Cutting down the rules
Andrew Hanson, Nicholas Jolly & Jeremy Peterson
Journal of Health Economics, forthcoming
Abstract:
In response to increasing public awareness and negative long-term health effects of concussions, the National Football League implemented the “Crown-of-the-Helmet Rule” (CHR). The CHR imposes penalties on players who initiate contact using the top of the helmet. This paper examines the intended effect of this policy and its potential for unintended consequences. We find evidence supporting the intended effect of the policy- a reduction in weekly concussion reports among defensive players by as much as 32 percent (34 percent for all head and neck injuries), but also evidence of an increase in weekly lower extremity injury reports for offensive players by as much as 34%.
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Simplification of Privacy Disclosures: An Experimental Test
Omri Ben-Shahar & Adam Chilton
Journal of Legal Studies, June 2016, Pages S41-S67
Abstract:
Simplification of disclosures is widely regarded as an important goal and is increasingly mandated in a variety of areas. In the area of data privacy, lawmakers and interest groups developed best-practices techniques to help consumers understand how firms collect and use personal information. Commentators have even advocated going a step further and using simpler disclosures — warning boxes that alert consumers to the least-expected elements. But do these techniques succeed in better informing consumers or preventing unwise behavior? To answer this question, we engaged a leading market research firm to conduct a survey on risky sexual behaviors while randomizing the format of the privacy disclosures provided to the respondents. We find that best-practice simplification techniques have little or no effect on respondents’ comprehension of the disclosure, willingness to share personal information, and expectations about their rights. Our results challenge the wisdom of focusing regulatory effort on simplifying disclosures.
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End of 9-Endings and Price Perceptions
Haipeng (Allan) Chen, Daniel Levy & Avichai Snir
Bar Ilan University Working Paper, January 2017
Abstract:
We take advantage of a natural experiment to document an emergence of a new price ending that has the same effects as 9-endings. In January 2014, the Israeli parliament has passed a law prohibiting the use of non 0-ending prices. We find that one year after 9-ending prices have disappeared, 90-ending prices acquired the same status as 9-ending prices had before the law was passed. 90-ending prices became the new psychological price points. The retailers and the shoppers both reacted to the regulatory intervention optimally, which has eliminated the regulation’s intended effect.
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Investment-less Growth: An Empirical Investigation
Germán Gutiérrez & Thomas Philippon
NBER Working Paper, December 2016
Abstract:
We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q, and that this weakness starts in the early 2000’s. There are two broad categories of explanations: theories that predict low investment because of low Q, and theories that predict low investment despite high Q. We argue that the data does not support the first category, and we focus on the second one. We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology or regulation), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with less entry and more concentration invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with less entry/more concentration. These firms spend a disproportionate amount of free cash flows buying back their shares.
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The Cumulative Cost of Regulations
Bentley Coffey, Patrick McLaughlin & Pietro Peretto
George Mason University Working Paper, April 2016
Abstract:
We estimate the effects of federal regulation on value added to GDP for a panel of 22 industries in the United States over a period of 35 years (1977–2012). The structure of our linear specification is explicitly derived from the closed-form solutions of a multisector Schumpeterian model of endogenous growth. We allow regulation to enter the specification in a flexible manner. Our estimates of the model’s parameters are then identified from covariation in some standard sector-specific data joined with RegData 2.2, which measures the incidence of regulations on industries based on a text analysis of federal regulatory code. With the model’s parameters fitted to real data, we confidently conduct counterfactual experiments on alternative regulatory environments. Our results show that economic growth has been dampened by approximately 0.8 percent per annum since 1980. Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012 (i.e., regulatory growth since 1980 cost GDP $4 trillion in 2012, or about $13,000 per capita).
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The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry
Georgios Zervas, Davide Proserpio & John Byers
Journal of Marketing Research, forthcoming
Abstract:
Peer-to-peer markets, collectively known as the sharing economy, have emerged as alternative suppliers of goods and services traditionally provided by long-established industries. The authors explore the economic impact of the sharing economy on incumbent firms by studying the case of Airbnb, a prominent platform for short-term accommodations. The authors analyze Airbnb's entry into the state of Texas, and quantify its impact on the Texas hotel industry over the subsequent decade. The authors estimate that in Austin, where Airbnb supply is highest, the causal impact on hotel revenue is in the 8–10% range; moreover, the impact is non-uniform, with lower-priced hotels and those hotels not catering to business travelers being the most affected. The impact manifests itself primarily through less aggressive hotel room pricing, an impact that benefits all consumers, not just participants in the sharing economy. The price response is especially pronounced during periods of peak demand, such as SXSW, and is due to a differentiating feature of peer-to-peer platforms – enabling instantaneous supply to scale to meet demand.
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On-demand high-capacity ride-sharing via dynamic trip-vehicle assignment
Javier Alonso-Mora et al.
Proceedings of the National Academy of Sciences, 17 January 2017, Pages 462–467
Abstract:
Ride-sharing services can provide not only a very personalized mobility experience but also ensure efficiency and sustainability via large-scale ride pooling. Large-scale ride-sharing requires mathematical models and algorithms that can match large groups of riders to a fleet of shared vehicles in real time, a task not fully addressed by current solutions. We present a highly scalable anytime optimal algorithm and experimentally validate its performance using New York City taxi data and a shared vehicle fleet with passenger capacities of up to ten. Our results show that 2,000 vehicles (15% of the taxi fleet) of capacity 10 or 3,000 of capacity 4 can serve 98% of the demand within a mean waiting time of 2.8 min and mean trip delay of 3.5 min.
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Regulation and the cost of childcare
Devon Gorry & Diana Thomas
Applied Economics, forthcoming
Abstract:
Female labour market choices depend on the availability, affordability and quality of childcare. In this article, we evaluate different regulatory measures and their effect on both the quality and the cost of childcare. First, we analyse data on regulations and costs to estimate the effect of regulatory measures on the cost of childcare. Next, we summarize the existing literature on the effect of regulation on childcare quality. We find that regulation intended to improve quality often focuses on easily observable measures of the care environment that do not necessarily affect the quality of care but that do increase the cost. Thus, we find that the regulatory environment could be improved by eliminating costly measures that do not affect quality of care.
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Imperfect Markets versus Imperfect Regulation in U.S. Electricity Generation
Steve Cicala
NBER Working Paper, January 2017
Abstract:
This paper measures changes in electricity generation costs caused by the introduction of market mechanisms to determine output decisions in service areas that were previously using command-and-control-type operations. I use the staggered transition to markets from 1999- 2012 to evaluate the causal impact of liberalization using a nationwide panel of hourly data on electricity demand and unit-level costs, capacities, and output. To address the potentially confounding effects of unrelated fuel price changes, I use machine learning methods to predict the allocation of output to generating units in the absence of markets for counterfactual production patterns. I find that markets reduce production costs by $3B per year by reallocating output among existing power plants: Gains from trade across service areas increase by 20% based on a 10% increase in traded electricity, and costs from using uneconomical units fall 20% from a 10% reduction in their operation.
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Working Conditions and Regulation
Philipp Weinschenk
Labour Economics, forthcoming
Abstract:
Do employers invest sufficiently in the working conditions of employees? We examine this question in a simple principal-agent model. We show that, even though investment is contractible, the principal underinvests whenever her agent's alternatives are rather poor. This provides a reason for regulation. The indirect regulatory approach of taking measures that improve the agent's bargaining power or outside option at least weakly enhances the agent's well-being and welfare. The direct regulatory approach of demanding a certain standard of working conditions increases the principal's investment, but may nonetheless leave the agent's well-being unaffected and deteriorate welfare. This holds true since due to a standard, the principal may provide the agent with a lower-powered incentive scheme and implement a lower effort level.
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Is Privacy Policy Language Irrelevant to Consumers?
Lior Jacob Strahilevitz & Matthew Kugler
Journal of Legal Studies, June 2016, Pages S69-S95
Abstract:
This article reports the results of two experiments in which large, census-weighted samples of Americans read short excerpts from Facebook’s, Yahoo’s, and Google’s privacy policies, which are at issue in high-stakes privacy class-action lawsuits. Subjects were randomly assigned to read language from either vague policies, some of which had been adjudicated insufficient to notify consumers about the companies’ practices, or explicit policies. Though many experimental subjects read these privacy policy excerpts closely, subjects who saw the explicit policies did not differ from those who saw vague policies in their assessment of whether their assent to the policies would permit the corporate practices at issue. Subjects generally stated that agreement to either vague or explicit language authorized companies to collect or use their personal information, even though consumers regarded these corporate practices as intrusive. These experiments show that courts and laypeople can understand the same privacy policy language quite differently.
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Political Determinants of Competition in the Mobile Telecommunication Industry
Mara Faccio & Luigi Zingales
NBER Working Paper, January 2017
Abstract:
We study how political factors shape competition in the mobile telecommunication sector. We show that the way a government designs the rules of the game has an impact on concentration, competition, and prices. Pro-competition regulation reduces prices, but does not hurt quality of services or investments. More democratic governments tend to design more competitive rules, while more politically connected operators are able to distort the rules in their favor, restricting competition. Government intervention has large redistributive effects: U.S. consumers would gain $65bn a year if U.S. mobile service prices were in line with German ones and $44bn if they were in line with Danish ones.
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Dennis Weisman
B.E. Journal of Economic Analysis & Policy, October 2016
Abstract:
In a pioneering article entitled “Taxation by Regulation,” Judge Richard Posner challenged the prevailing orthodoxy that regulation emulates competition along the lines of the Public Interest Theory of regulation. He argued that regulation is best viewed as a branch of public finance in which the power of the state is leveraged to achieve non-competitive outcomes. We develop an indirect test of Posner’s theory by specifying the regulator’s welfare function as a convex combination of consumer surplus, profits shared with the regulator and profits retained by the regulated firm. The welfare weights cannot be observed directly, but can be inferred from the regulator’s behavior in equilibrium. To wit, when the regulator permits the regulated firm to earn positive profits and authorizes higher prices in response to a greater degree of profit sharing this establishes both an upper bound on the consumer surplus weight and a higher weight on shared profits than on profits retained by the regulated firm. Applying this test to the implementation of the 1996 Telecommunications Act lends support to Posner’s theory.
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Sudarshan Jayaraman, S.P. Kothari & Karthik Ramanna
MIT Working Paper, November 2016
Abstract:
The lobbying literature provides evidence of firms shaping their regulatory context, consistent with corporate rent-seeking. We propose that such rent-seeking, where it exists, is unlikely to enrich shareholders at the expense of customers when firms operate in competitive product markets. We test this proposition through an assessment of the dissipation of the cash benefits accrued from corporate tax inversions. We find lower accounting and stock-market returns to shareholders of inverting firms in competitive industries (relative to those in concentrated industries). Further, inverting firms in competitive industries are more likely to improve liquidity and invest in R&D relative to those in concentrated industries. The evidence suggests that in competitive industries lobbying “rents” accrue to customers over shareholders.
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On the impossibility of protecting risk-takers
Toomas Hinnosaar
Economic Journal, forthcoming
Abstract:
Risk-neutral sellers can extract high profits from risk-loving buyers using lotteries. To limit risk-taking, gambling is heavily regulated in most countries. In this paper, I show that protecting risk-loving buyers is essentially impossible. Even if sellers are restricted from using mechanisms that resemble lotteries, they can still construct selling mechanisms that ensure unbounded profits as long as buyers are risk-loving, at least asymptotically. Asymptotically risk-loving preferences are both sufficient and necessary for unbounded profits. Buyers are asymptotically risk-loving, for example, when they are globally risk-loving, when they have cumulative prospect theory preferences, or when their utility is bounded from below.
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The Product Market Impact of Minority Stake Acquisitions
Amrita Nain & Yan Wang
Management Science, forthcoming
Abstract:
We show that partial equity ownership of a rival firm reduces product market competition. Acquisitions of a minority equity stake in rival firms are followed by higher output prices and higher industry profits, particularly when barriers to entry are high. Stock-price reactions of nonparticipating competitors of the acquirer and target are positive while announcement returns of customer firms are negative. Moreover, announcement returns of rivals are significantly higher and those of customers weakly lower when the customer industry is more competitive and when the acquirer and target are larger firms.