Constraints
Does economic freedom lighten the blow? Evidence from the Great Recession in the United States
Justin Callais & Jamie Bologna Pavlik
Economics of Governance, September 2023, Pages 357–398
Abstract:
The Great Recession led to a large decline in economic activity throughout the entire United States with significant variation in its severity across regions. Our paper examines the role of economic freedom in explaining these differences at the metropolitan statistical area (MSA) level. We use the Stansel (2013; 2019) MSA-level economic freedom index to analyze the relationship between institutional quality and economic outcomes throughout the crisis period. Using a panel dataset of 382 MSAs from 2002 to 2012, we find that economic freedom is associated with enhanced economic outcomes -- lower unemployment rates, more employment per 100 persons, and higher income per capita. This holds true even when examining a cross-section of MSAs using data from the crisis period alone. We supplement these findings with a matching analysis where we find that MSAs that experienced meaningful increases in economic freedom in the five-year period before the Great Recession (2002–2007) had quicker recoveries -- in terms of unemployment rates and income -- than their matched counterfactuals from 2007 to 2012. Overall, our findings suggest that economic freedom did “lighten the blow” from the Great Recession.
The Micro-Aggregated Profit Share
Thomas Hasenzagl & Luis Pérez
University of Minnesota Working Paper, October 2023
Abstract:
How much has market power increased in the United States in the last fifty years? And how did the rise in market power affect aggregate profits? Using micro-level data from U.S. Compustat, we find that several indicators of market power have steadily increased since 1970. In particular, the aggregate markup has gone up from 10% of price over marginal cost in 1970 to 23% in 2020, and aggregate returns to scale have risen from 1.00 to 1.13. We connect these market-power indicators to profitability by showing that the aggregate profit share can be expressed in terms of the aggregate markup, aggregate returns to scale, and a sufficient statistic for production networks that captures double marginalization in the economy. We find that despite the rise in market power, the profit share has been constant at 18% of GDP because the increase in monopoly rents has been completely offset by rising fixed costs and changes in technology. Our empirical results have subtle implications for policymakers: overly aggressive enforcement of antitrust law could decrease firm dynamism and paradoxically lead to lower competition and higher market power.
Measuring the value of rent stabilization and understanding its implications for racial inequality: Evidence from New York City
Ruoyu Chen, Hanchen Jiang & Luis Quintero
Regional Science and Urban Economics, November 2023
Abstract:
Despite a rekindled public interest in rent stabilization amidst the housing affordability crisis, evidence of the magnitude and distribution of the benefits offered by this policy is lacking. Measuring the policy’s benefits is challenging because the counterfactual unregulated rents of rent-stabilized housing units are not observed. This paper estimates quality-adjusted rent discounts for each rent-stabilized unit in New York City (NYC) from 2002 to 2017. We validate our model’s out-of-sample prediction power using a machine learning method, improve comparability between unregulated and stabilized units using propensity scores, and control for unobservable housing quality using a repeat-rent approach with a panel of deregulated units. We find an average rent discount of $410 per month and show that rent discounts are: (1) not progressively distributed towards lower-income households; (2) larger in Manhattan and increasing in gentrifying neighborhoods; and (3) twice as large for households correctly aware of being beneficiaries of the policy. The aggregate rent discounts for the entire NYC are between $4 and $5.4 billion per year, roughly 10%–14% of the federal budget on means-tested housing programs. Although rent stabilization disproportionately benefited White tenants in the 2000s, the racial gaps in rent discounts between White and minority tenants have narrowed or disappeared since 2011. We provide suggestive evidence that these patterns are consistent with spatial sorting and gentrification.
Upzoning with Strings Attached: Evidence from Seattle's Affordable Housing Mandate
Betty Xiao Wang & Jacob Krimmel
Federal Reserve Working Paper, August 2023
Abstract:
This paper analyzes the effects of a major municipal residential land use reform on new home construction and developer behavior. We examine Seattle’s Mandatory Housing Affordability (MHA) program, which relaxed zoning regulations while also encouraging affordable housing construction in 33 neighborhoods in 2017 and 2019. The reforms allowed for more dense new development (‘upzoning’), but they also required developers to either reserve some units of each project as below market rate rentals or pay into a citywide affordable housing fund. Using a difference-in-differences estimation comparing areas the reforms affected versus those not affected, we show new construction differentially fell in the upzoned, affordability-mandated census blocks. Our quasi-experimental border design finds strong evidence of developers strategically siting projects away from MHA-zoned plots -- despite their upzoning -- and instead to nearby blocks and parcels not subject to the program’s affordability requirements. The differential reduction from MHA to non-MHA zones could be as large as 70% of average permitting activity at the border. Our findings speak to the mixed results of allowing for more density while simultaneously mandating affordable housing for the same project.
Can Blockchain Technology Help Overcome Contractual Incompleteness? Evidence from State Laws
Mark Chen et al.
Management Science, forthcoming
Abstract:
Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quasi-natural experiment based on the staggered adoption of U.S. state laws that increased firms’ in-state ability to develop, adopt, and use blockchain technology. We find that, after exposure to a pro-blockchain law, firms with greater asset specificity exhibit more positive changes to Tobin’s Q, research and development, and blockchain-related innovation. Also, such firms appear to rely less on vertical integration, form more strategic alliances, and shift their emphasis to less geographically proximate customers. Overall, our results suggest that blockchain technology can help firms remedy constraints and inefficiencies arising from contractual incompleteness.
The effect of privacy regulation on the data industry: Empirical evidence from GDPR
Guy Aridor, Yeon-Koo Che & Tobias Salz
RAND Journal of Economics, forthcoming
Abstract:
Utilizing a novel dataset from an online travel intermediary, we study the effects of the EU's General Data Protection Regulation (GDPR). The opt-in requirement of GDPR resulted in a 12.5% drop in the intermediary-observed consumers, but the remaining consumers are trackable for a longer period of time. Our findings imply that privacy-conscious consumers exert privacy externalities on opt-in consumers, making them more predictable. Consistent with this finding, the average value of the remaining consumers to advertisers has increased, offsetting some of the losses from consumer opt-outs.
A Framework for Detection, Measurement, and Welfare Analysis of Platform Bias
Imke Reimers & Joel Waldfogel
NBER Working Paper, October 2023
Abstract:
Regulators are responding to growing platform power with curbs on platforms' potentially biased exercise of power, creating urgent needs for both a workable definition of platform bias and ways to detect and measure it. We develop a simple equilibrium framework in which consumers choose among ranked alternatives, while the platform chooses product display ranks based on product characteristics and prices. We define the platform's ranks to be biased if they deliver outcomes that lie below the frontier that maximizes a weighted sum of seller and consumer surplus. This framework leads to two bias testing approaches, which we compare using Monte Carlo simulations, as well as data from Amazon, Expedia, and Spotify. We then illustrate the use of our structural framework directly, producing estimates of both platform bias and its welfare cost. The EU's Digital Services Act's provision for researcher data access would allow easy implementation of our approach in contexts important to policy makers.
Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets
Oren Reshef
American Economic Journal: Microeconomics, November 2023, Pages 183-207
Abstract:
Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms' responses.
When Product Markets Become Collective Traps: The Case of Social Media
Leonardo Bursztyn et al.
NBER Working Paper, October 2023
Abstract:
Individuals might experience negative utility from not consuming a popular product. For example, being inactive on social media can lead to social exclusion or not owning luxury brands can be associated with having a low social status. We show that, in the presence of such spillovers to non-users, standard measures that take aggregate consumption as given fail to appropriately capture welfare. We propose a new methodology to measure welfare that accounts for these consumption spillovers, which we apply to estimate the consumer surplus of two popular social media platforms, TikTok and Instagram. In large-scale, incentivized experiments with college students, we show that, while the standard welfare measure suggests a large and positive surplus, our measure accounting for consumption spillovers indicates a negative surplus, with a large share of active users deriving negative utility. We also shed light on the drivers of consumption spillovers to non-users in the case of social media and show that, in this setting, the “fear of missing out” plays an important role. Our framework and estimates highlight the possibility of product market traps, where large shares of consumers are trapped in an inefficient equilibrium and would prefer the product not to exist.
Weather the storms? Resilience investment and production losses after hurricanes
Johan Brannlund et al.
Journal of Environmental Economics and Management, October 2023
Abstract:
This paper studies whether resilience investment mitigates damages from extreme weather events using data on offshore oil production in the Gulf of Mexico. We show that hurricanes which pass near rigs lower production and that stronger storms have larger impacts which persist for months. Regulatory changes that required rigs be designed to be resilient to major hurricanes only modestly mitigated the short-run production losses from hurricanes, reducing oil production losses by roughly 5% at 1 month and 20% 8 months after impact. They also only partly mitigated long-run losses, lowering the probability that a rig permanently exits production by 12–18 percentage points after a hurricane.
The Effect of Patent Disclosure Quality on Innovation
Travis Dyer et al.
Journal of Accounting and Economics, forthcoming
Abstract:
The patent system grants inventors temporary monopoly rights in exchange for a public disclosure detailing their innovation. These disclosures are meant to allow others to recreate and build on the patented innovation. We examine how the quality of these disclosures affects follow-on innovation. We use the plausibly exogenous assignment to patent applications of examiners who differ in their enforcement of disclosure requirements as a source of variation in disclosure quality. We find that some examiners are significantly more lenient with respect to patent disclosure quality requirements, and that patents granted by these examiners include significantly lower-quality disclosures and generate significantly less follow-on innovation. Overall, our evidence suggests that high-quality patent disclosures create knowledge spillovers that spur follow-on innovation.
The economic impact of a casino monopoly: Evidence from Atlantic City
Adam Scavette
Regional Science and Urban Economics, November 2023
Abstract:
Place-based policies and investments are often targeted at areas in economic decline and sometimes take the form of a granted monopoly (e.g., state flagship universities, professional sports franchises, mega events). After New Jersey voters approved legalized gambling as an economic development strategy to revive the blighted seaside resort town, Atlantic City held a regional monopoly on casinos east of the Mississippi River from 1978 through 1992. Using synthetic difference-in-differences, I find that commercial casinos had an immediate impact on the Atlantic City Metropolitan Area (Atlantic County, NJ) in the first five years through an increase in employment (26 percent), wages (9 percent), personal income (5 percent), and house prices (19 percent). The casinos’ positive impact on the metropolitan labor market was persistent and increasing through the early 1990s, but I find evidence that the city’s 1992 monopoly expiration negatively impacted the growth of local wages and personal income through 2000.