Left alone

Kevin Lewis

December 05, 2018

Does Private Regulation Preempt Public Regulation?
Neil Malhotra, Benoît Monin & Michael Tomz
American Political Science Review, forthcoming


Previous research has emphasized corporate lobbying as a pathway through which businesses influence government policy. This article examines a less-studied mode of influence: private regulation, defined as voluntary efforts by firms to restrain their own behavior. We argue that firms can use modest private regulations as a political strategy to preempt more stringent public regulations. To test this hypothesis, we administered experiments to three groups that demand environmental regulations: voters, activists, and government officials. Our experiments revealed how each group responded to voluntary environmental programs (VEPs) by firms. Relatively modest VEPs dissuaded all three groups from seeking more draconian government regulations, a finding with important implications for social welfare. We observed these effects most strongly when all companies within an industry joined the voluntary effort. Our study documents an understudied source of corporate power, while also exposing the limits of private regulation as a strategy for influencing government policy.

Choice Architecture, Framing, and Cascaded Privacy Choices
Idris Adjerid, Alessandro Acquisti & George Loewenstein
Management Science, forthcoming


For consumers, managing privacy online requires navigating a complex process of interrelated choices. This process may be conceived of as “cascaded,” in that a combination of upstream choices (e.g., of privacy settings on a social network site) and downstream choices (e.g., of what to reveal on the site) together determine ultimate privacy outcomes. In a series of experiments, we examine the potential impact of choice architecture in cascaded privacy choice settings. We investigate how changes in choice frames implemented by service providers can influence consumers’ upstream disclosure settings, often in ways that they are unaware of and that may be destructive to them. Whether the effects of choice frames upstream are ultimately detrimental to individuals’ privacy, however, depends on whether they are offset by more or less protective downstream choices. Thus, we also examine whether such upstream effects of choice architecture are “mitigated” through changes in downstream self-disclosure. We find, first, that various manipulations of decision frames, common in privacy contexts, significantly impact participants’ upstream choice of disclosure settings. Second, we do not find evidence that the impact of choice architecture upstream is mitigated downstream: participants’ self-disclosure rates do not adjust or change in response to choice architecture-induced changes in upstream choices. These findings call into question both policy makers’ and industry advocates’ reliance on choice-based privacy protection mechanisms, contribute to an emerging behavioral perspective on privacy decision making, and highlight the importance of accounting for the cascaded nature of privacy decision making in both policy and managerial settings.

How Does Competition Affect Innovation? Evidence from U.S. Antitrust Cases
Hyo Kang
University of California Working Paper, November 2018


This paper examines how market competition affects the intensity and breadth of innovation, using the formation and breakup of price fixing cartels to proxy for competition, or lack thereof. I assembled a unique dataset comprising 461 prosecuted cartel cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on patenting and other measures of innovation. I then use a difference-in-difference methodology, matching colluding firms to various counterfactual firms. Empirical results show a negative causal relationship between competition and innovation in the cartel context. When collusion suppressed market competition, colluding firms increased R&D investment by 12%, patenting by 51%, and top-quality patents by 20%. Furthermore, at the same time, firms broadened their areas of innovation by increasing the number of patented technology fields by 33%. The main finding has a notable strategic implication – that firms shift toward innovation competition when price competition weakens. Further tests suggest that financial constraint ("ability to innovate") and the industry’s growth rate ("incentive to innovate") are important economic mechanisms behind the trade-off between price competition and innovation growth.

Killer Acquisitions
Colleen Cunningham, Florian Ederer & Song Ma
Yale Working Paper, August 2018


Firms have incentives to acquire innovative targets to discontinue the development of the targets’ innovation projects and preempt future competition. We call such acquisitions “killer acquisitions.” We develop a parsimonious model in which killer acquisitions arise from an incumbent’s desire to prevent the profit cannibalization of existing products that are substitutes for (or overlap with) the target’s innovation. We provide empirical evidence for this phenomenon by tracking detailed project-level development for more than 35,000 pharmaceutical drug projects. Acquired drug projects are less likely to be developed when the acquired project overlaps with the acquirer’s portfolio of products and projects. This pattern is more pronounced when the acquirer has strong incentives to protect its market power due to weak existing competition. Alternative interpretations such as optimal project selection and human capital and technology redeployment do not explain our results. Conservative estimates indicate that about 6.4% of all acquisitions in our sample are killer acquisitions and that such acquisitions often occur just below thresholds for antitrust scrutiny.

Sludge and Ordeals
Cass Sunstein
Duke Law Journal, forthcoming


In 2015, the United States government imposed 9.78 billion hours of paperwork burdens on the American people. Many of these hours are best categorized as “sludge,” reducing access to important licenses, programs, and benefits. Because of the sheer costs of sludge, rational people are effectively denied life-changing goods and services; the problem is compounded by the existence of behavioral biases, including inertia, present bias, and unrealistic optimism. In principle, a serious deregulatory effort should be undertaken to reduce sludge, through automatic enrollment, greatly simplified forms, and reminders. At the same time, sludge can promote legitimate goals. First, it can protect program integrity, which means that policymakers might have to make difficult tradeoffs between (1) granting benefits to people who are not entitled to them and (2) denying benefits to people who are entitled to them. Second, it can overcome impulsivity, recklessness, and self-control problems. Third, it can prevent intrusions on privacy. Fourth, it can serve as a rationing device, ensuring that benefits go to people who most need them. In most cases, these defenses of sludge turn out to be more attractive in principle than in practice. For sludge, a form of cost-benefit analysis is essential, and it will often argue in favor of a neglected form of deregulation: sludge reduction. Various suggestions are offered for new action by the Office of Information and Regulatory Affairs, which oversees the Paperwork Reduction Act; for courts; and for Congress.

Irrational Ignorance at the Patent Office
Michael Frakes & Melissa Wasserman
Vanderbilt Law Review, forthcoming


There is widespread belief that the Patent Office issues too many bad patents that impose significant harms on society. At first glance, the solution to the patent quality crisis seems straightforward: give patent examiners more time to review applications so they grant patents only to those inventions that deserve them. Yet the answer to the harms of invalid patents may not be that easy. It is possible that the Patent Office is, as Mark Lemley famously wrote, “rationally ignorant.” In Rational Ignorance at the Patent Office, Lemley argued that because so few patents are economically significant, it makes sense to rely upon litigation to make detailed validity determinations in those rare cases rather than increase the expenses associated with conducting a more thorough review of all patent applications. He supported his thesis with a cost-benefit calculation in which he concluded that the costs of giving examiners more time outweighs the benefits of doing so. Given the import of the rational ignorance concept to the debate on how best to address bad patents, the time is ripe to revisit this discussion. This Article seeks to conduct a similar cost-benefit analysis to the one that Lemley attempted nearly fifteen years ago. In doing so, we employ new and rich sources of data along with sophisticated empirical techniques to form novel, empirically driven estimates of the relationships that Lemley was forced, given the dearth of empirical evidence at his time, to assume in his own analysis. Armed with these new estimates, this Article demonstrates that the savings in future litigation costs associated with giving examiners additional time per application alone more than outweigh the costs of increasing examiner time allocations. Thus, we conclude the opposite of Lemley: society would be better off investing more resources in the Agency to improve patent quality than relying upon ex-post litigation to weed out invalid patents. Given its current level of resources, the Patent Office is not being “rationally ignorant” but, instead, irrationally ignorant.

Political Discretion and Antitrust Policy: Evidence from the Assassination of President McKinley
Richard Baker, Carola Frydman & Eric Hilt
NBER Working Paper, November 2018


We study the importance of discretion in antitrust enforcement by analyzing the response of asset prices to the sudden accession of Theodore Roosevelt to the presidency. During McKinley’s term in office the largest wave of merger activity in American history occurred, and his administration did not attempt to use antitrust laws to restrain any of those mergers. His vice president, Theodore Roosevelt, was known to be a Progressive reformer and much more interested in controlling anticompetitive behavior. We find that firms with greater vulnerability to antitrust enforcement saw greater declines in their abnormal returns following McKinley’s assassination. The transition from McKinley to Roosevelt caused one of the most significant changes in antitrust enforcement of the Gilded Age — not from new legislation, but from a change in the approach taken to the enforcement of existing law. Our results highlight the importance of enforcement efforts in antitrust.

Muddled Information
Alexander Frankel & Navin Kartik
Journal of Political Economy, forthcoming


We study a model of signaling in which agents are heterogeneous on two dimensions. An agent's natural action is the action taken in the absence of signaling concerns. Her gaming ability parameterizes the cost of increasing the action. Equilibrium behavior muddles information across dimensions. As incentives to take higher actions increase — due to higher stakes or more manipulable signaling technology — more information is revealed about gaming ability, and less about natural actions. We explore a new externality: showing agents' actions to additional observers can worsen information for existing observers. Applications to credit scoring, school testing, and web search are discussed.

Insinuation Anxiety: Concern That Advice Rejection Will Signal Distrust After Conflict of Interest Disclosures
Sunita Sah, George Loewenstein & Daylian Cain
Personality and Social Psychology Bulletin, forthcoming


When expert advisors have conflicts of interest, disclosure is a common regulatory response. In four experiments (three scenario experiments involving medical contexts, and one field experiment involving financial consequences for both parties), we show that disclosure of a financial or nonfinancial conflict of interest can have a perverse effect on the advisor–advisee relationship. Disclosure, perhaps naturally, decreases an advisee’s trust in the advice. But disclosure can also lead to concern that failure to follow advice will be interpreted as a signal of distrust. That is, rejecting the advice could suggest that the advisee is insinuating that the advisor could be biased by the conflict of interest. We show that this insinuation anxiety persists whether the disclosure is voluntary or required by law and whether the disclosed conflict is big or small, but it diminishes when the disclosure is made by an external source rather than directly by the advisor.

Understanding the (Perverse) Effects of Disclosing Conflicts of Interest: A Direct Replication Study
Sunita Sah
Journal of Economic Psychology, forthcoming


Advisors are often subject to conflicts of interest — a potential clash between their professional responsibilities and personal interests. Such conflicts can increase bias in advice. Although disclosure is frequently proposed to manage conflicts of interest, it can have unintended consequences on both advisees and advisors. In seminal work, Cain et al., 2005, Cain et al., 2011 demonstrated that advisors give more biased advice with disclosure than without, to the detriment of advisees’ financial payoffs. However, recent experiments by Sah (2018), have revealed that in certain contexts, advisors give less biased advice with disclosure relative to nondisclosure. To further understand the contradictory findings and increase confidence in the original results, I conducted a direct replication of the main study from Cain et al. (2011) on advisors (with slight changes for advisees). I replicated the original finding that advisors give more biased advice with conflict-of-interest disclosure (vs. without) when giving recommendations on the sale price of houses to advisees who have less information. Like Cain et al., I found little or no support for effects on advisees, such as advisees giving higher estimates, being less accurate, or discounting more, with conflict-of-interest disclosure relative to nondisclosure. However, a meta-analysis revealed that across the original study and this replication, advisees were financially worse off with disclosure than without. I discuss when conflict-of-interest disclosure can lead advisors to give more or less biased advice.

The Short-Run Effects of GDPR on Technology Venture Investment
Jian Jia, Ginger Zhe Jin & Liad Wagman
NBER Working Paper, November 2018


The General Data Protection Regulation (GDPR) came into effect in the European Union in May 2018. We study its short-run impact on investment in new and emerging technology firms. Our findings indicate negative post-GDPR effects on EU ventures, relative to their US counterparts. The negative effects manifest in the overall dollar amounts raised across funding deals, the number of deals, and the dollar amount raised per individual deal.

The dynamic properties of institutional reform: An analysis of US states
Brandon Bolen
Journal of Institutional Economics, forthcoming


Decades of research show that economic freedom is highly correlated with desirable economic outcomes both internationally and locally. Yet we still know little about the transition from low to high levels of economic freedom, particularly for institutions under local control. This research shows that while economic freedom in the United States is decreasing with regard to institutions under national control, it is increasing with regard to institutions under state and local control. Economic freedom increases gradually among the states, driven primarily by increasing labor market freedom. Decreases in economic freedom, on the other hand, occur sharply, often following stark changes to state fiscal policies.

Affordable Housing and City Welfare
Jack Favilukis, Pierre Mabille & Stijn Van Nieuwerburgh
NYU Working Paper, November 2018


Housing affordability has become the main policy challenge for the major cities of the world. Two key policy levers are zoning and rent control. We build a new dynamic spatial equilibrium model to evaluate the effect of these policies on house prices, rents, labor supply, production, residential construction, income and wealth inequality, as well as the location decision of households within the city. The model incorporates risk, wealth effects, and dynamic spatial equilibrium. We calibrate the model to New York City, incorporating current zoning and rent control policies. Our model suggests sizable welfare gains from relaxing zoning regulations in the city center. That policy is progressive; it reduces overall inequality but increases spatial inequality between neighborhoods. In contrast, policies that decrease the size of the rent control system directly or indirectly (making income requirements more stringent, concentrating affordable housing outside the city center) are welfare reducing. The concentrated losses of the poor outweigh the benefits of a better spatial allocation of labor and housing.

How Much of Barrier to Entry is Occupational Licensing?
Peter Blair & Bobby Chung
NBER Working Paper, November 2018


We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.

Strengthening a Weak Rival for a Fight
Martin Byford & Joshua Gans
International Journal of Industrial Organization, March 2019, Pages 1-17


We provide a new model wherein firms of different productivities survive in an industry despite the threat of entry by high productivity firms. We demonstrate that an efficient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen its inefficient rival in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that this equilibrium gives rise to persistent performance differences, market compression, and stability in the identity of firms in the market. Moreover, the relational contracting equilibrium is facilitated by strong anti-trust laws.

Building Social Capital at the Expense of Principals: Evidence from Residential Real Estate Agent Trading Networks
Patrick Smith, Velma Zahirovic-Herbert & Karen Gibler
Journal of Real Estate Research, forthcoming


Principal-agent problems are common in industries, such as real estate, that employ agents. Social capital theory explains how an agent’s incentive to maximize revenue working with other agents on multiple transactions may be a disincentive when negotiating to capture a price surplus in individual transactions. We find that when two agents who have worked together represent clients in a single-family house transaction, the property sells for a lower price. This suggests that agents maximize their income over time by building a network of cooperating agents. The effect persists throughout the market cycle.

Traffic calming and neighborhood livability: Evidence from housing prices in Portland
Stefano Polloni
Regional Science and Urban Economics, January 2019, Pages 18-37


This paper examines the impact of traffic calming on the livability of urban residential streets. Using geo-referenced data on the installation of 1187 calming devices in Portland (OR), I test whether the interventions locally affect housing prices during succeeding years. I provide reduced-form evidence that city dwellers pay significant premiums to limit their exposure to motor vehicles, but obtain mixed results regarding the overall price impacts of calming devices. My estimates suggest that only the most effective traffic calming measures have a detectable impact on housing prices. The implied traffic flow elasticity is −0.07: projects decreasing traffic by 16% raise home values on treated streets by 1%.

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