Regulatory State

Kevin Lewis

October 26, 2022

Rising Markups or Changing Technology?
Lucia Foster, John Haltiwanger & Cody Tuttle
NBER Working Paper, September 2022


Recent evidence suggests the U.S. business environment is changing, with rising market concentration and markups. The most prominent and extensive evidence backs out firm-level markups from the first-order conditions for variable factors. The markup is identified as the ratio of the variable factor’s output elasticity to its cost share of revenue. Our analysis starts from this indirect approach, but we exploit a long panel of manufacturing establishments to permit output elasticities to vary to a much greater extent - relative to the existing literature - across establishments within the same industry over time. With our more detailed estimates of output elasticities, the measured increase in markups is substantially dampened, if not eliminated, for U.S. manufacturing. As supporting evidence, we relate differences in the markups’ patterns to observable changes in technology (e.g., computer investment per worker, capital intensity, diversification to non-manufacturing), and we find patterns in support of changing technology as the driver of those differences.

The Causes and Consequences of Development Costs: Evidence from Multifamily Housing
Michael Eriksen & Anthony Orlando
Purdue University Working Paper, September 2022 


We estimate the elasticities of break-even rents of new multifamily housing with respect to land prices, construction costs, and financial capital in the largest 50 cities in the United States from 2012 to 2020. This was accomplished by combining existing data on land prices and capitalization rates with a new data series on local historical pricing of required construction components of complete buildings called assemblies. While prices of residential land have more than doubled over this period, such increases have had only a relatively minor role in explaining increases in break-even rents of multifamily buildings and have been more than offset by decreases in capitalization rates. In contrast, construction costs of 3-story wood framed buildings have increased by 20% and 12-story steel framed buildings by 13% over this period and explain a greater share of the increase in break-even rents. The paper concludes by estimating how the prevailing wage premium required on federally-subsidized projects impacts construction costs and break-even rents across each of the cities.

The Understated 'Housing Shortage' in the United States
Kevin Corinth & Hugo Dante
Joint Economic Committee Working Paper, July 2022


Following popular discourse, we abuse economic terminology by defining the “housing shortage” in the United States as the difference between the number of homes that would be built in the absence of supply constraints and the actual number of homes. The magnitude of the housing shortage is important to policymakers, who use it to measure the scope of the housing supply problem and the extent to which proposed policies would solve it. However, previous studies understate the housing shortage because they estimate how many more homes would have been built if historical building or household formation trends prevailed today, even though historical trends were also affected by supply constraints. We are the first to use a supply and demand framework to estimate the full housing shortage in the United States. Using county-level data on land shares of home prices, we estimate that the U.S. housing shortage was 20.1 million homes in 2021, 14.1 percent of the national housing stock. Our housing shortage estimate is 4 to 5 times as large as previous estimates, and 13 times as high as the shortage cited by the White House to contextualize the effects of policies intended to close the gap. Consistent with predictions of economic theory, our estimated housing shortage is uniformly low in areas with low regulation but varies in areas with high regulation, since a housing shortage requires both stringent regulations and strong housing demand.

The Effect of Short-Term Rentals on Residential Investment
Ron Bekkerman et al.
Marketing Science, forthcoming 


We provide new evidence that short-term rental (STR) platforms like Airbnb incentivize residential real estate investment. We exploit two complementary identification strategies. First, we use variation in the timing of STR regulations to estimate the effect of regulation on both Airbnb listings and residential permits. We find that over the first 12 months following the start of the regulation, STR regulations reduce Airbnb listings by 8.9% and residential permits by 10.8%. Second, we show that residential permits decline discontinuously across jurisdictional boundaries in which one side of the boundary has an STR regulation and the other side does not. The effect is especially striking for accessory dwelling units, which decline by 16.5% across regulatory boundaries. Our results imply that STRs incentivize residential investment and especially so for housing units that are well suited for short-term renting.

Fending Off Critics of Platform Power with Differential Revenue Sharing: Doing Well by Doing Good?
Hemant Bhargava, Kitty Wang & Xingyue (Luna) Zhang
Management Science, forthcoming


Many digital platforms have accrued enormous power and scale, leveraging cross-side network effects between the sides they connect (e.g., producers and consumers or creators and viewers). Platforms motivate a diverse spectrum of producers, large and small, to participate by sharing platform revenue with them, predominantly under a linear revenue-sharing scheme with the same commission rate regardless of producer power or size. Under pressure from society, lawsuits, and antitrust investigations, major platforms have announced revenue sharing designs that favor smaller businesses. We develop a model of platform economics and show that a small-business oriented (SBO) differential revenue sharing design can increase total welfare and outputs on the platform. Although smaller producers almost always benefit from the shift in revenue sharing design, spillover effects can also make large producers better off under some conditions. More interestingly, we show that platforms are the most likely winner under a differential revenue sharing scheme. Hence, an intervention that ostensibly offers concessions and generous treatment to producers might well be self-serving for platforms and good for the entire ecosystem.

The Instagram Infodemic Persists: Extreme Content Escapes Platform's Removal Tactics
Emma Quinn et al.
Cyberpsychology, Behavior, and Social Networking, forthcoming


The general cobranding of conspiracy theories and COVID-19 misinformation has been shared at an alarming rate on social media platforms. Instagram has attempted an initiative to flag and/or remove health misinformation and/or disinformation; however, the efficacy of these efforts has been unclear. This study aimed to re-examine 300 posts collected in a previous study evaluating trends in misinformation removal process on Instagram. One hundred eighty-three of 300 original posts remained on the platform, most of which were from the hashtag #hoax. Only one post was flagged for containing false information, despite presence in more than one post. The claims that the platform is removing or flagging misinformation does not align with these findings and amplifies the concern for public safety for Instagram users. Sharing and removal patterns among the 300 posts suggest that conspiracy theorists or those exposed to the inaccurate information may be at higher risk of believing and propagating other unsupported theories.

The impact of paid sick leave laws on consumer and business bankruptcies
Michelle Miller
Journal of Empirical Legal Studies, forthcoming


This paper examines how missed income due to illness impacts household fragility. Specifically, it shows that paid sick leave laws, which provide households insurance against illness-related income shocks, reduce consumer bankruptcy. Using a panel dataset at the county-quarter level, this paper exploits the geographic and temporal variation in the adoption of paid sick leave laws to implement a difference-in-differences and event study analysis. It finds that paid sick leave laws reduce consumer bankruptcy filings by approximately 11%; this effect is seen within three quarters of the law's implementation and remains constant in magnitude and significance thereafter. As paid sick leave laws may come at a cost to businesses, this paper also examines the impact of such laws on business bankruptcy filings — it shows that paid sick leave laws have little to no impact on business bankruptcy filings.

Framing Price Increase as Discount: A New Manipulation of Reference Price
Sungsik Park, Man Xie & Jinhong Xie
Marketing Science, forthcoming


This research investigates a newly observed pricing practice by which a seller frames a price increase as a discount by simultaneously increasing the price and introducing a list price, a scheme we call “price-increase and list-price synchronization” (PILPS). To investigate this potentially deceptive practice, we tracked multiple product categories on Amazon over a 13-month period. We find that PILPS (1) is a prevalent practice adopted by a broad range of categories and sellers, (2) allows sellers to simultaneously achieve higher profit margins and a larger sales volume at consumers’ expense, and (3) is most effective for and more likely to be deployed by products with advantages in consumer reviews. Current regulations of deceptive pricing focus on the legitimacy of the value of a reference price by, for instance, deterring the use of fake or inflated list prices. PILPS, which misleads consumers by synchronizing the timing of a price increase with list-price introduction, has so far managed to fly under the regulatory radar. Our research provides the first empirical evidence of the existence, prevalence, and impact of this new manipulation of reference price. These results provide helpful insights for consumers, consumer advocates, and policy makers.

Secrecy Rules and Exploratory Investment: Theory and Evidence from the Shale Boom
Thomas Covert & Richard Sweeney
NBER Working Paper, October 2022


We analyze how information disclosure policy affects investment efficiency in non-cooperative settings with information externalities. In a two-firm, two-period model, we characterize equilibrium behavior under policies which disclose whether investment returns exceed a predefined level. These policies include complete secrecy, in which players only observe rival actions, as well as full disclosure, in which players also perfectly observe rival returns. With less disclosure (higher disclosure thresholds), there is less free riding, but additional losses from incomplete information aggregation. We characterize the surplus maximizing disclosure threshold in this environment, and show how it depends on firms' patience. We then apply the model to the early years of the shale boom in Pennsylvania and West Virginia, which at the time were governed by complete secrecy and full disclosure, respectively. We find that full disclosure would have maximized surplus in both states, generating 49% and 160% more value than complete secrecy.


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