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The Cost of Regulatory Compliance in the United States
Francesco Trebbi & Miao Ben Zhang
NBER Working Paper, November 2022
Abstract:
We quantify firms’ compliance costs of regulation from 2002 to 2014 in terms of their labor input expenditure to comply with government rules, a primary component of regulatory compliance spending for large portions of the U.S. economy. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account on average for 1.34 percent of the total wage bill of a firm, but vary substantially across and within industries, and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage regulatory spending peaking for an establishment size of around 500 employees. Finally, we develop an instrumental variable methodology for decoupling the role of regulatory requirements from that of enforcement in driving firms’ compliance costs.
Folk Economics and the Persistence of Political Opposition to New Housing
Clayton Nall, Christopher Elmendorf & Stan Oklobdzija
University of California Working Paper, November 2022
Abstract:
Political scientists commonly attribute the underproduction of housing in US metropolitan areas to unequal participation and collective action problems. Homeowners, who are organized, repeat players in local politics, mobilize against proposed projects nearby, while renters, who would benefit from more housing, benefit too diffusely to mobilize for it and may not even vote in the jurisdiction. Using data from two nationally representative surveys of urban and suburban residents, we posit a further cause of the housing shortage: public misunderstanding of housing markets. Through vignettes describing a 10% shock to regional housing supply, we find that only about 30–40% of respondents believe that additional supply would reduce prices and rents. Using a conjoint design, we find that this “Supply Skepticism” is robust to question wording, stipulated counterfactual assumptions, and the cause of the supply shock. It also appears to be specific to housing: respondents generally gave correct answers to questions about supply shocks in other markets. Finally, we find that while nearly all renters and even a majority of homeowners say they would prefer home prices and rents in their city to be lower in the future, support for state preemption of local land-use restrictions depends on beliefs about housing markets. “Supply skepticism” among renters undermines their support for home construction, while some homeowners appear to be more supportive of new development than they would be if they held conventional economic views.
Competing for Inventors: Market Concentration and the Misallocation of Innovative Talent
Andrea Manera
MIT Working Paper, November 2022
Abstract:
The rapid productivity gains achieved by technological innovations in the 20th century have slowed in recent decades. This has come at a time of increased market concentration. In this paper, I explore how dominant companies in concentrated sectors have siphoned off inventors that might have been employed more productively in competitive industries. For the period 1997-2012, I establish that sectors with rising concentration captured a disproportionate share of researchers, while also experiencing a decrease in R&D productivity, signaled by falling forward citations and slowing growth per inventor. These findings imply that inventors became increasingly misallocated, accounting for nearly 30 percent of the decline in output per worker growth over the period. I show that these results arise naturally in a Schumpeterian growth model where monopolistic firms conduct “defensive patenting” to hamper competitors’ R&D. A calibration of this model reveals that a growth-maximizing planner should subsidize entrants’ R&D in high-concentration sectors.
Closing the Revolving Door
Joseph Kalmenovitz, Siddharth Vij & Kairong Xiao
University of Rochester Working Paper, November 2022
Abstract:
Regulators can leave their government position for a job in a regulated firm. Using granular payroll data on 23 million federal employees, we uncover the first causal evidence of revolving door incentives. We exploit the fact that post-employment restrictions on federal employees, which reduce the value of their outside option, trigger when the employee's base salary exceeds a threshold. We document significant bunching of employees just below the threshold, consistent with a deliberate effort to preserve the value of their outside option. The effect is concentrated among agencies with broad regulatory powers, minimal supervision by elected officials, and frequent interactions with high-paying industries. In those agencies, 32% of the regulators respond to revolving door incentives and sacrifice 5% of their wage potential to stay below the threshold. Consistent with theories of regulatory capture, we find that revolving regulators issue fewer rules and rules with lower costs of compliance. Using our findings to calibrate a structural model, we show that doubling the duration of the restriction will reduce the incentive distortion in the federal government by 2.7%, at the cost of modest decline in labor supply to the public sector. Combined, our results shed new light on the economic implications of the revolving door in the government.
The Novice Administrative State: The Function of Regulatory Commissions in the Progressive Era
Judge Glock
Studies in American Political Development, forthcoming
Abstract:
Researchers have long argued that an important impetus for the creation of the administrative state was the desire to bring experts into government and especially into the regulation of business. Yet Progressive Era politicians did not focus on attracting experts when crafting one part of the administrative state, independent regulatory commissions. This article examines the contemporary understanding of regulatory commissions and shows that they were most often intended as a substitute for vacillating juries. Commissions’ most important advantage over juries was that they acquired experience in investigations of a single subject over time, not that their appointees were already academics or experts in a particular subject. This article also shows that appointments to these commissions did not demonstrate a desire for apolitical expertise. This is the first examination of all members appointed to the Interstate Commerce Commission, Federal Trade Commission, Federal Power Commission, Federal Communications Commission, and the Securities and Exchange Commission in the period from 1887 to 1935. This article finds that political and sectional balance, rather than previous expertise, were the most important criteria for these commissions’ members, at least until the late 1920s, after the end of the supposed Progressive Era.
The Impact of Privacy Regulation on Web Traffic: Evidence From the GDPR
Raffaele Congiu, Lorien Sabatino & Geza Sapi
Information Economics and Policy, December 2022
Abstract:
We use traffic data from around 5,000 web domains in Europe and United States to investigate the effect of the European Unions General Data Protection Regulation (GDPR) on website visits and user engagement. We document an overall traffic reduction of approximately 15% in the long-run and find a measurable reduction in engagement with websites. Traffic from both paid and unpaid channels dropped significantly. We observe an inverted U-shaped relationship between website size and change in visits due to privacy regulation: the smallest and largest websites lost visitors, while medium-sized ones were less affected. Enforcement matters as well: The effects were amplified considerably in the long-run, following the first significant fine issued eight months after the entry into force of the GDPR. Exploring potential mechanisms, both a reduction in advertising effectiveness and a higher user awareness of privacy issues can explain our results.
Privacy Rights and Data Security: GDPR and Personal Data Markets
Tony Ke & K. Sudhir
Management Science, forthcoming
Abstract:
General Data Protection Regulation (GDPR) -- the European Union’s data protection regulation -- has two key principles. It recognizes that individuals own and control their personal (but not contractual) data in perpetuity, leading to three critical privacy rights, namely, the rights to (i) explicit consent (data opt-in), (ii) to be forgotten (data erasure), and (iii) portability (data transfer). It also includes data security mandates against privacy breaches through unauthorized access. We study GDPR’s equilibrium impact by including these features in a dynamic two-period model of forward-looking firms and consumers. Firms collect consumer data for personalization and price discrimination. Consumers trade off gains from personalization relative to potential losses from privacy breaches and price discrimination in their purchase, data opt-in, erasure, and transfer decisions. Though data security mandates impose fines on firms for privacy breaches, firms can benefit from higher opt-in given lower breach risk. Surprisingly, data security mandates can hurt consumers. The effect of privacy rights is nuanced. Since the right to opt in separates goods exchange from the provision of personal data, it prevents market failure under high breach risk. But it also reduces consumer opt-in and personal data availability. Erasure and portability rights reduce consumers’ hold-up concerns by disciplining firms to provide ongoing value by limiting price discrimination and not slacking off on data security; but they also reduce the incentive to offer lower initial prices that encourages opt-in. Overall, privacy rights always benefit consumers in competitive markets, but they can surprisingly hurt consumers under monopoly, as monopolists have less incentives to subsidize consumer opt-in. They raise (reduce) firm profit and social welfare when breach risk is high (low). Finally, privacy rights increase firm profit most at moderate levels of data transferability.
Intellectual Property Protection Lost and Competition: An Examination Using Machine Learning
Utku Acikalin et al.
NBER Working Paper, November 2022
Abstract:
We examine the impact of lost intellectual property protection on innovation, competition, acquisitions, lawsuits and employment agreements. We consider firms whose ability to protect intellectual property (IP) using patents is weakened following the Alice Corp. vs. CLS Bank International Supreme Court decision. This decision has impacted patents in multiple areas including business methods, software, and bioinformatics. We use state-of-the-art machine learning techniques to identify firms’ existing patent portfolios’ potential exposure to the Alice decision. While all affected firms decrease patenting post-Alice, we find an unequal impact of decreased patent protection. Large affected firms benefit as their sales and market valuations increase, and their exposure to lawsuits decreases. They also acquire fewer firms post-Alice. Small affected firms lose as they face increased competition, product-market encroachment, and lower profits and valuations. They increase R&D and have their employees sign more nondisclosure agreements.
Does Competition Benefit Complements? Evidence from Airlines and Hotels
Silke Forbes & Renáta Kosová
Management Science, forthcoming
Abstract:
We analyze how changes in the market structure of one industry -- airlines -- affect the performance of firms in a complementary industry -- hotels -- using an instrumental variables strategy to account for potential correlation between unobserved shocks to both markets. We find that more intense airline competition boosts hotel performance across all standard measures: price, occupancy rate, and revenue per available room. Spillovers vary across hotel quality and passenger type: Lower-quality branded hotels serving more price-sensitive travelers, most likely brought into the market because of more intense airline competition, benefit the most. However, performance spillovers do not translate into higher hotel entry.
When do "Nudges" Increase Welfare?
Hunt Allcott et al.
NBER Working Paper, December 2022
Abstract:
Policymakers are increasingly interested in non-standard policy instruments (NPIs), or “nudges,” such as simplified information disclosure and warning labels. We characterize the welfare effects of NPIs using public finance sufficient statistic approaches, allowing for endogenous prices, market power, and optimal or suboptimal taxes. While many empirical evaluations have focused on whether NPIs increase ostensibly beneficial behaviors on average, we show that this can be a poor guide to welfare. Welfare also depends on whether the NPI reduces the variance of distortions from heterogenous biases and externalities, and the average effect becomes irrelevant with zero pass-through or optimal taxes. We apply our framework to randomized experiments evaluating automotive fuel economy labels and sugary drink health labels. In both experiments, the labels increase ostensibly beneficial behaviors but also may decrease welfare in our model, because they increase the variance of distortions.
Did the MillerCoors Joint Venture Strengthen the Craft Beer Revolution?
Jose Azar & Xabier Barriola
International Journal of Industrial Organization, December 2022
Abstract:
We study how the MillerCoors joint venture affected craft brewers in the United States. We use scanner data to track the entry, assortment, and market share of artisanal and commercial brewers over a 4-year period after the merger. Using an instrumental variables strategy that uses only variation in concentration generated by the merger, we find that, in the average market, the merger led to an 11.59% increase in the number of craft brewers. The number of products per craft brewer did not increase. Most of the new entrants were small, and thus the market share of craft brewers experienced only a small (though statistically significant) increase. This entry of new firms may have been facilitated by the increase in prices by incumbent commercial producers following the merger.
Competition and Innovation in Markets for Technology
Jean-Etienne de Bettignies et al.
Management Science, forthcoming
Abstract:
We examine the impact of product market competition on innovation in markets for technology. An innovator makes an investment in quality-improving innovation that can be licensed to one (targeted licensing) or all (market-wide licensing) product market competitors. Our model points to a U-shaped relationship between competition in licensee product markets and innovation in the market for technology: at low levels of competition, market-wide licensing is optimal, and competition reduces innovation, whereas at high levels of competition, targeted licensing is optimal and competition increases innovation. Our empirical analysis using a large panel of U.S. data provides clear support for these predictions linking competition, innovation, and licensing.