. Using state-level timing variation, I estimate that the expansion reduced households' wireless service spending by more than 100% of subsidy payments. The expansion created a separate, competitive market for providers catering to low-income households. Consequently, higher-quality subsidized services crowded out lower-quality unsubsidized options, saving households more than an equivalent cash transfer. This highlights how market segmentation and competition can magnify a targeted subsidy's impact.
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Flying the Needles: Flight Deck Automation Erodes Fine-Motor Flying Skills Among Airline Pilots
Andreas Haslbeck & Hans-Juergen Hoermann
Human Factors: The Journal of the Human Factors and Ergonomics Society, June 2016, Pages 533-545
Objective: The aim of this study was to evaluate the influence of practice and training on fine-motor flying skills during a manual instrument landing system (ILS) approach.
Method: One hundred twenty-six randomly selected airline pilots had to perform a manual flight scenario with a raw data precision approach. Pilots were assigned to four equal groups according to their level of practice and training by fleet (short-haul, long-haul) and rank (first officer, captain).
Results: Average ILS deviation scores differed significantly in relation to the group assignments. The strongest predictor variable was fleet, indicating degraded performance among long-haul pilots.
Conclusion: Manual flying skills are subject to erosion due to a lack of practice on long-haul fleets: All results support the conclusion that recent flight practice is a significantly stronger predictor for fine-motor flying performance than the time period since flight school or even the total or type-specific flight experience.
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Effects of Deregulation and Consolidation of the Broadcast Television Industry
Jessica Calfee Stahl
American Economic Review, forthcoming
Abstract:
This paper exploits deregulation in the 1990's to estimate viewership and revenue effects of consolidation in broadcast television, then finds cost effects that explain the ownership structure given viewership and revenue effects. Results suggest that consolidation greatly increased profitability in an industry with otherwise declining profitability. Groups with broader national coverage attract more advertising per station. Joint ownership of two stations within a market and network ownership both allow for significant cost savings. There is some evidence that within-market consolidation allows stations to achieve local market power. However, both within-market and across-market consolidation appear to have boosted viewership, on net.
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Freedom and gross in-migration: An empirical study of the post-great recession experience
Richard Cebula, Maggie Foley & Joshua Hall
Journal of Economics and Finance, April 2016, Pages 402-420
Abstract:
Determinants of migration, including policy variables such as tax rates, have been extensively studied by regional scientists over the past several decades. The development of the Economic Freedom of North America Index has allowed researchers to test the relationship between migration patterns and economic freedom, with recent studies finding that net in-migration is positively related to economic freedom. Using a new cross-section measure of economic and personal freedom at the state level, we investigate the relationship between gross in-migration and economic freedom on the one hand and then between gross in-migration and total freedom on the other hand. This empirical study of domestic U.S. migration during the post-Great Recession period finds clear evidence that migrants prefer to move to those states affording higher levels of economic freedom and higher levels of total freedom.