Findings

Mandatory

Kevin Lewis

March 14, 2014

The Paternalist Meets His Match

Jayson Lusk, Stephan Marette & Bailey Norwood
Applied Economic Perspectives and Policy, March 2014, Pages 61-108

Abstract:
Despite the frequent arguments that findings from behavioral economics experiments justify paternalism, there is scant evidence of how people (the paternalists) make decisions for others or how the recipients of paternalism (the paternalees) respond to decisions made for them. Using data from over 300 people recruited from two cities in the United States and France, we study how choices between a relatively healthy item (apples) and a relatively unhealthy item (cookies) are influenced by one's role as either the paternalist or the paternalee. We find that after being provided information on nutritional content, but not before, paternalists make healthier choices for the paternalees than for themselves. Surprisingly, prior to being provided information, paternalees desire healthier choices than they expect the paternalists to give, a phenomenon that seems to arise from a type of egotism where individuals believe they make healthier choices than everyone else. Results in both locations reveal that more than 75% of paternalees prefer their own choices compared to the ones made for them by the paternalists, and are willing to pay non-trivial amounts to have their own choices. Any intrinsic value people place on the freedom of choice must be weighed against whatever benefits might arise from paternalistic policies, and consequently the scope for paternalism may be narrower than is often purported.

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Does Planning Regulation Protect Independent Retailers?

Raffaella Sadun
NBER Working Paper, January 2014

Abstract:
Regulations aimed at curbing the entry of large retail stores have been introduced in many countries to protect independent retailers. Analyzing a planning reform launched in the United Kingdom in the 1990s, I show that independent retailers were actually harmed by the creation of entry barriers against large stores. Instead of simply reducing the number of new large stores entering a market, the entry barriers created the incentive for large retail chains to invest in smaller and more centrally located formats, which competed more directly with independents and accelerated their decline. Overall, these findings suggest that restricting the entry of large stores does not necessarily lead to a world with fewer stores, but one with different stores, with uncertain competitive effects on independent retailers.

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Risk Aversion and the Desirability of Attenuated Legal Change

Steven Shavell
American Law and Economics Review, forthcoming

Abstract:
This article develops two points. First, insurance against the risk of legal change is largely unavailable, primarily because of the correlated nature of the losses that legal change generates. Second, given the absence of insurance against legal change, it is generally desirable for legal change to be attenuated. Specifically, in a model of uncertainty about two different types of legal change - in regulatory standards, and in payments for harm caused - it is demonstrated that the optimal new regulatory standard is less than the conventionally efficient standard, and that the optimal new payment for harm is less than the harm.

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Regulatory costs on entrepreneurship and establishment employment size

Peter Calcagno & Russell Sobel
Small Business Economics, March 2014, Pages 541-559

Abstract:
In this article, we examine how the level of regulation affects the size distribution of businesses. To the extent that regulation functions as a fixed cost, it should lead to larger firm size. However, regulations may also lead to smaller establishments with firms outsourcing regulated activities or staying small to take advantage of state exemptions for small businesses from regulations. We empirically examine the relationship between the size distribution of establishments and the level of regulation using state- and industry-level panel data from 1992 to 2004. Our results suggest that regulation decreases the proportion of zero employee and 1-4 employee establishments. The proportion of establishments in the 5-9 employee range generally increases with the level of regulation. Thus, regulation appears to operate as a fixed cost causing establishments to be larger.

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Smart Money? The Effect of Education on Financial Outcomes

Shawn Cole, Anna Paulson & Gauri Kartini Shastry
Review of Financial Studies, forthcoming

Abstract:
Household financial decisions are important for household welfare, economic growth, and financial stability. Yet our understanding of the determinants of financial decision making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show that education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest that the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.

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Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers

Orley Ashenfelter, Daniel Hosken & Matthew Weinberg
NBER Working Paper, February 2014

Abstract:
In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork's views on merger policy from The Antitrust Paradox. Many of Bork's recommendations have been implemented over time and have improved merger analysis. Bork's proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.

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The Price Effects of the Delta/Northwest Airline Merger

Dan Luo
Review of Industrial Organization, February 2014, Pages 27-48

Abstract:
This paper examines the price effects of the merger between Delta Airlines and Northwest Airlines. Empirical analysis finds that, other things equal, the fares for airport-pairs where Delta and Northwest competed with each other prior to the merger did not increase by much following the merger. This result is consistent with the additional finding that the impact of changes in low-cost carrier competition is large while the effect of changes in competition from legacy carriers is slight. Since both Delta and Northwest Airlines are legacy carriers, the results for other legacies suggest that the merger should not have exerted a dramatic impact on fares.

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Competition and service quality: New evidence from the airline industry

Daniel Greenfield
Economics of Transportation, forthcoming

Abstract:
Previous studies examine the relationship between competition and airline service quality by regressing on-time performance on market structure. These studies implicitly assume that market structure is exogenously determined with respect to service quality. To address the likely endogeneity of market structure I employ two distinct instrumental variables. The first is lagged market structure. The second exploits a global airline merger that induced differential variations in market structure across hundreds of airport-pair markets. I find that the effect of competition on airline delays is three times stronger than previous studies suggest.

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Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

Albert Choi & Kathryn Spier
Journal of Law, Economics, and Organization, forthcoming

Abstract:
A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the risk type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated damages to be paid by the firm ex post in the event of an accident. Although the stipulated damage payments are a potential solution to the moral hazard problem, firms have a private incentive to reduce the stipulated damages (and simultaneously lower the up front price) in order to attract the safer consumers who are less costly to serve. The competitive equilibrium - if an equilibrium exists at all - features suboptimally low stipulated damages and correspondingly suboptimal levels of product safety. Imposing some degree of tort liability on firms for uncovered accident losses - and prohibiting private parties from waiving that liability - can improve social welfare.

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Liability versus Regulation for Dangerous Products When Consumers Vary in Their Susceptibility to Harm and May Misperceive Risk

Thomas Miceli & Kathleen Segerson
Review of Law & Economics, December 2013, Pages 341-355

Abstract:
When consumers vary in their susceptibility to product-related harm, safety regulation dominates liability because when consumers bear their own damages, they are induced to self-select in their purchase decisions, with higher-risk consumers refraining from purchase. When consumers also misperceive risk, however, liability may be preferred because the price of the product accurately conveys the risk, thereby eliminating any distortions due to misperception. In comparing the two approaches to risk control, regulation therefore becomes more desirable as consumers perceive risk more accurately.

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Economic Freedom and the Stability of Stock Prices: A Cross-Country Analysis

Benjamin Blau, Tyler Brough & Diana Thomas
Journal of International Money and Finance, March 2014, Pages 182-196

Abstract:
This paper investigates the link between economic freedom and the price stability of individual securities in a unique setting. Using a sample of 327 American Depositary Receipts (ADRs), we find an inverse relation between the economic freedom of a ADRs' home country and the price volatility of the ADR. This negative correlation is driven primarily by certain components of economic freedom, such as property right protection, the soundness of the money, and the level of free trade in the home country. Further, we find evidence that less regulation and less government control of markets in the home country leads to more stable ADR prices.

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Taxing Audit Markets and Reputation: An Examination of the U.S. Tax Shelter Controversy

John Incardona et al.
Journal of International Accounting, Auditing and Taxation, forthcoming

Abstract:
From 2002 to 2007, the nation's largest CPA firms faced allegations of illegal activity related to the sale of tax shelters: EY, KPMG and PwC paid fines; KPMG was investigated by a federal grand jury; and EY faced a criminal inquiry. These shelter events occurred shortly after the 2002 collapse of Arthur Andersen, when policy makers were concerned about audit market concentration. This is the first paper to provide a chronological summary of how the tax shelter controversy started and ended. We investigate the stock market reaction to tax shelter news developments between 2003 and 2005 to make inferences about the market's view of audit competition and CPA firm reputation. Our results are consistent with market concern over large audit firm concentration, evidenced by large negative returns for clients of all audit providers upon the KPMG grand jury investigation announcement. We also find that tax shelter activities impact both the reputation of the accounting profession and the individual CPA firms marketing tax shelter products.

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Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement

Gregory Lewis & Patrick Bajari
Review of Economic Studies, forthcoming

Abstract:
Deadlines and late penalties are widely used to incentivize effort. Tighter deadlines and higher penalties induce higher effort, but increase the agent's risk. We model how these contract terms affect the work rate and time-to-completion in a procurement setting, characterizing the effcient contract design. Using new micro-level data on Minnesota highway construction contracts that includes day-by-day information on work plans, hours worked and delays, we find evidence of ex-post moral hazard: contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks, in a way that is consistent with our theoretical predictions. We next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks, and simulate how commuter welfare and contractor costs vary across different terms and shocks. Accounting for the traffic delays caused by construction, switching to a more effcient contract design would increase welfare by 22.5% of the contract value while increasing the standard deviation of contractor costs - a measure of risk - by less than 1% of the contract value.


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