It's the Regulations, Stupid
Learning to Hoard: The Effects of Preexisting and Surprise Price-Gouging Regulation During the COVID-19 Pandemic
Rik Chakraborti & Gavin Roberts
Journal of Consumer Policy, December 2021, Pages 507–529
Theory suggests anticipation of shortages stemming from price regulation can motivate households to stock up more and thereby aggravate the regulation-induced shortage. We test this theory on online shopping searches for two typically store-bought staples: hand sanitizer and toilet paper. Combining (i) interstate variation in type of price-gouging regulation — preexisting versus surprise versus none, (ii) their temporally staggered implementation, and (iii) the demand surges for hand sanitizer and toilet paper during the COVID-19 pandemic facilitates identifying the impacts of different price-gouging regulation on consumer searches. Our results are consistent with price-gouging regulation-driven anticipatory hoarding. Difference-in-differences estimates reveal that states with preexisting-regulation experience the largest increases in post-implementation search proportions for both products. Accounting for potential endogeneity of implementation using a nearest-neighbor matching strategy reveals states that make surprise announcements of new regulation during the pandemic also experience larger increases in post-activation hand sanitizer search proportions than states without any such policy, but smaller increases than what preexisting-law states experience. These results corroborate the theoretical predictions about consequences of regulation-induced anticipation of shortages and inform the current policy debate surrounding impacts of price-gouging laws. Fundamentally, our results indicate behavioural responses to policy evolve as experience reveals the effects of the policy, and this evolution might influence the welfare consequences of the policy.
Regulation and Redistribution with Lives in the Balance
University of Chicago Law Review, forthcoming
A central question in law and economics is whether non-tax legal rules should be designed solely to maximize efficiency or whether they also should account for concerns about the distribution of income. This question takes on particular importance in the context of cost-benefit analysis. Federal agencies apply cost-benefit analysis when writing regulations that generate multibillion dollar impacts on the US economy and profound effects on millions of Americans’ lives. In the past, agency cost-benefit analyses typically have ignored the income-distributive consequences of those regulations. That may soon change: On his first day in office, President Biden instructed his Office of Management and Budget to propose procedures for incorporating distributive considerations into cost-benefit analysis, thus bringing renewed relevance to a long-running law-and-economics debate. This article explores what it might mean in practice for agencies to incorporate distributive considerations into cost-benefit analysis. It uses, as a case study, a 2014 rule promulgated by the National Highway Traffic Safety Administration (NHTSA) requiring new motor vehicles to have rearview cameras that reduce the risk of backover crashes. As with most major federal regulations that impose large dollar costs, the principal benefit of the rear visibility rule is a reduction in premature mortality. Quantitative cost-benefit analysis typically translates mortality reductions into dollar terms based on the “value of a statistical life,” or VSL. Any distributive evaluation of the rule will depend critically on a parameter known as the “income elasticity of the VSL,” which reflects the relationship between an individual’s income and her willingness to pay for mortality risk reductions. Although agency cost-benefit analyses use the same VSL for all individuals regardless of income, the Department of Transportation — of which NHTSA is a part — has issued guidance on the income elasticity of the VSL for other purposes. When this article applies the Department of Transportation’s income-elasticity guidance in its distributive analysis, the rear visibility rule appears to be “regressive”: it generates net costs for lower-income groups and net benefits for higher-income groups. Rerunning the distributive analysis with equal dollar VSLs at all income levels, the rule appears to be “progressive”: lower-income individuals are the primary beneficiaries and higher-income individuals are the losers. The article goes on to explain why assumptions about the relationship between income and the VSL will have important implications for distributive analyses of other lifesaving regulations. The article then asks what agencies ought to do: should they incorporate distributive objectives into cost-benefit analysis by assigning greater weight to dollars in lower-income individuals’ hands, and should they assign different dollar VSLs to individuals with different incomes? The two questions are closely linked. Incorporating distributive objectives into cost-benefit analysis of lifesaving regulations while maintaining equal dollar VSLs for rich and poor will potentially produce perverse outcomes that — according to standard economic thinking — actually redistribute from poor to rich. After canvassing options, this article ultimately concludes that the status quo approach — equal weights for low-income and high-income individuals’ dollars, equal dollar VSLs for low-income and high-income individuals — makes practical sense in light of expressive concerns, informational burdens, and institutional constraints. The article ends by reflecting on the case study’s lessons for broader debates over legal system design, and it explains why the issues that arise in the rear visibility case study are likely to affect other efforts to redistribute through non-tax legal rules.
You Won't be My Neighbor: Opposition to High Density Development
Urban Affairs Review, forthcoming
Virtually every city in the United States bans multifamily homes in at least some neighborhoods, and in many cities most residential land is restricted to single family homes. This is the case even though many metropolitan areas are facing skyrocketing housing costs and increased environmental degradation that could be alleviated by denser housing supply. Some scholars have argued that an unrepresentative set of vocal development opponents are the culprits behind this collective action failure. Yet, recent work suggests that opposition to density may be widespread. In this research note, I use a conjoint survey experiment to provide evidence that preferences for single-family development are ubiquitous. Across every demographic subgroup analyzed, respondents preferred single-family home developments by a wide margin. Relative to single family homes, apartments are viewed as decreasing property values, increasing crime rates, lowering school quality, increasing traffic, and decreasing desirability.
Winning Big: Scale and Success in Retail Entrepreneurship
Brett Hollenbeck & Renato Zaterka Giroldo
Marketing Science, forthcoming
In 2014, Washington State used a lottery system to allocate licenses to firms in the newly legalized retail cannabis industry, generating random variation in how many stores entrepreneurs were able to own. We observe highly detailed data on all subsequent industry transactions, including prices, wholesale costs, markups, and product assortments. We find that entrepreneurs who are randomly allocated more store licenses ultimately earn substantially higher per store profits than do single-store firms, suggesting that the returns to scale in the mom-and-pop retail sector are quite large. Despite these firms having less local competition, this increase in profits does not come at the expense of consumers. Rather, retailers in multistore chains ultimately charge significantly lower prices and margins and offer greater product variety. This gap in prices is not initially present but grows substantially over time, as does the difference in assortment size and profits between stores in multistore chains and stores operating alone, consistent with firm learning. Using the full history of outcomes, we track the evolution of firms in this new market and show that multistore retailers use an initial advantage in offering larger assortments to position themselves as the low-price, large-assortment retail option and attract a larger but more price-sensitive set of customers. These results have implications for the study of retail concentration and mergers, countervailing buyer power, and consumer search. Our results suggest that policies to help entrepreneurs expand in retail may have large benefits to both firms and consumers.
Shielding Firm Value: Employment Protection and Process Innovation
Jan Bena, Hernán Ortiz-Molina & Elena Simintzi
Journal of Financial Economics, forthcoming
Following state-level legal changes that increase labor dismissal costs, firms increase their innovation in new processes that facilitate the adoption of cost-saving production methods, especially in industries with a large share of labor costs in total costs. Firms with high innovation ability exhibit larger increases in process innovation and capital-labor ratios - an effect driven by both increases in capital investment and decreases in employment. By facilitating the adjustment of the input mix when conditions in input markets change, innovation ability allows firms to mitigate value losses and is a key driver of their performance.
Are Newspaper Deserts an Oasis for Leniency? The Effect of Information Dissemination on Regulator Activity
University of Chicago Working Paper, November 2021
The effectiveness of regulator activity, such as inspections and audits, increases with the deterrence effects triggered by such activity. Deterrence can be increased through information dissemination (e.g., newspaper coverage) about regulator activity. I combine detailed inspection data from OSHA (Occupational Safety and Health Administration) with local newspaper closures to estimate the effect of a decrease in deterrence on regulator activity. I show that newspaper closures lead to a 6% decrease in the inspection rate, meaning regulators consider deterrence effects when making enforcement decisions. This effect is stronger when newspapers have stronger deterrence effects and the change in deterrence is more salient to the regulator. My results show that information dissemination can be an integral part of regulatory enforcement due to its inherent deterrence effects.
The Novelty of Innovation: Competition, Disruption, and Antitrust Policy
Steven Callander & Niko Matouschek
Management Science, forthcoming
We develop a model to capture the novelty of innovation and explore what it means for the nature of market competition and quality of innovations. An innovator decides not only whether to innovate but how boldly to innovate, where the more novel is the innovation — the more different it is from what has come before — the more uncertain is the outcome. We show in this environment that a variant of the Arrow replacement effect holds in that new entrants pursue more innovative technologies than do incumbents. Despite this, we show that the new entrant is less likely to disrupt an incumbent than the incumbent is to disrupt itself, and less likely to fail in the market. We extend the model to allow the incumbent to acquire the entrant postinnovation and show that this reverses the Arrow effect. The prospect of acquisition makes innovation more profitable but simultaneously suppresses the novelty of innovation as the entrant seeks to maximize her value to the incumbent. This reversal suggests a positive role for a strict antitrust policy that spurs entrepreneurial firms to innovate boldly.
Genetic risk scores in life insurance underwriting
Richard Karlsson Linnér & Philipp Koellinger
Journal of Health Economics, forthcoming
Genetic tests that predict the lifetime risk of common medical conditions are fast becoming more accurate and affordable. The life insurance industry is interested in using predictive genetic tests in the underwriting process, but more research is needed to establish whether this nascent form of genetic testing can refine the process over conventional underwriting factors. Here, we perform Cox regression of survival on a battery of genetic risk scores for common medical conditions and mortality risks in the Health and Retirement Study, without returning results to participants. Adjusted for covariates in a relevant insurance scenario, the scores could improve mortality risk classification by identifying 2.6 years shorter median lifespan in the highest decile of total genetic liability. We conclude that existing genetic risk scores can already improve life insurance underwriting, which stresses the urgency of policymakers to balance competing interests between stakeholders as this technology develops.
Can Facing the Truth Improve Outcomes? Effects of Information in Consumer Finance
Jessica Fong & Megan Hunter
Marketing Science, forthcoming
This paper explores the impact of information avoidance in the context of consumer finance. Specifically, under what circumstances do individuals avoid information about their credit, and how does avoiding this information affect their future credit scores? Using data from a consumer finance platform, we find that a decline in credit score decreases the likelihood that an individual views her credit report in the future. We then measure the impact of receiving information on future credit scores, especially for those likely to avoid information. To obtain a causal local average treatment effect, we use variation in whether an individual views her credit report induced by email campaign A/B tests on a subsample of users who do not opt out of email communication. We find heterogeneous effects of information on credit scores. For individuals who were more likely to avoid information (users whose credit scores were decreasing), viewing their credit reports further decreases credit scores, whereas information increases credit scores for individuals less likely to avoid information. This finding suggests that encouraging individuals to access information when they are more likely to avoid information may worsen their financial health. We discuss the implications for firms’ targeting strategies in retention efforts.
Demand Interactions in Sharing Economies: Evidence from a Natural Experiment Involving Airbnb and Uber/Lyft
Shunyuan Zhang et al.
Journal of Marketing Research, forthcoming
We examine whether and how ride-sharing services influence the demand for home-sharing services. Our identification strategy hinges on a natural experiment in which Uber/Lyft exited Austin, Texas, in May 2016 due to local regulation. Using a 12-month longitudinal dataset of 11,536 Airbnb properties, we find that Uber/Lyft’s exit led to a 14% decrease in Airbnb occupancy in Austin. In response, hosts decreased the nightly rate by $9.3 and the supply by 4.5%. We argue that when Uber/Lyft exited Austin, the transportation costs for most Airbnb guests increased significantly because most Airbnb properties (unlike hotels) have poor access to public transportation. We report three key findings: First, demand became less geographically dispersed, falling (increasing) for Airbnb properties with poor (excellent) access to public transportation. Second, demand decreased significantly for low-end properties, whose guests may be more price-sensitive, but not for high-end properties. Third, the occupancy of Austin hotels increased after Uber/Lyft’s exit; the increase occurred primarily among low-end hotels, which can substitute for low-end Airbnb properties. The results indicate that access to affordable, convenient transportation is critical for the success of home-sharing services in residential areas. Regulations that negatively affect ride-sharing services may also negatively affect the demand for home-sharing services.
The Impact of Payment Frequency on Consumer Spending and Subjective Wealth Perceptions
Wendy De La Rosa & Stephanie Tully
Journal of Consumer Research, forthcoming
Payment frequency is a fundamental yet underexplored feature of consumers’ finances. As higher payment frequencies are becoming more prevalent, consumers are receiving more frequent yet smaller paychecks. An analysis of income and expenditure data of over 30,000 consumers from a financial services provider demonstrates a naturally occurring relationship between higher payment frequencies and increased spending. A series of lab studies support this finding, providing causal evidence that higher (vs. lower) payment frequencies increase spending. The effect of payment frequency on spending is driven by changes in consumers’ subjective wealth perceptions. Specifically, higher payment frequencies reduce consumers’ uncertainty in predicting whether they will have enough resources throughout a period, increasing their subjective wealth perceptions. As such, situational factors that reduce prediction uncertainty for those paid less frequently (i.e., the timing of consumers’ expenses, income levels) moderate the impact of payment frequency. Moreover, the effects of payment frequency on subjective wealth and spending can occur even when objective wealth favors those with lower payment frequencies. More broadly, the current work underscores a need to understand how timing variations in when consumers receive their income impact their perceptions, behaviors, and general well-being.
Does Access to Bank Accounts as a Minor Improve Financial Capability? Evidence from Minor Bank Account Laws
Michael Collins, Jeff Larrimore & Carly Urban
Federal Reserve Working Paper, November 2021
Banking the unbanked is a common policy goal, but should this include access to bank accounts for minors? This study estimates how teenagers' access to bank accounts affects their financial development. Using variation in state laws, we show policies that permit access to independently-owned accounts increase account ownership at age 16 through age 19, although by age 24 those young adults are banked at similar rates to teens who grew up in states that do not allow minors to own accounts independently. Teens who had access to independently-owned accounts use fewer high-cost alternative financial services (like payday loans) through age 20 — but are then more likely to use AFS, particularly check-cashing services, from age 21 through 24. Using credit records, we show that access to non-custodial accounts has no effects on credit scores in the short-run, but lower credit scores and more loan delinquencies at ages 21 through 24. While these state laws promote financial inclusion for teenagers, the young people who take on accounts may experience negative consequences in the longer run.