Proscriptive
Is Dodd-Frank the Biggest Law Ever?
Patrick McLaughlin et al.
George Mason University Working Paper, July 2020
Abstract:
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 continued a trend toward lengthier and more complex acts of Congress. We use novel metrics of the size, scope, and complexity of acts of Congress to assess Dodd-Frank’s place in this trend. Our analysis is consistent with the hypothesis that, in terms of its regulatory effects, Dodd-Frank is the biggest act of Congress in recent history and may become the biggest ever. We argue that this trend toward longer and more complex laws can cause deterioration in the quality of the regulations the laws authorize for two procedural reasons. First, a large act can create a regulatory surge that overwhelms the quality control process. Second, because a large act can precipitate the creation of many regulations by different agencies that target the same industry, the agencies create rules in relative ignorance of their potential interactions.
Market Power, Inequality, and Financial Instability
Isabel Cairó & Jae Sim
Federal Reserve Working Paper, August 2020
Abstract:
Over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability. We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends. We derive macroprudential policy implications for financial stability.
Tenant Rights, Eviction, and Rent Affordability
Edward Coulson, Thao Le & Lily Shen
University of California Working Paper, August 2020
Abstract:
We use state-level differences in the legal relationship between landlords and tenants to estimate the impact of these differences on housing markets. We construct a search-theoretic model of landlord and tenant search and matching, which predicts that an increase in the cost of eviction reduces the number of evictions, but raises rents and homeless rates, and lowers housing supply and vacancy rates. To test these predictions, we construct an annual index to measure the level of the legal protection of tenant rights in each state. Our instrumental variable results indicate while a one-unit increase in the Tenant-Right Index reduces eviction rate by 8.9 percent, rental housing is 6.1 percent more expensive in areas where tenants have more protections against landlords. A higher Tenant-Right Index is also associated with a decrease in housing supply and an increase in the homeless rate. Taken together, our findings highlight a significant trade-off between tenant protections and rent affordability. Thus the welfare effects of tenant rights depend on the presumably large benefits for those who avoid eviction versus a loss of consumer surplus for other housing consumers.
Lobbying and Product Recalls: A Study of the US Automobile Industry
Khimendra Singh & Rajdeep Grewal
University of North Carolina Working Paper, August 2020
Abstract:
Reports of the influence of corporate lobbying suggest that firms (e.g., automotive companies) try to persuade regulators (the U.S. National Highway Traffic Safety Administration – NHTSA) not to order recalls of products (vehicles) with potentially harmful or fatal defects (e.g., rapid acceleration). Lobbying as a political mechanism is widely studied in social science research, but remains unexplored in the marketing literature on product-harm crisis. In a utopian setting, only product quality should influence product recalls, and lobbying should not matter. To examine whether corporate lobbying influences recalls, the authors combine automotive recall data with firms’ corporate lobbying expenditures. The results reveal that increase in lobbying expenses reduces number of voluntary recalls (which the automobile firm initiates) and mandatory recalls (which NHTSA recommends). Firms with higher lobbying expenditure are less likely to initiate a recall, such that approximately $417,014 more in lobbying expenditures is associated with one less voluntary recall by the firm. This amount is important, as a typical conservative estimates of recall costs a firm are around $12 million. Results suggest that a firm’s political influence also led the regulatory agency to adopt a bias that favors the lobbying firm; approximately $1.55 million more in lobbying expenditures are associated with one less mandatory recall. The authors exploit changes in individual political contributions as an instrumental variable to address potential endogeneity concerns for lobbying expenditures. The consistent results affirm that lobbying is an important (marketing) tool used by automotive companies to influence automotive recalls.
The Quality of Innovation 'Booms' During 'Busts'
Christos Makridis & Erin McGuire
MIT Working Paper, July 2020
Abstract:
Models of creative destruction posit that recessions are periods of reallocation and disruption, generating new ideas that catapult new firms to the frontier. However, empirical evidence suggests that research and development (R&D) expenditures and patenting is procyclical, not counter-cyclical. Using panel data on the quantity and quality of patents for nearly two decades, we provide a resolution to the tension by documenting that the quality of innovation is counter-cyclical: innovations produced during busts have a larger effect on the path of future research than those developed during booms. These results are a function of financial constraints that affect private sector firms most heavily, shifting the concentration of resources and time among R&D workers towards longer-term and basic science research in the public sector during busts. Our results suggest that the ongoing coronavirus pandemic could lead to large innovations in the future.
Data Privacy and Temptation
Zhuang Liu, Michael Sockin & Wei Xiong
NBER Working Paper, August 2020
Abstract:
This paper derives a preference for data privacy from consumers' temptation utility. This approach facilitates a welfare analysis of different data privacy regulations, such as the GDPR enacted by the European Union and the CCPA enacted by the state of California, when a fraction of the consumers may succumb to targeted advertising of temptation goods. While sharing consumer data with firms improves firms' matching efficiency of normal consumption goods, it also exposes weak-willed consumers to temptation goods. Despite that the GDPR and the CCPA give each consumer the choice to opt in or out of data sharing, these regulations may not provide sufficient protection for severely tempted consumers because of a negative externality in which the opt-in decision of some consumers reduces the anonymity of those who opt out. Our analysis also shows that the default choices instituted by the GDPR and the CCPA can lead to sharply different outcomes.
Single Bidders and Tacit Collusion in Highway Procurement Auctions
David Barrus & Frank Scott
Journal of Industrial Economics, forthcoming
Abstract:
Collusion in auctions can take different forms, such as refraining from bidding. Certain aspects of highway procurement auctions facilitate collusive outcomes. We collect data on asphalt paving auctions conducted in Kentucky from 2005‐2007. We determine the potential service area of each asphalt plant and potential bidders for each paving project. We analyze firms’ bid participation decisions, including variables affecting costs as well as competitive and strategic effects. In many geographic markets where firms face only a few identifiable rivals, county boundaries serve as a coordinating mechanism for softening competition, significantly influencing firms’ decisions whether and how much to bid.
Effects of Union Certification on Workplace-Safety Enforcement: Regression-Discontinuity Evidence
Aaron Sojourner & Jooyoung Yang
ILR Review, forthcoming
Abstract:
The authors study how union certification affects the enforcement of workplace-safety laws. To generate credible causal estimates, a regression discontinuity design compares outcomes in establishments in which unions barely won representation elections to outcomes in establishments in which unions barely lost such elections. The study combines two main data sets: the census of National Labor Relations Board (NLRB) representation elections and the Occupational Safety and Health Administration’s (OSHA) enforcement database since 1985. Evidence shows positive effects of union certification on establishment’s rate of OSHA inspection, the share of inspections carried out in the presence of a union representative, violations cited, and penalties assessed.
The Political Economy of Historic Districts: The Private, the Public, and the Collective
Yang Zhou
Regional Science and Urban Economics, forthcoming
Abstract:
This paper studies the political economy of historic district designation, with a focus on how historic district designation influences housing prices. I provide transaction-level empirical evidence from Denver, Colorado from 1990 to 2016 using hedonic price models with multiple fixed-effects. Results suggest that being in a historic district generates a 12-23% premium for house transactions after designation. Given the institutional context of Denver, I argue that one possible mechanism of the premium is the collective action problem in the historic district designation process. Meanwhile, a 10-20% positive spillover to the neighboring homes of historic districts is found, and the specific characteristics of historic districts influence the spillovers.
The Effects of Employee Hours‐of‐Service Regulations on the U.S. Airline Industry
Alexander Luttmann & Cody Nehiba
Journal of Policy Analysis and Management, Fall 2020, Pages 1043-1075
Abstract:
Maximum employee work‐hour restrictions are implemented to reduce accidents. However, because they decrease the stock of work hours available to employers in the short run, they may also have detrimental effects. A quasi‐experiment suggests that pilot hours‐of‐service reforms, which decreased the number of flights and hours a pilot may work, reduced consumer choice and increased fares in the airline industry. We find that regional and low‐cost carriers reduced scheduled flight frequency, while less constrained legacy carriers (and potentially their wholly owned subsidiaries) were unaffected. Further, we find evidence that market concentration increased on many routes, implying that fare increases may be due to a decrease in competition. These findings suggest a situation where a policy implemented to correct one market failure, airlines not internalizing the full social costs of accidents by allowing dangerously fatigued pilots to fly, exacerbated another market failure by decreasing competition.
Law and Lemons
Chihoon Cho, Richard Frankel & Xiumin Martin
Washington University in St. Louis Working Paper, August 2020
Abstract:
We study how statutory-law changes relate to disclosure, pricing, and liquidity in the used-car market. Federal odometer laws mandated disclosure of mileage on car titles upon ownership transfer and thereby enhanced enforcement of odometer-fraud prohibitions. Exploiting time variations in state implementation of odometer regulations, we have four key findings. First, the frequency of mileage disclosure in classified ads increases significantly post implementation, suggestive of improved disclosure incentives. Second, the sensitivity of asking price to mileage disclosed increases post implementation, suggesting that laws increased the credibility of information disclosed. Third, we show a 5.8 percent increase in asking price, indicating a reduction of adverse selection. Fourth, we find a decrease in repeated ads, particularly among mileage disclosers−implying that the law improves trade liquidity. Our study highlights the value of laws in enhancing verifiability of disclosed information and market outcomes.