Findings

Rules of the game

Kevin Lewis

December 22, 2014

"It’s ironic that many blast Washington politicians by saying they’re 'anti-business.' Many are very pro-business — but anti-competition." [Arthur Brooks]

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https://www.aei.org/publication/zenefits-utah-classic-case-regulatory-capture-protecting-incumbent-producers-expense-public-interest

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"[There are] numerous financial ties the FDA hasn’t disclosed between medical-device makers and the doctors and other experts who review devices for it, a Wall Street Journal analysis of corporate, state and federal data shows. In panels evaluating devices involved in cardiology, orthopedics and gynecology from 2012 through 2014, a third of 122 members had received compensation — such as money, research grants or travel and food — from medical-device companies, an examination of databases shows. Nearly 10% of the FDA advisers received something of value from the specific company whose product they were evaluating. The FDA disclosed roughly 1% of these corporate connections." [WSJ]

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A Long Constitution is a (Positively) Bad Constitution: Evidence from OECD Countries

George Tsebelis & Dominic Nardi, British Journal of Political Science, forthcoming

Abstract:
This article starts with two empirical observations from Organisation for Economic Co-operation and Development countries about longer constitutions: (1) they are more rigid (that is, more difficult to amend) and (2) they are in practice more frequently amended. The study presents models of the frequently adopted rules for constitutional revision (for example, qualified majorities in one or two chambers, referendums) and demonstrates that, if longer constitutions are more frequently revised, it is because they must impose actual harm on overwhelming majorities. In trying to explain this finding, the article demonstrates that longer constitutions tend to contain more substantive restrictions. Countries with longer constitutions also tend to have lower levels of GDP per capita and higher corruption. Finally, the negative effect of constitutional length on GDP per capita is shown to persist even if corruption is controlled for.

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To Hive or to Hold? Producing Professional Authority through Scut Work

Ruthanne Huising, Administrative Science Quarterly, forthcoming

Abstract:
This paper examines how professionals working in bureaucratic organizations, despite having formal authority, struggle to enact authority over the clients they advise, transforming their right to command into deference to commands. Drawing on a comparative ethnographic study of two professional groups overseeing compliance in university laboratories, I identify how choices about their task jurisdiction influence each profession’s ability to enact authority over and gain voluntary compliance from the same group of clients. One group constructs its work domain to include not only high-skilled tasks that emphasize members’ expertise but also scut work — menial work with contaminated materials — through which they gain regular entry into clients’ workspaces, developing knowledge about and relationships with clients. Using these resources to accommodate, discipline, and understand clients, they produce relational authority — the capacity to elicit voluntary compliance with commands. The other group outsources everyday scut work and interacts with lab researchers mostly during annual inspections and training, which leads to complaints by researchers to management and eventual loss of jurisdiction. The findings show the importance of producing relational authority in contemporary professional–client interactions in bureaucratic settings and challenge the relevance of expertise and professional identity in generating relational authority. I show how holding on to, not hiving off, scut work allows professionals to enact authority over clients.

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Inspection technology, detection, and compliance: Evidence from Florida restaurant inspections

Ginger Zhe Jin & Jungmin Lee, RAND Journal of Economics, Winter 2014, Pages 885–917

Abstract:
In this article, we show that a small innovation in inspection technology can make substantial differences in inspection outcomes. For restaurant hygiene inspections, the state of Florida has introduced a handheld electronic device, the portable digital assistant (PDA), which reminds inspectors of about 1,000 potential violations that may be checked for. Using inspection records from July 2003 to June 2009, we find that the adoption of PDA led to 11% more detected violations and subsequently, restaurants may have gradually increased their compliance efforts. We also find that PDA use is significantly correlated with a reduction in restaurant-related foodborne disease outbreaks.

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A Tale of Repetition: Lessons from Florida Restaurant Inspections

Ginger Zhe Jin & Jungmin Lee, NBER Working Paper, October 2014

Abstract:
We examine the role of repetition in government regulation. Using Florida restaurant inspection data from 2003 to 2010, we find that inspectors new to the inspected restaurant report 12.7-17.5% more violations than the second visit of a repeat inspector. This effect is even more pronounced if the previous inspector had inspected the restaurant more times. The difference between new and repeat inspectors is driven partly by inspector heterogeneity in inherent taste and stringency, and partly by new inspectors having fresher eyes in the first visit of a restaurant. These findings highlight the importance of inspector assignment in regulatory outcomes.

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Libertarian Paternalism, Path Dependence, and Temporary Law

Tom Ginsburg, Jonathan Masur & Richard McAdams, University of Chicago Law Review, Winter 2014, Pages 291-359

"The recent wave of behavioral economics has led some theorists to advocate the possibility of 'libertarian paternalism,' in which regulators designing institutions permit significant individual choice but nonetheless use default rules to 'nudge' cognitively biased individuals toward particular salutary choices. In this Article, we add the possibility of a different kind of nudge: temporary law. The case for temporary law arises from a particular regulatory rationale. In some cases, the best normative defense of regulation against the libertarian critique — the best response to the claim that free market competition produces efficiency — is path dependence, the idea that market institutions can become trapped or locked in to a suboptimal equilibrium, even when some better equilibrium exists."

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Valuable Lies

Ariel Porat & Omri Yadlin, University of Chicago Working Paper, October 2014

Abstract:
Should a Muslim employee who falsely stated in his job interview that he is Christian in order to avoid discrimination be fired for his dishonesty? Should a buyer of a tract of land who conducted an expensive investigation before contracting that revealed a high likelihood of mineral deposits be subject to liability for fraud because he told the seller he knew nothing about the land's mineral potential before purchase? Is a doctor violating her legal duties toward her patient if she convinces him to get vaccinated on the pretext that it is in his best interest when it is instead in the public interest? In all of these cases, and many others, parties are allowed not to disclose material information to an interested party but not to lie about the same information. This article makes the argument that in many contexts, where non-disclosure is permitted lies should also be tolerated, for otherwise the social goals sought by allowing non-disclosure are frustrated. With this as its starting point, the article develops a theory of valuable lies, discussing the conditions under which lies should be permitted. It analyzes the main impediments to allowing lies, the most important of which being the risk that permitting lies would impair truth-tellers' ability to reliably convey truthful information. The article applies the theory to various fields, including contract law, tort law, medical malpractice, criminal law and procedure, and constitutional law. It concludes by proposing changes to the law that will allow telling valuable lies in well-defined categories of cases.

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Do regulators overestimate the costs of regulation?

David Simpson, Journal of Benefit-Cost Analysis, November 2014, Pages 315–332

Abstract:
It has occasionally been asserted that regulators typically overestimate the costs of the regulations they impose. A number of arguments have been proposed for why this might be the case. The most widely credited is that regulators fail sufficiently to appreciate the effects of innovation in reducing regulatory compliance costs. Most existing studies have found that regulators are more likely to over- than to underestimate costs. While it is difficult to develop summary statistics to aggregate the results of different studies of disparate industries, one such measure is the average of the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs. This ratio is generally greater than one. In this paper I argue that neither the greater frequency of overestimates nor the fact that the average ratio of ex ante to ex post cost estimates is greater than one necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs could be skewed, so that the median of the distribution would lie below the mean. It is not surprising, then, that most estimates would prove to be too high. Moreover, Jensen’s inequality implies that the expected ratio of ex ante to ex post compliance costs would be greater than one. I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. Failure to reject a hypothesis with limited and noisy data should not, of course, be interpreted as a strong argument to accept the hypothesis. Rather, this paper argues for the generation of more and better information. Despite the existence of a number of papers reporting ex ante and ex post compliance cost estimates, it is surprisingly difficult to get a large sample with which to make such comparisons.

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Won’t we scare them? The impact of communicating uncontrollable risks on the public’s perception

Melanie De Vocht et al., Journal of Risk Research, forthcoming

Abstract:
Authorities often refrain from communicating risks out of fear to arouse negative feelings amongst the public and to create negative reactions in terms of the public’s behavior. This study examines the impact of communicating risks on the public’s feelings and behavioral intentions regarding an uncontrollable risk related to fresh produce. In addition, the impact of risk communication is compared between a situation in which the risk either does or does not develop into a crisis, by means of a 2 (risk communication vs. no risk communication) × 2 (crisis communication vs. no crisis communication) between-subjects factorial design. The results show that communicating risks has a positive impact on the behavioral intention to keep on eating fresh produce compared to when no risk communication was provided, as it reduces negative feelings amongst the public. In addition, the findings illustrate that when a risk develops into an actual crisis, prior risk communication can result in greater trust in the government and reduce perceived government responsibility for the crisis when the crisis hits. Based on these findings, it can be suggested that risk communication is an effective tool for authorities in preparing the public for potential crises. The findings indicate that communicating risks does not raise negative reactions amongst the public, on the contrary, and that it results in more positive perceptions of the authorities.

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Very Long-Run Discount Rates

Stefano Giglio, Matteo Maggiori & Johannes Stroebel, Quarterly Journal of Economics, forthcoming

Abstract:
We estimate how households trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The price difference between leaseholds and freeholds reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Households discount very long-run cash flows at low rates, assigning high present value to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims.

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“Bluewashing” the Firm? Voluntary Regulations, Program Design, and Member Compliance with the United Nations Global Compact

Daniel Berliner & Aseem Prakash, Policy Studies Journal, forthcoming

Abstract:
Voluntary programs have emerged as important instruments of public policy. We explore whether programs lacking monitoring and enforcement mechanisms can curb participants’ shirking with program obligations. Incentive-based approaches to policy see monitoring and enforcement as essential to curb shirking, while norm-based approaches view social mechanisms such as norms and learning as sufficient to serve this purpose. The United Nations Global Compact (UNGC), a prominent international voluntary program, encourages firms to adopt socially responsible policies. Its program design, however, relies primarily on norms and learning to mitigate shirking. Using a panel of roughly 3,000 U.S. firms from 2000 to 2010, and multiple approaches to address endogeneity and selection issues, we examine the effects of Compact membership on members’ human rights and environmental performance. We find that members fare worse than nonmembers on costly and fundamental performance dimensions, while showing improvements only in more superficial dimensions. Exploiting the lack of monitoring and enforcement, UNGC members are able to shirk: enjoying goodwill benefits of program membership without making costly changes to their human rights and environmental practices.

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Analyzing the Effectiveness of State Regulatory Review

Russell Sobel & John Dove, Public Finance Review, forthcoming

Abstract:
This article provides a systematic empirical study of how differences in regulatory review processes across the fifty US states affect the level of regulation. We examine whether rules for regulatory review matter in terms of lowering the overall level of regulation in states. Our findings suggest that sunset provisions are the most effective means of reducing state regulatory levels. Requirements for reviewing the fiscal impacts of new regulations on state government budgets and to present lower-cost alternatives for achieving the same policy goals also appear to be somewhat effective. There is limited evidence that a regulatory review process within the state legislative branch or an independent agency reduces new regulations.

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Merger Review by the Federal Communications Commission: Comcast–NBC Universal

Christopher Yoo, Review of Industrial Organization, November 2014, Pages 295-321

Abstract:
The Communications Act of 1934 created a dual review process in which mergers in the communications industry are reviewed by the Federal Communications Commission (FCC) as well as the antitrust authorities. Commentators have criticized dual review not only as costly and redundant, but also as subject to substantive and procedural abuse. The process of clearing the 2011 Comcast–NBC Universal merger provides a useful case study to examine whether such concerns are justified. A review of the empirical context reveals that the FCC intervened even though the relevant markets were not structured in a way that would ordinarily raise anticompetitive concerns. In addition, the FCC was able to use differences between its review process and that used by the Justice Department to extract concessions from the merging parties that had nothing to do with the merger and which were more properly addressed through general rulemaking. Moreover, the use of voluntary commitments also allowed the FCC to avoid subjecting certain aspects of its decision to public comment and immunized it from having to offer a reasoned explanation or subjecting its decision to judicial review. The aftermath of the merger provides an opportunity to assess whether the FCC’s intervention yielded consumer benefits.

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Market Structure and Media Diversity

Scott Hiller, Scott Savage & Donald Waldman, Economic Inquiry, forthcoming

Abstract:
We estimate a mixed logit model of the demand for local news service. Results provide evidence that suggest the representative consumer values more diverse news, more coverage of multicultural issues, and more information on community news, and has a distaste for advertising. Demand estimates are used to calculate the impact on consumer welfare from a marginal decrease in the number of independent television stations that lowers the amount of diversity, multiculturalism, community news, and advertising. Consumer welfare decreases, but the losses are smaller in large markets. For example, small-market consumers lose $45 million annually while large-market consumers lose $13 million.

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Quantifying search and switching costs in the US auto insurance industry

Elisabeth Honka, RAND Journal of Economics, Winter 2014, Pages 847–884

Abstract:
I estimate demand for auto insurance in the presence of two types of market frictions: search and switching costs. I develop an integrated utility-maximizing model in which consumers decide over which and how many companies to search and from which company to purchase. My modelling approach rationalizes observed consideration sets as being the outcomes of consumers' search processes. I find search costs to range from $35 to $170 and average switching costs of $40. Search costs are the most important driver of customer retention and their elimination is the main lever to increase consumer welfare in the auto insurance industry.

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Nobody’s Innocent: The Role of Customers in the Doping Dilemma

Berno Buechel, Eike Emrich & Stefanie Pohlkamp, Journal of Sports Economics, forthcoming

Abstract:
Customers who boycott an organization after some scandal may actually exacerbate the fraud problem they would like to prevent. This conclusion is derived from a game-theoretic model that introduces a third player into the standard inspection game. Focusing on the example of doping in professional sports, we observe that doping is prevalent in equilibrium because customers undermine an organizer’s incentives to inspect the athletes. Establishing transparency about doping tests is necessary but not sufficient to overcome this dilemma. Our analysis has practical implications for the design of anti-doping policies as well as for other situations of fraudulent activities.

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Childcare quality and pricing: Evidence from Wisconsin

Benjamin Artz & David Welsch, Applied Economics, Fall 2014, Pages 4276-4289

Abstract:
Childcare prices vary dramatically both between and within states. We identify the effects of demographic and provider characteristics on childcare pricing, but focus primarily on whether unique government-provided information on childcare quality has an effect on pricing. Using provider-level observations across three adjacent counties in southern Wisconsin, we find that this government-provided information on childcare quality does not significantly affect pricing. Recognizing that information asymmetry may be the root cause of the insignificant relationship, we test the relationship further within multiple subsamples and with alternative models. Only the lowest quality childcare providers are significantly associated with lower prices in areas that we hypothesize suffer from greater information asymmetry.

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When the smoke clears: Expertise, learning and policy diffusion

Charles Shipan & Craig Volden, Journal of Public Policy, December 2014, Pages 357-387

Abstract:
In federal systems, governments have the opportunity to learn from the policy experiments – and the potential successes – of other governments. Whether they seize such opportunities, however, may depend on the expertise or past experiences of policymakers. Based on an analysis of state-level adoptions of antismoking restrictions targeted towards youths, we find that US states are more likely to emulate other states that have demonstrated the ability to successfully limit youth smoking. In addition, we find that political expertise (as captured by legislative professionalism) and policy expertise (as captured by previous youth access policy experiments at the local level) enhance the likelihood of emulating policy successes found in other states. As such, we establish that internal expertise and external learning are complements, rather than substitutes.


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