The golden rules
Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting
Jonathan Peterson & Henry Schneider
Management Science, forthcoming
Abstract:
We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality. We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.
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Economic freedom and economic crises
Christian Bjørnskov
European Journal of Political Economy, forthcoming
Abstract:
In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crises. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993–2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.
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Eric Posner & Glen Weyl
University of Chicago Working Paper, August 2016
Abstract:
The existing system of private property interferes with allocative efficiency by giving owners the power to hold out for excessive prices. We propose a remedy in the form of a tax on property, based on the value self-assessed by its owner at intervals, along with a requirement that the owner sell the property to any third party willing to pay a price equal to the self-assessed value. The tax rate would reflect a tradeoff between gains from allocative efficiency and losses to investment efficiency, and would increase in line with expected developments in information technology. The legal and economic implications of this system are explored.
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Joan Farre-Mensa, Deepak Hegde & Alexander Ljungqvist
NBER Working Paper, February 2016
Abstract:
Motivated by concerns that the patent system is hindering innovation, particularly for small inventors, this study investigates the bright side of patents. We examine whether patents help startups grow and succeed using detailed micro data on all patent applications filed by startups at the U.S. Patent and Trademark Office (USPTO) since 2001 and approved or rejected before 2014. We leverage the fact that patent applications are assigned quasi-randomly to USPTO examiners and instrument for the probability that an application is approved with individual examiners’ historical approval rates. We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors. Exogenous delays in the patent examination process significantly reduce firm growth, job creation, and innovation, even when a firm’s patent application is eventually approved. Our results suggest that patents act as a catalyst that sets startups on a growth path by facilitating their access to capital. Proposals for patent reform should consider these benefits of patents alongside their potential costs.
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The Regulatory Determinants of Railroad Safety
Jerry Ellig & Patrick McLaughlin
Review of Industrial Organization, September 2016, Pages 371-398
Abstract:
The dramatic improvement in railroad safety since the 1970s has been accompanied by a substantial increase in safety regulation and a substantial reduction in economic regulation after 1980. We assess the effects of both regulatory changes on railroad safety with the use of RegData: a new data set that was developed by one of the authors that measures the amount of regulation that is imposed by specific regulatory agencies on specific industries. We find that partial economic deregulation is associated with improved safety. Safety regulation was most closely associated with improved railroad safety during the period when economic regulation curtailed railroads’ incentives to operate safely.
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Regional business climate and interstate manufacturing relocation decisions
Tessa Conroy, Steven Deller & Alexandra Tsvetkova
Regional Science and Urban Economics, September 2016, Pages 155–168
Abstract:
In this study, we use the National Establishment Time Series (NETS) database to study relocation by manufacturers based on differences in the business climate between the origin and destination states. We model interstate relocations for manufacturers in aggregate and for three subgroups characterized by their industry-level research and development (R&D) intensity. The analysis suggests that very few manufacturing firms relocate across state lines in any given year and the vast majority of those that do are small in size and move to adjoining states. Our results also reveal that interstate migration by manufacturing establishments varies with their R&D intensity. Whereas a number of factors considered in this study are statistically significant, marginal effects at the mean are infinitesimal. This implies that states attempting to encourage manufacturing firms to relocate from other states via traditional perspectives on business climate are unlikely to be successful.
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Insurance coverage of customers induces dishonesty of sellers in markets for credence goods
Rudolf Kerschbamer, Daniel Neururer & Matthias Sutter
Proceedings of the National Academy of Sciences, 5 July 2016, Pages 7454–7458
Abstract
Honesty is a fundamental pillar for cooperation in human societies and thus for their economic welfare. However, humans do not always act in an honest way. Here, we examine how insurance coverage affects the degree of honesty in credence goods markets. Such markets are plagued by strong incentives for fraudulent behavior of sellers, resulting in estimated annual costs of billions of dollars to customers and the society as a whole. Prime examples of credence goods are all kinds of repair services, the provision of medical treatments, the sale of software programs, and the provision of taxi rides in unfamiliar cities. We examine in a natural field experiment how computer repair shops take advantage of customers’ insurance for repair costs. In a control treatment, the average repair price is about EUR 70, whereas the repair bill increases by more than 80% when the service provider is informed that an insurance would reimburse the bill. Our design allows decomposing the sources of this economically impressive difference, showing that it is mainly due to the overprovision of parts and overcharging of working time. A survey among repair shops shows that the higher bills are mainly ascribed to insured customers being less likely to be concerned about minimizing costs because a third party (the insurer) pays the bill. Overall, our results strongly suggest that insurance coverage greatly increases the extent of dishonesty in important sectors of the economy with potentially huge costs to customers and whole economies.
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Economic freedom and social capital: Pooled mean group evidence
Jeremy Jackson
Applied Economics Letters, forthcoming
Abstract:
This article uses annual US-state-level data from 1986 to 2004 and pooled-mean group estimation based on Pesaran et al. (1999) to examine whether economic freedom influences social capital. We find economic freedom has a negative effect on our social capital measure. This result is driven by the labour market component of freedom which is indicative of the relationship between labour market freedom and Olson-type group social capital.
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Of Mice and Academics: Examining the Effect of Openness on Innovation
Fiona Murray et al
American Economic Journal: Economic Policy, February 2016, Pages 212-252
Abstract:
This paper argues that openness, by lowering costs to access existing research, can enhance both early and late stage innovation through greater exploration of novel research directions. We examine a natural experiment in openness: late-1990s NIH agreements that reduced academics' access costs regarding certain genetically engineered mice. Implementing difference-in-differences estimators, we find that increased openness encourages entry by new researchers and exploration of more diverse research paths, and does not reduce the creation of new genetically engineered mice. Our findings highlight a neglected cost of strong intellectual property restrictions: lower levels of exploration leading to reduced diversity of research output.
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Beyond Kelo: An Experimental Study of Public Opposition to Eminent Domain
Logan Strother
Journal of Law and Courts, Fall 2016, Pages 339-375
Abstract:
The power of government to take private property for public use has been a frequent source of political disquiet because of the tension it creates with notions of individual rights ingrained in liberal society. The backlash against takings after Kelo offers a case in point. Existing research has focused on the public’s distaste for the taking of homes and has thus missed an important cause of the backlash: the purpose for which property is taken. I utilize a combination of experimental and observational methods to advance our understanding of this important issue, finding that purpose is crucial in shaping attitudes toward takings.
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Francesco Castellaneta, Raffaele Conti & Aleksandra “Olenka” Kacperczyk
Strategic Management Journal, forthcoming
Abstract:
We investigate the impact of trade secret legal protection on firm market value in the context of acquisitions. On one hand, market value may increase because trade secret assets become better protected from rivals. On the other hand, market value may decrease because trade secret protection reduces information about the target and its competitors available to potential buyers, increasing uncertainty about its value. Buyers will discount their offers in expectation of being compensated for riskier deals. Using a sample of private equity investments in the United States, we find that trade secret protection has a positive effect in industries with high mobility of knowledge workers, and a negative effect in industries with (a) high resource-value uncertainty, and (b) high poor-investment risk.
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Low-quality Patents in the Eye of the Beholder: Evidence from Multiple Examiners
Gaétan de Rassenfosse, Adam Jaffe & Elizabeth Webster
NBER Working Paper, May 2016
Abstract:
Low-quality patents are of considerable concern to businesses operating in patent-dense markets. There are two pathways by which low-quality patents may be issued: the patent office may apply systematically a standard that is too lenient (low inventive step threshold); or the patent office may grant patents that are, in fact, below its own threshold (so-called ‘weak’ patents). This paper uses novel data from inventions that have been examined at the five largest patent offices and an explicit model of the grant process to derive first-of-their-kind office-specific estimates of the height of the inventive step threshold and the prevalence of weak patents. The empirical analysis is based on patent applications granted at one office but refused at another office. We estimate that the fraction of patent grants associated with a patent standard that is lower than that of other countries ranges from 2-15%, with Japan having the tightest standard and the United States and China the loosest. The fraction of grants that are inconsistent with the office’s own standard ranges from 2-6 per cent. The fraction of grants that are inconsistent in this sense is generally higher in newer fields such as software and biotechnology, and lower in traditional fields such as mechanical engineering. Our estimates of invalidity are much lower than those that have been derived from litigation studies, consistent with litigated patents being highly non-representative of the population.