Findings

Compliance

Kevin Lewis

June 24, 2020

When Consumption Regulations Backfire: The Role of Political Ideology
Caglar Irmak, Mitchel Murdock & Vamsi Kanuri
Journal of Marketing Research, forthcoming

Abstract:

The authors investigate the role of political ideology in consumer reactions to consumption regulations. First, they demonstrate via a natural experiment that conservatives (but not liberals) increase usage of mobile phones in cars after a law was enacted prohibiting that activity (Study 1). Then, through three lab experiments the authors illustrate that after consumers are exposed to consumption regulations from the government (e.g., laws that restrict consumption, warning labels designed by the Food and Drug Administration), conservatives (vs. liberals) are more likely to (1) use phones when restricted (Study 2), (2) purchase unhealthy foods (Study 3), and (3) view smoking e-cigarettes more favorably (Study 4). No such effects are observed when a nongovernment source is used, or when the message from the government is framed as a notification (vs. warning). These findings point to the important roles of political ideology and the message source in increasing reactance to consumption regulations, thereby mitigating the effectiveness of public policy initiatives undertaken by the government.


Three Myths about Federal Regulation
Patrick McLaughlin & Casey Mulligan
NBER Working Paper, May 2020

Abstract:

Despite evidence to the contrary, three common myths persist about federal regulations. The first myth is that many regulations concern the environment, but in fact only a small minority of regulations are environmental. The second myth is that most regulations contain quantitative estimates of costs or benefits. However, these quantitative estimates appear rarely in published rules, contradicting the impression given by executive orders and Office of Management and Budget guidance, which require cost-benefit analysis (CBA) and clearly articulate sound economic principles for conducting CBA. Environmental rules have relatively higher-quality CBAs, at least by the low standards of other federal rules. The third myth, which is particularly relevant to the historic regulations promulgated during the COVID-19 pandemic, is the misperception that regulatory costs are primarily clerical, rather than opportunity or resource costs. If technocrats have triumphed in the regulatory arena, their victory has not been earned by the merits of their analysis.


The Tension Between Worker Safety and Organization Survival
Mark Pagell et al.
Management Science, forthcoming

Abstract:

This research addresses the fundamental question of whether providing a safe workplace improves or hinders organizational survival, because there are conflicting predictions on the relationship between worker safety and organizational performance. The results, based on a unique longitudinal database covering more than 100,000 organizations across 25 years in the U.S. state of Oregon, indicate that, in general, organizations that provide a safe workplace have significantly lower odds and length of survival. Additionally, the organizations that would, in general, have better survival odds benefit most from not providing a safe workplace. This suggests that relying on the market does not engender workplace safety.


Kill Zone
Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales
NBER Working Paper, May 2020

Abstract:

We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in the space of startups, as described by venture capitalists, where new ventures are not worth funding. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere theoretical possibility.


Regulation by Shaming: Deterrence Effects of Publicizing Violations of Workplace Safety and Health Laws
Matthew Johnson
American Economic Review, June 2020, Pages 1866-1904

Abstract:

Publicizing firms' socially undesirable actions may enhance firms' incentives to avoid such actions. In 2009, the Occupational Safety and Health Administration (OSHA) began issuing press releases about facilities that violated safety and health regulations. Using quasi-random variation arising from a cutoff rule OSHA followed, I find that publicizing a facility's violations led other facilities to substantially improve their compliance and experience fewer occupational injuries. OSHA would need to conduct 210 additional inspections to achieve the same improvement in compliance as achieved with a single press release. Evidence suggests that employers improve compliance to avoid costly responses from workers.


Competition Laws and Corporate Innovation
Ross Levine et al.
NBER Working Paper, May 2020

Abstract:

A central debate in economics concerns the relationship between competition and innovation, with some stressing that competition discourages innovation by reducing post-innovation rents and others emphasizing that more contestable markets spur currently dominant and other firms to invest more in innovation. We examine the impact of competition laws on innovation. We create a unique firm-level dataset on patenting activities that includes over 1.4 million firm-year observations, across 68 countries, from 1991 through 2015. Using a new, comprehensive dataset on competition laws, we find that more stringent competition laws are associated with increases in firms’ number of self-generated patents and the citation-impact and explorative nature of those patents. We also conduct the first examination of the relationship between competition laws and firms’ acquisition of patents from other firms. We find that competition increases patent acquisitions but lowers the ratio of acquired to self-generated patents. The results hold when using country-industry data on 186 countries over the 1888-2015 period.


Economic Freedom and Migration: A Metro Area-Level Analysis
Imran Arif et al.
Southern Economic Journal, forthcoming

Abstract:

We examine the determinants of intra-U.S. population migration at the metropolitan area level (MSA), with an emphasis on the presence of policies that are consistent with economic freedom. We are the first to produce a multi-variate regression analysis of migration and economic freedom at the local level. Combining a 1993-2014 unbalanced panel of MSA-to-MSA migration data from the Internal Revenue Service with a new economic freedom index for U.S. metropolitan areas, we find that a 10 percent increase in economic freedom of a destination MSA, relative to the economic freedom of an origin MSA, was associated with a 27.4 percent increase in net migration from the origin MSA to the destination MSA. If we use mean net migration flows as a benchmark, we would expect a 10 percent increase in relative economic freedom to increase net migration to the destination MSA by 22 workers per year from each other MSA.


The Darwinian Returns to Scale
David Baqaee & Emmanuel Farhi
NBER Working Paper, May 2020

Abstract:

How does an increase in the size of the market due to fertility, immigration, or trade integration, affect welfare and real GDP? We study this question using a model with heterogeneous firms, fixed costs, and monopolistic competition. We decompose the change in welfare into changes in technical and allocative efficiency due to reallocation. We non-parametrically identify residual demand curves with firm-level data and, using these estimates, quantify our theoretical results. We find that somewhere between 70% to 90% of the aggregate returns to scale are due to changes in allocative efficiency. In bigger markets, competition endogenously toughens and triggers Darwinian reallocations: big firms expand, small firms shrink and exit, and new firms enter. However, important as they are, the improvements in allocative efficiency are not driven by oft-emphasized reductions in markups or deaths of unproductive firms. Instead, they are caused by a composition effect that reallocates resources from low-markup to high-markup firms. Our analysis implies that the aggregate return to scale is an endogenous outcome shaped by frictions and market structure and likely varies with time, place, and policy. Furthermore, even mild increasing returns to scale at the micro level can give rise to large increasing returns to scale at the macro level.


Spectrum anarchy: Why self-governance of the radio spectrum works better than we think
Pedro Bustamante et al.
Journal of Institutional Economics, forthcoming

Abstract:

The exploitation of radio-electric spectrum bands for wireless transmission purposes has some features of the commons: it is subject to congestion and conflict without rules governing its use. The Coasean approach is to assign private property rights to overcome the tragedy of the spectrum commons. The process of assigning these rights is still centralized, with governments assigning property rights through agencies such as the Federal Communications Commission and National Telecommunications and Information Administration in the USA. We consider the possibility of self-governance of the spectrum. We use insights from the study of common pool resources governance to analyze the emergence of property rights to spectrum in a ‘government-less’ environment in which norms, rules, and enforcement mechanisms are solely the product of the repeated interactions among participants in the network. Our case study considers the spectrum-sharing arrangement in the 1,695-1,710 MHz band. Using agent-based modeling (ABM), we show that self-governance of the spectrum can work and under what conditions it is likely to improve the efficiency of the allocation of property rights.


Orbital-use fees could more than quadruple the value of the space industry
Akhil Rao, Matthew Burgess & Daniel Kaffine
Proceedings of the National Academy of Sciences, 9 June 2020, Pages 12756-12762

Abstract:

The space industry’s rapid recent growth represents the latest tragedy of the commons. Satellites launched into orbit contribute to - and risk damage from - a growing buildup of space debris and other satellites. Collision risk from this orbital congestion is costly to satellite operators. Technological and managerial solutions - such as active debris removal or end-of-life satellite deorbit guidelines - are currently being explored by regulatory authorities. However, none of these approaches address the underlying incentive problem: satellite operators do not account for costs they impose on each other via collision risk. Here, we show that an internationally harmonized orbital-use fee can correct these incentives and substantially increase the value of the space industry. We construct and analyze a coupled physical-economic model of commercial launches and debris accumulation in low-Earth orbit. Similar to carbon taxes, our model projects an optimal fee that rises at a rate of 14% per year, equal to roughly $235,000 per satellite-year in 2040. The long-run value of the satellite industry would more than quadruple by 2040 - increasing from around $600 billion under business as usual to around $3 trillion. In contrast, we project that purely technological solutions are unlikely to fully address the problem of orbital congestion. Indeed, we find debris removal sometimes worsens economic damages from congestion by increasing launch incentives. In other sectors, addressing the tragedy of the commons has often been a game of catch-up with substantial social costs. The infant space industry can avert these costs before they escalate.


Tacit Collusion and Voluntary Disclosure: Theory and Evidence from the U.S. Automotive Industry
Jeremy Bertomeu et al.
Management Science, forthcoming

Abstract:

We develop a model of voluntary disclosure and production decisions and use it to establish that firms will tacitly collude by disclosing when current market demand is low and when the decision horizon is long. Low demand helps sustain tacit collusion, because deviation from tacit collusion yields only a limited increase in profit when demand is low. Similarly, longer decision horizons give firms incentive to receive the benefits of collusion over a longer period. Using monthly production forecasts issued by the Big Three U.S. automobile manufacturers, we show that the frequency, horizon, and accuracy of the production forecasts increase when demand decreases and when the firms focus more on long-term profit. Collectively, the evidence suggests that firms use voluntary disclosures to tacitly collude.


Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry
Kory Kroft et al.
NBER Working Paper, June 2020

Abstract:

We quantify the importance of imperfect competition in the U.S. construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise both due to markdown of wages and markup of prices. Our analyses combine the universe of U.S. business and worker tax records with newly collected records from U.S. procurement auctions. We first examine how firms respond to a plausibly exogenous shift in product demand through a difference-in-differences design that compares first-time procurement auction winners to the firms that lose, both before and after the auction. Motivated and guided by these estimates, we next develop, identify, and estimate a model where construction firms compete with one another for projects in the product market and for workers in the labor market. We find that American construction firms have significant wage- and price-setting power. This imperfect competition generates a considerable amount of rents, two-thirds of which is captured by the firms.


The Effect of Information Salience on Product Quality: Louisville Restaurant Hygiene and Yelp.com
Matthew Philip Makofske
Journal of Industrial Economics, March 2020, Pages 52-92

Abstract:

In June, 2013, Louisville, Kentucky, announced plans to provide restaurant health inspection scores - already available on the city’s website - for publication on Yelp.com. I find that this increased salience caused substantial hygiene improvements among independent Louisville restaurants across three different counterfactual models. Among independent Louisville restaurants, estimates suggest the partnership caused anywhere from a 9‐14% relative decrease in inspection score point deductions, with the effect being entirely evident in restaurants’ first inspections following the partnership’s announcement. Relative to the rest of Kentucky, I find that the partnership significantly reduced rates of severe food poisoning in Louisville.


Promotional effects and the determination of royalty rates for music
Randolph Beard, George Ford & Michael Stern
Journal of Media Economics, forthcoming

Abstract:

When a terrestrial radio station plays a song during its over-the-air broadcast, the artists and their record labels receive no compensation for the sound recording right. Yet radio’s digital competitors - including streaming services and satellite radio - do pay performance royalties to performers and their labels for the sound recording. Terrestrial radio’s cost-advantage is not the result of marketplace deals or competitive forces, but from a statutory preference granted to radio broadcasters. Legislation aimed at leveling the playing field has been strongly resisted by broadcasters based on the claim that radio provides a promotional effect, or free advertising, for record labels and performers. In this article, we demonstrate that any promotional effect is fully internalized in a marketplace bargain between the music and radio industries. As such, a promotional effect provides no basis for federal law to mandate the free use of music by the radio broadcast industry.


Major League Soccer Expansion and Property Values: Do Sports Franchises Generate Amenities or Disamenities?
Aakrit Joshi, Brady Horn & Robert Berrens
Applied Economics, forthcoming

Abstract:

While amenity effects generated by sports stadiums or facilities have been studied extensively for housing markets, there has been significantly less attention focused on team effects generated by sports franchises alone. The objective of this analysis is to estimate the impact of Major League Soccer (MLS) expansion on property values, using nearby condominium sales from 2003-2016 in Seattle, Washington. Econometric results from hedonic pricing method and repeat sales regression indicate that property values depreciated after the Seattle Sounders Football Club was promoted to the MLS in 2009. The distance-decaying depreciation in condominium values occurs within a mile of the facility.


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