Playing fair
Under the radar: How firms manage competitive uncertainty by appointing friends of other CEOs to their boards
James Westphal & David Zhu
Strategic Management Journal, forthcoming
Abstract:
In this study we reveal a previously unstudied type of board tie that may help firms manage competitive uncertainty. While firms face regulatory barriers to the use of board interlock ties as a strategy for reducing competition, we suggest that firms can circumvent these barriers by appointing the friends of competitors’ CEOs to their boards. Our theoretical framework addresses the antecedents, maintenance, and performance consequences of such “board‐friendship ties” to rivals. Our theory explains (1) why firms form and maintain board‐friendship ties, where maintenance involves the reconstitution of broken ties, and (2) how firms form and maintain these ties, by revealing the role of search firms in identifying the friends of rivals’ CEOs. Empirical analyses of large‐sample, longitudinal survey and archival data provide substantial support for our theory.
Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act
Thomas Wollmann
American Economic Review: Insights, forthcoming
Abstract:
Prospective merger review is the most frequent application of antitrust law. It exempts transactions on the basis of size, though small deals can have large anticompetitive effects in segmented industries. I examine its impact on antitrust enforcement and merger activity in the context of an abrupt increase in the US exemption threshold. I find that among newly-exempt deals, antitrust investigations fall to almost zero while mergers between competitors rise sharply. Effectively all of the rise reflects an endogenous response of firms to reduced premerger scrutiny, consistent with large deterrent effects of antitrust enforcement.
Making Firms Liable for Consumers’ Mistaken Beliefs: Applications to the U.S. Mortgage and Credit Card Markets
Alexei Alexandrov
Journal of Empirical Legal Studies, forthcoming
Abstract:
In theory, an introduction of a liability on firms, related to the difference between consumers’ beliefs and the effective terms of purchase/contract, can improve both social welfare and consumer surplus, depending on the relative magnitudes of: (1) decrease in the gap between the beliefs and the effective terms of the contract due to the introduction of the liability, (2) output decrease or price increase, and (3) efficiency of administering the liability (and the amount transferred). I do not find statistically significant evidence of (2) in two examples of instituting a similar liability: when several large U.S. credit card issuers dropped mandatory arbitration clauses (that effectively precluded class action lawsuits) and when U.S. residential mortgage creditors became liable for failing to consider a borrower's future ability to repay the mortgage, suggesting that these events improved consumer surplus and might have improved social welfare.
Does traffic congestion influence the location of new business establishments? An analysis of the San Francisco Bay Area
Taner Osman et al.
Urban Studies, forthcoming
Abstract:
Chronic traffic congestion is widely assumed to negatively affect regional economic performance, but this assumption has been only lightly tested. We examine the traffic congestion-economic performance link using data for the San Francisco Bay Area and find that the effect of traffic on the regional economy may be both less significant and more nuanced than is widely assumed. Our analysis examines how traffic congestion affects the location of new business establishments in six industries: advertising, biotechnology, computer systems design, information technology manufacturing, securities, and, as a control, groceries & supermarkets. New business establishments are a key driver of economic performance because they account for the majority of job creation in the USA. We find little evidence that traffic levels affect the location of new establishments in the Bay Area, and when we do observe an effect it is a positive one; that is, after controlling for a wide array of factors known to influence firm location, new firms are often more likely to start up in already congested areas. This does not mean that traffic congestion attracts new firms, but instead that the access advantages new firms accrue from clustering near same-industry firms strongly outweigh the added impedance of traffic congestion in these built-up areas of agglomeration.
Is Uber a substitute or complement for public transit?
Jonathan Hall, Craig Palsson & Joseph Price
Journal of Urban Economics, November 2018, Pages 36-50
Abstract:
How Uber affects public transit ridership is a relevant policy question facing cities worldwide. Theoretically, Uber’s effect on transit is ambiguous: while Uber is an alternative mode of travel, it can also increase the reach and flexibility of public transit’s fixed-route, fixed-schedule service. We estimate the effect of Uber on public transit ridership using a difference-in-differences design that exploits variation across U.S. metropolitan areas in both the intensity of Uber penetration and the timing of Uber entry. We find that Uber is a complement for the average transit agency, increasing ridership by five percent after two years. This average effect masks considerable heterogeneity, with Uber increasing ridership more in larger cities and for smaller transit agencies.
Arbitration with Uninformed Consumers
Mark Egan, Gregor Matvos & Amit Seru
NBER Working Paper, October 2018
Abstract:
We examine whether firms have an informational advantage in selecting arbitrators in consumer arbitration, and the impact of the arbitrator selection process on outcomes. We collect data containing roughly 9,000 arbitration cases in securities arbitration. Securities disputes present a good laboratory: the selection mechanism is similar to other major arbitration forums; arbitration is mandatory for all disputes, eliminating selection concerns; and the parties choose arbitrators from a randomly generated list. We first document that some arbitrators are systematically industry friendly while others are consumer friendly. Firms appear to utilize this information in the arbitrator selection process. Despite a randomly generated list of potential arbitrators, industry-friendly arbitrators are forty percent more likely to be selected than their consumer friendly counterparts. Better informed firms and consumers choose more favorable arbitrators. We develop and calibrate a model of arbitrator selection in which, like the current process, both the informed firms and uninformed consumers have control over the selection process. Arbitrators compete against each other for the attention of claimants and respondents. The model allows us to interpret our empirical facts in equilibrium and to quantify the effects of changes to the current arbitrator selection process on consumer outcomes. Competition be- tween arbitrators exacerbates the informational advantage of firms in equilibrium resulting in all arbitrators slanting towards being industry friendly. Evidence suggests that limiting the respondent's and claimant's inputs over the arbitrator selection process could significantly improve outcomes for consumers.
Work Intensity and Worker Safety in Early Twentieth-Century Coal Mining
William Boal
Explorations in Economic History, forthcoming
Abstract:
Why did coal mining remain so dangerous in the early twentieth century? Observers blamed miners for neglecting safety in their haste to load coal, for which they were paid on piece. Using a panel of about 500 coal mines, the elasticity of fatalities with respect to speed or intensity of work is estimated to be about one-half, implying a marginal cost of a statistical life to miners of about $400 thousand in 1921 dollars. This likely exceeded their value of a statistical life, so preventing accidents was expensive for miners. However, the union reduced fatalities with little effect on work intensity.
Peer Advice on Financial Decisions: A Case of the Blind Leading the Blind?
Sandro Ambuehl et al.
NBER Working Paper, September 2018
Abstract:
Previous research shows that many people seek financial advice from non-experts, and that peer interactions influence financial decisions. We investigate whether such influences are beneficial, harmful, or simply haphazard. In our laboratory experiment, face-to-face communication with a randomly assigned peer significantly improves the quality of private decisions, measured by subjects' ability to choose as if they properly understand their opportunity sets. Subjects do not merely mimic those who know better, but also make better private decisions in novel tasks. People with low financial competence experience greater improvements when their partners also exhibit low financial competence. Hence, peer-to-peer communication transmits financial decision-making skills most effectively when peers are equally uninformed, rather than when an informed decision maker teaches an uninformed peer. Qualitative analysis of subjects' discussions supports this interpretation. The provision of effective financial education to one member of a pair influences the nature of communication but does not lead to additional improvements in the quality of the untreated partner's decisions, particularly in novel tasks.
Measuring the effects of employment protection policies: Theory and evidence from the Americans with Disabilities Act
Soojin Kim & Serena Rhee
Labour Economics, October 2018, Pages 116-134
Abstract:
Title I of the Americans with Disabilities Act (ADA) is an employment protection policy for disabled workers. By exploiting cross-state variation in pre-ADA legislation, we measure the effects of the law on transition rates of disabled workers. We find a decline in employment-to-non-employment transitions after the ADA, with an insignificant change in flow into employment. We use a model to disentangle the costs of firing and hiring imposed by the ADA. Our findings suggest that the ADA induces firms to fire less frequently but become more selective with new hires, impacting the aggregate productivity of the workforce and output of the economy.
Increasing Differences Between Firms: Market Power and the Macro-Economy
John Van Reenen
MIT Working Paper, August 2018
Abstract:
A rich understanding of macro-economic outcomes requires taking into account the large (and increasing) differences between firms. These differences stem in large part from heterogeneous productivity rooted in managerial and technological capabilities that do not transfer easily between firms. In recent decades the differences between firms in terms of their relative sales, productivity and wages appear to have increased in the US and many other industrialized countries. Higher sales concentration and apparent increases in aggregate markups have led to the concern that product market power has risen substantially which is a potential explanation for the falling labor share of GDP, sluggish productivity growth and other indicators of declining business dynamism. I suggest that this conclusion is premature. Many of the patterns are consistent with a more nuanced view where many industries have become “winner take most/all” due to globalization and new technologies rather than a generalized weakening of competition due to relaxed anti-trust rules or rising regulation.
The Effect of Product Misperception on Economic Outcomes: Evidence from the Extended Warranty Market
Jose Miguel Abito & Yuval Salant
Review of Economic Studies, forthcoming
Abstract:
Panel and experimental data are used to analyze the economic outcomes in the extended warranty market. We establish that the strong demand and high profits in this market are driven by consumers distorting the failure probability of the insured product, rather than standard risk aversion or sellers’ market power. Providing information to consumers about failure probabilities significantly reduces their willingness to pay for warranties, indicating the important role of information, or lack of, in driving consumers’ purchase behavior. Such information provision is shown to be more effective in enhancing consumer welfare than additional market competition.
Technology, Policy Distortions and the Rise of Large Farms
Wenbiao Cai
International Economic Review, forthcoming
Abstract:
Between 1900 and 2002, mean farm size in the U.S. tripled; productive resources were increasingly concentrated in large farms. These observations are difficult to explain as results of profit maximization by farmers in a frictionless equilibrium model, given exogenous factor endowment and technology. I show that notable shifts in the farm size distribution coincided with important changes in farm legislation, and that farm programs provided larger farms more subsidy per dollar of output produced. These farm‐level distortions are crucial for the increasing dominance of large farms, but have little impact on employment and productivity in agriculture.
The Effect of Workplace Inspections on Worker Safety
Ling Li & Perry Singleton
ILR Review, forthcoming
Abstract:
The US Occupational Safety and Health Administration (OSHA) enforces safety regulations through workplace inspections. The authors estimate the effect of inspections on worker safety by exploiting a feature of OSHA’s Site-Specific Targeting plan. The program targeted establishments for inspection if their baseline case rate exceeded a cutoff. This approach generated a discontinuous increase in inspections, which the authors exploit for identification. Using the fuzzy regression discontinuity model, they find that inspections decrease the rate of cases that involve days away from work, job restrictions, and job transfers in the calendar year immediately after the inspection cycle. They find no effect for other case rates or in subsequent years. Effects are most evident in manufacturing and less evident in health services, the largest two-digit industries represented in the data.