To Comply
Certification Relics: Entrepreneurship Amidst Discontinued Certifications
Robert Eberhart & Daniel Erian Armanios
Organization Science, forthcoming
Abstract:
We explore a key tension between certification and entrepreneurial entry. On the one hand, more stringent certifications may provide greater legitimacy. On the other hand, market entry may be facilitated by easing such standards. To reconcile this tension, we examine discontinued certifications. We draw on research into how new ventures use certifications to gain legitimacy, along with quantitative data from new venture credit records. We show that after a certification is discontinued, new ventures in emerging industries continue to conform to these discontinued certified standards. Our study shows that those whose attributes do not provide other sources of legitimacy (e.g., unconventional founders in emerging industries) are more likely than other new ventures to comply with discontinued certification. However, those with other legitimating attributes (e.g., elite institution alumni founders) can overcome such legitimacy deficits and take advantage of new rules easing entry. Overall, our findings show that discontinued certifications can become certification "relics" whose standards continue to linger and influence entry, even after they are no longer formally in effect. Our study and its findings enhance our understanding of institutional support for new ventures, as well as the repertoire of strategic actions available to new ventures to gain legitimacy and acceptance in the face of institutional change.
Larger polities are more regulated
James Bailey, James Broughel & Patrick McLaughlin
Journal of Public Finance and Public Choice, forthcoming
Abstract:
Using a variety of novel data sources from the RegData project, we show that population levels and the amount of regulation are highly correlated across countries and time, and that more-populated US states, Australian states and Canadian provinces tend to be more heavily regulated than less-populated states and provinces. A doubling of population size is associated with a 22 to 33 per cent increase in regulation. This provides support for the theory that the fixed costs associated with regulating partly determine where and when regulations occur.
Industry Size and Regulation: Evidence from US States
Marc Law & Patrick McLaughlin
George Mason University Working Paper, May 2021
Abstract:
What explains variation in the degree of regulation across US states and industries? We examine cross-sectional variation in state-level regulation facing 81 three-digit NAICS industries by matching novel data on regulatory restrictions at the state-industry level with data on state-industry characteristics. For most states, an increase in industry size is positively correlated with the extent of regulation. Additionally, for most industries, there is also a positive correlation between industry size and the degree to which states regulate that industry. Controlling for unobserved heterogeneity at the state and industry levels, we find a robust correlation between the size of an industry and the degree to which it is regulated, but no relationship between regulation and average wages, average establishment size, or the distribution of employment across various establishment sizes. Taken as a whole, our findings are consistent with hypotheses for regulation that emphasize the fixed costs of establishing regulation or the salience of industries that are large and are inconsistent with hypotheses that suggest that regulation is influenced by firm size or industry-level concentration of establishment sizes.
Understanding Disparities in Punishment: Regulator Preferences and Expertise
Karam Kang & Bernardo Silveira
Journal of Political Economy, forthcoming
Abstract:
This paper quantifies the benefits of discretion in the enforcement of environmental regulations. We identify and estimate a structural model of regulator-discharger interactions, exploiting an increase in the enforcement stringency of water pollution regulations in California. Our estimates indicate that most of the heterogeneity in punishments for observably similar violations is due to heterogeneity in discharger compliance costs rather than heterogeneity in regulator preferences. We find that removing the discretion of regulators to tailor punishments to discharger attributes would raise enforcement costs and decrease compliance by dischargers with high social harms of violations.
Consumer Psychology and the Problem of Fine Print Fraud
Meirav Furth-Matzkin & Roseanna Sommers
Stanford Law Review, March 2020, Pages 503-560
Abstract:
This Article investigates how laypeople respond to consumer contracts that are formed as a result of fraud. Across four studies, we show that contrary to the prevailing wisdom in contract law scholarship, fine print is not simply white noise. Rather, it has a significant and detrimental effect on lay consumers. We demonstrate that clauses that consumers neglect to read ex ante, at the time of signing, have a significant psychological effect ex post, when consumers discover that they were deceived about the terms of the transaction. Consumers who would otherwise complain about being cheated are demoralized by contractual fine print, and consequently decline to seek redress. This is because they erroneously assume that all contracts-even contracts induced by fraud-are binding. Our studies presented participants with cases in which a seller induces a consumer to buy a product or service by making a false representation. The false representation is directly contradicted by the written terms of the contract, which the consumer signs without reading. Our findings reveal that laypeople, unlike legally trained individuals, mistakenly believe that such agreements are consented to, and will be enforced as written, despite the seller's material deception. Importantly, the presence of fine print discourages consumers from wanting to take legal action, initiate a complaint, or damage the firm's reputation by telling others what happened, even when the contract contradicts what they were told. At the same time, the fact that the seller lied makes little difference to laypeople's intuitions about whether the contract will be, or should be, enforced as written. Finally, we show that informing consumers about Anti-Deception Consumer Protection Laws alters their perceptions about the legal and moral status of contracts induced by fraud, although such information does not completely counteract their formalistic intuition that whatever the contract says is the final word. The implications of our study, we argue, are that prevailing methods for addressing deceptive business practices are inadequate because they fail to take account of consumer psychology.
Algorithmic monoculture and social welfare
Jon Kleinberg & Manish Raghavan
Proceedings of the National Academy of Sciences, 1 June 2021
Abstract:
As algorithms are increasingly applied to screen applicants for high-stakes decisions in employment, lending, and other domains, concerns have been raised about the effects of algorithmic monoculture, in which many decision-makers all rely on the same algorithm. This concern invokes analogies to agriculture, where a monocultural system runs the risk of severe harm from unexpected shocks. Here, we show that the dangers of algorithmic monoculture run much deeper, in that monocultural convergence on a single algorithm by a group of decision-making agents, even when the algorithm is more accurate for any one agent in isolation, can reduce the overall quality of the decisions being made by the full collection of agents. Unexpected shocks are therefore not needed to expose the risks of monoculture; it can hurt accuracy even under "normal" operations and even for algorithms that are more accurate when used by only a single decision-maker. Our results rely on minimal assumptions and involve the development of a probabilistic framework for analyzing systems that use multiple noisy estimates of a set of alternatives.
On the Direction of Innovation
Hugo Hopenhayn & Francesco Squintani
Journal of Political Economy, July 2021, Pages 1991-2022
Abstract:
How are resources allocated across different R&D areas (i.e., problems to be solved)? As a result of dynamic congestion externalities, the competitive market allocates excessive resources into those of high return, being those with higher private (and social) payoffs. Good problems are tackled too soon, and as a result the distribution of open research problems in the socially optimal solution stochastically dominates that of the competitive equilibrium. A severe form of rent dissipation occurs in the latter, where the total value of R&D activity equals the value of allocating all resources to the least valuable problem solved. Resulting losses can be substantial.
Short-term rentals and the housing market: Quasi-experimental evidence from Airbnb in Los Angeles
Hans Koster, Jos van Ommeren & Nicolas Volkhausen
Journal of Urban Economics, forthcoming
Abstract:
Online short-term rental (STR) platforms such as Airbnb have grown spectacularly. We study the effects of regulation of these platforms on the housing market using a quasi-experimental research design. 18 out of 88 cities in Los Angeles County have severely restricted short-term rentals by adopting Home Sharing Ordinances. We apply a panel regression-discontinuity design around the cities' borders. Ordinances reduced listings by 50% and housing prices by 2%. Additional difference-in-differences estimates show that ordinances reduced rents also by 2%. These estimates imply large effects of Airbnb on property values in areas attractive to tourists (e.g. an increase of house prices of 15% within 2.5km of Hollywood's Walk of Fame).
Is Sharing Really Caring? The Effect of Airbnb on the Affordability of Housing
Andrew Bibler, Keith Teltser & Mark Tremblay
Georgia State University Working Paper, May 2021
Abstract:
We examine the impact of peer-to-peer (P2P) short-term rentals on housing affordability. Using a simple model we illustrate that, although growth in the short-term rental market leads to higher housing prices, home-sharing profits can offset increased housing costs. That is, we show the net effect of the rise of platforms like Airbnb on housing affordability is theoretically ambiguous. To address this ambiguity empirically, we leverage city-level registration requirements that substantially increase the cost of hosting on Airbnb to estimate the effect of policy enforcement on the Airbnb market and the corresponding effects on home prices and foreclosures. Using data on Airbnb listings and transactions from the San Francisco and Chicago metro areas, we find that enforcing registration requirements on Airbnb listings within the city limits of Chicago and San Francisco reduces Airbnb supply and bookings by 40% relative to untreated areas within the two metros. We also find substantial heterogeneity in these effects, with the largest shocks experienced by zip codes with the highest per-capita density of Airbnb listings. Using the same identification strategy with transaction-level data from Zillow on home sales and foreclosures, we find that home prices decline by roughly 10% in the most Airbnb-dense zip codes while foreclosures in these same zip codes increase by almost 20%. These findings suggest that, while growth in P2P short-term rental markets increases housing prices, it may also improve individuals' ability to avoid negative financial outcomes like foreclosure.
Disruptive Competition and the Cost of Leveling the Playing Field: Evidence from the Taxi Industry
Mario Leccese
University of Maryland Working Paper, April 2021
Abstract:
I study the effects of a tax on ride-sharing trips in Chicago, which was nominally motivated by a desire to reduce congestion, but which also affected competition between ride-sharing platforms and traditional taxis. I find that platforms passed through more than 100% of the tax to consumers taking single rides, but there was incomplete pass-through to shared rides. This pattern can be explained by the two-sidedness of the market. The tax shifted demand back to taxis, but only in the downtown area, where competition is more intense. Finally, I find that the tax did not significantly reduce congestion and a simple calibration suggests that it lowered consumer surplus by over $300,000 per day.
Mitigating agency costs in the housing market
Geoffrey Turnbull, Bennie Waller & Scott Wentland
Real Estate Economics, forthcoming
Abstract:
We investigate two mechanisms that plausibly curtail agency costs in the homeowner-listing agent relationship. Empirically, we find that differences in compensation structures across brokers effectively mitigate agency costs, while additional training associated with licensure made little, if any, difference. The evidence is consistent with managers/partners of a brokerage (principal brokers) having stronger incentives to internalize potential reputational spillovers for their brokerage offices. For identification, we exploit the timing of brokers' incentives changing using a difference-in-differences (within agent) approach. Further, in a triple-difference specification that leverages a setting where local reputational incentives are most instrumental, we find the clearest evidence of agency cost mitigation among principal brokers of non-franchise, locally owned brokerages.
Competition Laws, Governance, and Firm Value
Ross Levine, Chen Lin & Wensi Xie
NBER Working Paper, June 2021
Abstract:
Do antitrust laws influence corporate valuations? We evaluate the relationship between firm value and laws limiting firms from engaging in anticompetitive agreements, abusing dominant positions, and conducting M&As that restrict competition. Using firm-level data from 99 countries over the 1990-2010 period, we discover that valuations rise after countries strengthen competition laws. The effects are larger among firms with more severe pre-existing agency problems: firms in countries with weaker investor protection laws, with weaker firm-specific governance provisions, and with greater opacity. The results suggest that antitrust laws that intensify competition exert a positive influence on valuations by reducing agency problems.
(When) Does Patent Protection Spur Cumulative Research Within Firms?
Ashish Arora et al.
NBER Working Paper, June 2021
Abstract:
We estimate the effect of patent protection on follow-on investments in corporate scientific research. We exploit a new method for identifying an exogenous reduction in the protection a granted patent provides. Using data on public, research-active firms between 1990 and 2015, we find that firms decrease follow-on research after a reduction in patent protection, as measured by a drop in internal citations to an associated scientific article. This effect is stronger for smaller firms and in industries where patents are traded less frequently. Our findings are consistent with a stylized model whereby patent protection is a strategic substitute for commercialization capability. Our results imply that stronger patents encourage follow-on research, but also shift the locus of research from big firms toward smaller firms and startups. As patent protection has strengthened since the mid-1980s, our results help explain why the American innovation ecosystem has undergone a growing division of innovative labor, where startups become primary sources of new ideas.
Regulatory Capture's Self-Serving Application
Susan Webb Yackee
Public Administration Review, forthcoming
Abstract:
Observers regularly assert that government regulations are captured - meaning the content of the regulation is diverted away from the public interest and toward the interests of regulated industry. I argue that the label of regulatory capture is often applied differently by policy losers than by policy winners. I hypothesize that when an entity is unsuccessful in achieving its goals during regulatory policy making, that entity is more likely to deem the process captured. With data from 41 FDA regulations and guidance documents, I find that - even when provided a common definition - those interest groups engaged in the same rulemaking vary as to whether or not they would categorize the process as captured. Moreover, this variation is negatively associated with whether the entity achieved its policy goals during the rulemaking. These findings imply that scholars ought to reassess capture's occurrence, as well as the political and policy implications attached to its invocation.