Failing Enterprise

Kevin Lewis

February 21, 2024

The Morality of Markets
Mathias Dewatripont & Jean Tirole
Journal of Political Economy, forthcoming 


Scholars and civil society have argued that competition erodes supplier morality. This paper establishes a robust irrelevance result, whereby intense market competition does not crowd out consequentialist ethics; it thereby issues a strong warning against the wholesale moral condemnation of markets and pro-competitive institutions. Intense competition, while not altering the behavior of profitable suppliers, however may reduce the standards of highly ethical suppliers or not-for-profits, raising the potential need to protect the latter in the marketplace.

The Unreasonable Effectiveness of Algorithms
Jens Ludwig, Sendhil Mullainathan & Ashesh Rambachan
NBER Working Paper, February 2024 


We calculate the social return on algorithmic interventions (specifically their Marginal Value of Public Funds) across multiple domains of interest to economists -- regulation, criminal justice, medicine, and education. Though these algorithms are different, the results are similar and striking. Each one has an MVPF of infinity: not only does it produce large benefits, it provides a "free lunch." We do not take these numbers to mean these interventions ought to be necessarily scaled, but rather that much more R&D should be devoted to developing and carefully evaluating algorithmic solutions to policy problems.

The Anatomy of Concentration: New Evidence From a Unified Framework
Kenneth Ahern, Lei Kong & Xinyan Yan
NBER Working Paper, January 2024


Concentration is a single summary statistic driven by two opposing forces: the number of firms in a market and the evenness of their market shares. This paper introduces a generalized measure of concentration that allows researchers to vary the relative importance of each force. Using the generalized measure, we show that the widely-cited evidence of increasing industrial employment concentration is driven by the Herfindahl Index's over-weighting of evenness and under-weighting of firm counts. We propose an alternative, equally-weighted measure that has an equivalent economic meaning as the Herfindahl Index, but possesses superior statistical attributes in typical firm size distributions. Using this balanced measure, we find that employment concentration decreased from 1990 to 2020. Finally, decomposing aggregate diversity into meaningful geographic and industry subdivisions reveals that concentration within regional markets has fallen, while concentration between markets has risen.

Built Out Cities? A New Approach to Measuring Land Use Regulation
Paavo Monkkonen
Journal of Housing Economics, forthcoming 


We introduce a new way to measure the stringency of housing regulation. Rather than a standard regulatory index or a single aspect of regulation like Floor Area Ratio, we draw on cities' self-reported estimates of their total zoned capacity for new housing. This measure, available to us as a result of state legislation in California, offers a more accurate way to assess local antipathy towards new housing, and also offers a window into how zoning interacts with existing buildout. We show, in regressions analyzing new housing permitting, that our measure has associations with new supply that are as large or larger than conventional, survey-based indexes of land use regulation. Moreover, unbuilt zoning capacity interacts with rent to predict housing production in ways conventional measures do not. Specifically, interacting our measure with rent captures the interplay of regulation and demand: modest deregulation in high-demand cities is associated with substantially more housing production than substantial deregulation in low-demand cities. These findings offer a more comprehensive explanation for the historically low levels of housing production in high cost metros.

The Effects of Minimum-Lot-Size Reform on Houston Land Values
Emily Hamilton
George Mason University Working Paper, January 2024 


In 1998 Houston policymakers cut minimum-lot-size requirements by about two-thirds -- from 5,000 square feet to 1,400 square feet -- within the center city. A 2013 expansion of this minimum-lot-size reform is the policy change at the center of this study. Relative to recent zoning changes intended to facilitate denser construction in single-family neighborhoods, such as those in Minneapolis and Oregon, Houston's reform has received less media attention but has facilitated greater rates of construction. One concern critics raise about increasing property owners' development rights is that the resulting greater option value of the land may increase the prices of the existing stock of housing with the potential to worsen housing affordability, at least in the short term. I use a difference-indifference study design to estimate the effect of the 2013 reform on land values. Across many model specifications, I find no evidence that minimum-lot-size reform increased land values. In general, I find that the reform had no measurable effect on land values. This may be because Houston's reform has facilitated a large amount of housing construction. The downward pressure on structure rents due to increased housing supply, and to house's structure values as a result, may offset the effect of an increase in land's option value.

The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies
Sharat Ganapati
NBER Working Paper, January 2024 


Nearly half of all transactions in the $5 trillion market for manufactured goods in the United States were intermediated by wholesalers in 2012, up from 32 percent in 1992. Seventy percent of this increase is due to the growth of "superstar" firms - the largest one percent of wholesalers. Estimates based on detailed administrative data show that the rise of the largest firms was driven by an intuitive linkage between their sourcing of goods from abroad and an expansion of their domestic distribution network to reach more buyers. Both elements require scale economies and lead to increased wholesaler market shares and markups. Counterfactual analysis shows that despite increases in wholesaler market power and markups, scale has benefits. Buyers gain access to globally sourced varieties, nationwide distribution networks, and increased quality while wholesalers decrease their marginal costs.

Declining Responsiveness at the Establishment Level: Sources and Productivity Implications
Russell Cooper, John Haltiwanger & Jonathan Willis
NBER Working Paper, February 2024 


This paper studies competing sources of declining dynamism. Evidence shows that an important component of this decline is accounted for by the reduction in the response of employment to shocks in US establishments. Using a plant level dynamic optimization problem as a framework for analysis, four potential reasons for this decline are studied: (i) a change in exogenous processes for profits, (ii) an increase in impatience, (iii) increased market power and (iv) increasing adjustment costs. We identify and quantity the contribution of each of these factors building on a simulated method of moments estimation of our structural model. Our results indicate that the reduction in responsiveness largely reflects increased costs of employment adjustment. Changes in market power, as captured by changes in the curvature of the revenue, function play a minimal role. But, in the presence of rising adjustment costs, measured sales-weighted markups using the recently popular indirect production approach rise substantially, along with rising dispersion and skewness of such measured markups.

Imperfect Information About Consumer Rights: Implications for Efficiency and Distribution
Florian Baumann, Tim Friehe & Tobias Wenzel
American Law and Economics Review, forthcoming 


This paper shows that the provision of consumer rights can induce unintended distributional effects and may, under specific circumstances, even decrease welfare when some consumers are unaware of these rights. We find that consumers who are uninformed about a mandated warranty may demand excessively safe products when the share of informed consumers is high. In other circumstances, uninformed consumers buy the efficient or an inefficiently unsafe products like informed consumers, but the former cross-subsidize the latter via firms' pricing. Concerning the salient policy option of improving information about consumer rights, we find that increasing the share of informed consumers may raise the risk of inefficiency.

Data, Privacy Laws and Firm Production: Evidence from the GDPR
Mert Demirer et al.
NBER Working Paper, February 2024 


By regulating how firms collect, store, and use data, privacy laws may change the role of data in production and alter firm demand for information technology inputs. We study how firms respond to privacy laws in the context of the EU's General Data Protection Regulation (GDPR) by using seven years of data from a large global cloud-computing provider. Our difference-in-difference estimates indicate that, in response to the GDPR, EU firms decreased data storage by 26% and data processing by 15% relative to comparable US firms, becoming less "data-intensive." To estimate the costs of the GDPR for firms, we propose and estimate a production function where data and computation serve as inputs to the production of "information." We find that data and computation are strong complements in production and that firm responses are consistent with the GDPR, representing a 20% increase in the cost of data on average. Variation in the firm-level effects of the GDPR and industry-level exposure to data, however, drives significant heterogeneity in our estimates of the impact of the GDPR on production costs.

Social Connectedness and Information Markets 
Rachel Kranton & David McAdams
American Economic Journal: Microeconomics, February 2024, Pages 33-62 


This paper investigates information quality in a simple model of socially connected information markets. Suppliers' payoffs derive from the fraction of consumers who see their stories. Consumers prefer to share and act only on high-quality information. Quality is endogenous and highest when social connectedness is neither too high nor too low. In highly connected markets, low-quality stories are widely seen, giving suppliers little incentive to invest in quality. Increasing the volume of misinformation and increasing consumers' costs of tuning in to suppliers' broadcasts can each increase equilibrium information quality.


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