New Sheriffs in Town

Kevin Lewis

January 20, 2021

Incentivizing Financial Regulators
Joseph Kalmenovitz
Review of Financial Studies, forthcoming


I study how promotion incentives within the public sector affect financial regulation. I assemble individual data for all SEC enforcement attorneys between 2002 and 2017, including enforcement cases, salaries, and ranks. Consistent with tournament model, attorneys with stronger promotion incentives are involved in more enforcement, especially against severe misconduct, and in tougher settlement terms. For identification, I rely on cross-sectional tests within offices and ranks and on exogenous variation in salaries resulting from a conversion to a new pay system. The findings highlight a novel link between incentives and regulation and show that the regulator's organizational design affects securities markets.

Divided We Fall
Joshua Livnat, Amir Rubin & Dan Segal
NYU Working Paper, November 2020


We analyze the effects of partisan Congressional control on the US economy. We find that economic performance is weaker when no party has the majority in both chambers of Congress (divided Congress). This weaker economic performance is attributed to reduced and less effective regulation. We provide evidence that undivided Congresses, whether Democrat or Republican, tend to enhance economic performance. Republicans seem to create value for large firms, whereas Democrats enhance competition and create value for small firms. Overall, we conclude that congressional cycles and effective regulation are important drivers of economic activity.


Regulation and Corruption: Evidence from the United States
Sanchari Choudhury
Oxford Bulletin of Economics and Statistics, forthcoming


I exploit a panel data set on United States for the time span 1990-2013 to evaluate the causal impact of government regulation on bureaucratic corruption. Despite the stylized fact that corruption and regulation are positively correlated, there is a lack of empirical evidence to substantiate a causal relationship. Using novel data on federal regulation of industries (Al‐Ubaydli and McLaughlin [2015], Regulation and Governance, 11, 109-123), and convictions of public officials from the Public Integrity Section, I apply a stochastic frontier approach to account for one‐sided measurement error in bureaucratic corruption and the Lewbel [2012, Journal of Business and Economic Statistics, 30, 67-80] identification strategy to control for potential endogeneity of regulation. Results are striking. Based on the preferred model, there is evidence of endogeneity of regulation and absence of a causal link between regulation and corruption. However, if any of the above two econometric issues are ignored, evidence of a spurious relationship between corruption and regulation is found.

The Value of Time in the United States: Estimates from Nationwide Natural Field Experiments
Ariel Goldszmidt et al.
NBER Working Paper, December 2020


The value of time determines relative prices of goods and services, investments, productivity, economic growth, and measurements of income inequality. Economists in the 1960s began to focus on the value of non-work time, pioneering a deep literature exploring the optimal allocation and value of time. By leveraging key features of these classic time allocation theories, we use a novel approach to estimate the value of time (VOT) via two large-scale natural field experiments with the ridesharing company Lyft. We use random variation in both wait times and prices to estimate a consumer's VOT with a data set of more than 14 million observations across consumers in U.S. cities. We find that the VOT is roughly $19 per hour (or 75% (100%) of the after-tax mean (median) wage rate) and varies predictably with choice circumstances correlated with the opportunity cost of wait time. Our VOT estimate is larger than what is currently used by the U.S. Government, suggesting that society is under-valuing time improvements and subsequently under-investing public resources in time-saving infrastructure projects and technologies.

A Model of Occupational Licensing and Statistical Discrimination
Peter Blair & Bobby Chung
NBER Working Paper, December 2020


We develop a model of statistical discrimination in occupational licensing. In the model, there is endogenous occupation selection and wage determination that depends on how costly it is to obtain the license and the productivity of the human capital that is bundled with the license. Under these assumptions, we find a unique equilibrium with sharp comparative statics for the licensing premiums. The key theoretical result in this paper is that the licensing premium is higher for workers who are members of demographic groups that face a higher cost of licensing. The intuition for this result is that the higher cost of licensing makes the license a more informative labor market signal. The predictions of the model can explain, for example, the empirical finding in the literature that occupational licenses that preclude felons close the racial wage gap among men by conferring a higher premium to black men than white men. Moreover, we show that in general the optimal cost of licensing is non-zero: an infinitely costly license screens out all workers while a cost less license is no screen at all.

Digital Capital and Superstar Firms
Prasanna Tambe et al.
NBER Working Paper, December 2020


General purpose technologies like information technology typically require complementary firm-specific investments to create value. These complementary investments produce a form of capital, which is typically intangible and which we call digital capital. We create an extended firm-level panel on IT labor investments (1990-2016) using data from LinkedIn. We then apply Hall’s Quantity Revelation Theorem to compute both prices and quantities of digital capital over recent decades. We find that 1) digital capital prices vary significantly over time, peaking around the dot-com boom in 2000, 2) significant digital capital quantities have accumulated since the 1990s, with digital capital accounting for at least 25% of firms’ assets by the end of our panel, 3) that digital capital has disproportionately accumulated in a small subset of “superstar” firms and its concentration is much greater than the concentration of other assets, and 4) that digital capital accumulation predicts firm-level productivity about three years in the future.

Missing the Mark: The Long-Term Impacts of the Federal Trade Commission’s Red Flag Initiative to Reduce Deceptive Weight Loss Product Advertising
Mara Schein, Rosemary Avery & Matthew Eisenberg
Journal of Public Policy & Marketing, forthcoming


This study examines the long-term efficacy of the Federal Trade Commission’s (FTC) 2003 Red Flag Initiative, which aimed to curb the prevalence of deceptive claims in over-the-counter (OTC) weight loss product advertising. The principal component of this effort was the FTC’s promotion of voluntary guidelines which encouraged media outlets to screen advertisements for the seven deceptive (“Red Flag”) claims prior to publication. By analyzing the content of English-language advertisement airings appearing in nationally circulated print magazines and on television programs between 2010 and 2011, this study evaluates the success of the Red Flag Initiative as a long-term regulatory solution to deceptive advertising in this market. This study finds that the FTC’s voluntary initiative failed to halt the dissemination of deceptive claims during the time period analyzed. In response to the FTC’s actions, manufacturers appear to have engaged in offsetting behaviors and employed other creative content to convey similar deceptive information in their advertising, allowing them to avoid scrutiny while continuing to mislead consumers.

Patent Protection and Software Innovation: Evidence from Alice
Yu-Kai Lin & Arun Rai
Georgia State University Working Paper, September 2020


Although software innovations are the cornerstone in the modern economy, their patent-ability, as well as the social and private value of software patenting, have continued to be at the center of policy debates pertaining to the U.S. patent system. The landmark 2014 U.S. Supreme Court ruling in Alice v. CLS Bank had profound impact on software patenting as it drastically limited the scope of patent protection on software innovations. Using Alice as a natural experiment, we found that limiting software patents had no detectable downsides to the value of software firms. Instead, it was associated with improved sales, greater engagements in open source development, and tighter scope of individual patents. Our findings offer implications for the extent to which software firms pursue patenting as a strategy to protect innovation versus pursuing alternative appropriability mechanisms. They also have compelling implications for patent policies on software and software-related inventions, such as artificial intelligence, business methods, and other emerging digital innovations.

The Effect of Patent Disclosure Quality on Innovation
Travis Dyer et al.
University of North Carolina Working Paper, November 2020

The patent system grants inventors temporary monopoly rights in exchange for a public disclosure detailing their innovation. These disclosures are meant to allow others to recreate and build on the patented innovation. We examine how the quality of these disclosures affects follow-on innovation. We use the plausibly exogenous assignment to patent applications of patent examiners who differ in their enforcement of disclosure requirements as a source of variation in disclosure quality. We find that some examiners are significantly more lenient with respect to patent disclosure quality requirements, and that patents granted by these examiners lead to significantly less follow-on innovation. Our results suggest that the characteristics of patent disclosures affect the course of subsequent innovation.

The Innovation Consequences of Mandatory Patent Disclosures
Jinhwan Kim & Kristen Valentine
Journal of Accounting and Economics, forthcoming

We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor’s Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals’ disclosures facilitate a firm’s innovation. However, we also highlight that mandatory patent disclosures can impose proprietary costs on firms. These results broadly contribute to our understanding of the real effects of disclosure, such that forcing firms to share proprietary information can be privately costly but beneficial to other firms.

Reducing a Barrier to Entry: The 120/150 CPA Licensing Rule
Brian Meehan & Frank Stephenson
Journal of Labor Research, December 2020, Pages 382-402

In the United States, one of the most common state-level occupational licensing requirements is education. Education requirements for certified public accountants (CPAs) in many states have increased over the past few decades, but recently a few states have reduced their educational requirement to sit for the CPA exam. Using data from 2006 to 2016, we separately examine the effects of relaxing or strengthening educational requirements on the number of first-time candidates sitting for the CPA exam and on candidate performance. Our results indicate that a reduction in the number of credit hours required to sit for the CPA exam increases the number of candidates, while an increase in the number of prerequisite hours reduces the number of candidates (the latter effect is sensitive to the inclusion of control variables). We also find no relationship between changes in CPA exam requirements and pass rates or scores. Hence, requiring 150 h instead of 120 acts as a barrier to entry for potential CPAs with no accompanying increase in candidate quality.


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