Kevin Lewis

May 08, 2019

Is the market for digital privacy a failure?
Caleb Fuller
Public Choice, September 2019, Pages 353-381


Conventional wisdom holds that the market for digital privacy fails owing to widespread informational asymmetry between digital firms and their customers, behavioral biases exhibited by those customers, and negative externalities from data resale. This paper supplies both theoretical and empirical reasons to question the standard market failure conclusion. On the theoretical side, I argue that digital markets are not qualitatively different from markets for other consumer goods. To wit, just as in traditional markets, it is costly to measure product attributes (such as "privacy") and, just as in more traditional settings, some firms offer credible commitments to reduce the threat of potential opportunism. On the empirical side, I conduct a survey of Google's users. The most important results of this survey suggest that, at least with respect to Google, (a) the extent of informational asymmetry is minimal and (b) the demands for "unconstrained" and "constrained" privacy diverge substantially. Significantly, 86% of respondents express no willingness to pay for additional privacy when interacting with Google. Among the remaining 14%, the average expressed willingness to pay is low.

A Culture of Favoritism: Corporate Privilege and Beliefs about Markets and Government
Matthew Mitchell, Scott Eastman & Tamara Winter
George Mason University Working Paper, March 2019


This paper discusses a national survey of business leaders that sought to determine how government favoritism toward particular firms correlates with attitudes about government, the market, and selectively favorable economic policy. Findings indicate that those individuals who believe they work for favored firms are more likely to approve of free markets in the abstract but also more likely to say the US market is currently too free. These individuals are more skeptical of competition and more inclined to approve of government intervention in markets. They also are more likely to approve of government favoritism and to believe that favoritism is compatible with a free market. Those who have direct experience with economic favoritism or are more attuned to such favoritism are more likely to have distorted perceptions of free-market capitalism and are more comfortable with further favoritism.

What Happened to U.S. Business Dynamism?
Ufuk Akcigit & Sina Ates
NBER Working Paper, April 2019


In the past several decades, the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting "best versus the rest" dynamics. We focus on multiple potential mechanisms that can potentially drive the observed changes and use the calibrated model to assess the relative importance of these channels with particular attention to the implied transitional dynamics. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude by presenting new evidence that corroborates a declining knowledge diffusion in the economy. We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge. These findings present a potential avenue for future research on the drivers of declining knowledge diffusion.

Are U.S. Industries Becoming More Concentrated?
Gustavo Grullon, Yelena Larkin & Roni Michaely
Review of Finance, forthcoming


Since the late 1990s, over 75% of U.S. industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration show higher profit margins and more profitable mergers and acquisitions deals. At the same time, we find no evidence for a significant increase in operational efficiency. Taken together, our results suggest that market power is becoming an important source of value. These findings are robust to the inclusion of (i) private firms; (ii) factors accounting for foreign competition; and (iii), the use of alternative measures of concentration. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Overall, our results suggest that the U.S. product markets have undergone a shift that has potentially weakened competition across the majority of industries.

Government Technology Policy, Social Value, and National Competitiveness
Frank Nagle
Harvard Working Paper, March 2019


This study seeks to better understand the impact that government technology procurement regulations have on social value and national competitiveness. To do this, it examines the impact of a change in France's technology procurement policy that required government agencies to favor open source software (OSS) over proprietary software in an attempt to reduce costs creating an unexpected demand shock for OSS. Analysis using the rest of the EU as controls via difference-in-differences and synthetic control frameworks shows that this policy change led to an increase of nearly 600,000 OSS contributions per year from France, creating social value by increasing the availability and quality of free and open source software. Estimates indicate this would have cost paid software developers roughly $20 million per year to replicate. However, the open nature of such goods means that any country can reap the benefits of these efforts. Therefore, additional economic outcomes that enhance France's competitiveness are also considered. The results show that within France, the regulation led to a 0.6% - 5.4% yearly increase in companies that use OSS, a 9% - 18% yearly increase in the number of IT-related startups, a 6.6% - 14% yearly increase in the number of individuals employed in IT related jobs, and a 5% - 16% yearly decrease in software related patents. All of these outcomes help to increase productivity and competitiveness at the national level. In aggregate, these results show that changes in government technology policy that favor OSS can have a positive impact on both global social value and domestic national competitiveness.

Sharing Guilt: How Better Access to Information May Backfire
Roman Inderst, Kiryl Khalmetski & Axel Ockenfels
Management Science, forthcoming


We study strategic communication between a customer and an advisor who is privately informed about the most suitable choice for the customer but whose preferences are misaligned with the customer's preferences. The advisor sends a message to the customer who, in turn, can secure herself from bad advice by acquiring costly information on her own. In our experiments, we find that making the customer's information acquisition less costly leads to less prosocial behavior of the advisor. This can be explained by a model of shared guilt, which predicts a shift in causal attribution of guilt from the advisor to the customer if the latter could have avoided her ex post disappointment. We conclude that providing better access to information through, for example, consumer protection regulation or digital information aggregation and dissemination, may have unintended negative consequences on peoples' willingness to take responsibility for each other.

New Evidence on Information Disclosure through Restaurant Hygiene Grading
Daniel Ho, Zoe Ashwood & Cassandra Handan-Nader
American Economic Journal: Economic Policy, forthcoming


The case of restaurant hygiene grading occupies a central role in information disclosure scholarship. Comparing Los Angeles, which enacted grading in 1998, with California from 1995-99, Jin and Leslie (2003) found that grading reduced foodborne illness hospitalizations by 20 percent. Expanding hospitalization data and collect- ing new data on mandatorily reported illnesses, we show that this finding does not hold up under improvements to the original data and methodology. The largest salmonella outbreak in state history hit Southern California before Los Angeles implemented grading. Placebo tests detect the same treatment effects for Southern California counties, none of which changed restaurant grading.

When Private Information Settles the Bill: Money and Privacy in Google's Market for Smartphone Applications
Michael Kummer & Patrick Schulte
Management Science, forthcoming


We shed light on a money-for-privacy trade-off in the market for smartphone applications ("apps"). Developers offer their apps at lower prices in return for greater access to personal information, and consumers choose between low prices and more privacy. We provide evidence for this pattern using data from 300,000 apps obtained from the Google Play Store (formerly Android Market) in 2012 and 2014. Our findings show that the market's supply and demand sides both consider an app's ability to collect private information, measured by the apps's use of privacy-sensitive permissions: (1) cheaper apps use more privacy-sensitive permissions; (2) given price and functionality, demand is lower for apps with sensitive permissions; and (3) the strength of this relationship depends on contextual factors, such as the targeted user group, the app's previous success, and its category. Our results are robust and consistent across several robustness checks, including the use of panel data, a difference-in-differences analysis, "twin" pairs of apps, and various measures of privacy-sensitivity and app demand.

Zoned Out? The Determinants of Manufactured Housing Rents: Evidence from North Carolina
Charles Becker & Timothy Rickert
Journal of Housing Economics, forthcoming


This paper explores determinants of manufactured housing park (MHP) plot rents in North Carolina, with particular focus on the distinction among high-growth urban parks and small town/rural parks, and on the possible role played by zoning restrictiveness. Little is known about how MHP rents are determined, even though it is estimated that more than 10 million Americans live in MHPs. We implement a hedonic model and an instrumental variables approach to examine the relationship between MHP rents and local housing markets, land use restrictions, and other factors. We find that, contrary to expectations, zoning is strongly negatively associated with park rents in periurban and rural parks, but appears as a positive driver in high-growth cities. We then extend this model to an out-of-sample prediction for MHPs rents in Texas.

Left for Dead: Anti-Competitive Behavior in Orbital Space
Nodir Adilov et al.
Economic Inquiry, forthcoming


In a dynamic investment framework with depreciation, we show incumbent satellite operators have incentives to "warehouse" a fraction of their assigned spectrum and orbital slots, keeping nonoperational assets in place, which reduces output, increases prices, and diminishes social welfare. Exploring three distinct market structures, we model firms' incentives to warehouse, and show conditions under which firms choose to warehouse rather than replace nonfunctioning satellites. We find a dominant firm with a competitive fringe produces more and longer duration warehousing relative to perfect competition or monopoly. Regulators could remediate warehousing by increasing a firm's marginal costs, or by increasing the probability of reallocating orbital slots that do not have a fully functioning satellite.

How do slot restrictions affect airfares? New evidence from the US airline industry
Hideki Fukui
Economics of Transportation, March 2019, Pages 51-71


This paper examines the impact of slot restrictions as a determinant of scarcity rent. I took advantage of an exogenous regulatory change: the removal of slots at Newark Airport in October 2016. The results from the difference-in-differences estimation with and without propensity score matching or weighting methods suggest that after the slot removal at Newark Airport, the average fare on routes to or from Newark decreased by about 2.5-2.6% in comparison to the average fare on routes to or from the two other slot-controlled New York-area airports. The estimation results from modified models suggest that the key driver lowering airfares on routes to or from Newark after the slot elimination was carriers other than the dominant carrier at Newark, though even the dominant carrier, United Airlines, appears to be making price cuts to counteract other carriers' aggressive price reductions on competitive routes. Overall, the estimation results suggest that slot restrictions limit the effect of competition on airfare.

Impact of mandated exclusive territories in the US brewing industry: Evidence from scanner level data
Jacob Burgdorf
International Journal of Industrial Organization, March 2019, Pages 376-416


I examine the competitive effects of mandated exclusive territories in the US beer industry. Theory is ambiguous as to the competitive impacts of this vertical practice. Using scanner data from a large number of grocery stores, I empirically examine the impact on beer prices, quantities, and number of brands sold after Wisconsin mandated that brewers must assign exclusive wholesale territories in 2006. Reduced form results from a differences-in-differences model using several control groups and a synthetic control show that the mandates increased prices and reduced quantity of craft beer. Overall number of brands sold decreased as well and craft brewers were the most negatively impacted. Findings suggest that the mandate gave protection to wholesalers and caused an increase in the costs of distribution and reduced competition in the brewing industry.

The Complementary Role of Liability and Safety Regulation
Massimo D'Antoni & Avraham Tabbach
American Law and Economics Review, forthcoming


This article deals with the control of hazardous activities in situations where potential victims can affect their exposure to risk. Economists have generally considered ex ante regulation (safety standards) to be a substitute for ex post policies (exposure to tort liability) in order to control externalities. We show that when the victim's compensation is partial (e.g., due to death or serious bodily injury) there are inefficiencies associated with the exclusive use of negligence liability and that an optimal policy may involve the combined use of ex-ante regulation and ex-post liability. A noteworthy feature of our explanation is that regulation is complementary to liability, in the sense that it may facilitate a higher and more efficient standard of negligence. In that case, it is efficient to set the regulatory safety standard below the standard of negligence, which is consistent with the legal doctrines of negligence per se and the (non) regulatory compliance defense.

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