A Theory of Falling Growth and Rising Rents
Philippe Aghion et al.
NBER Working Paper, November 2019
Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor's share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating IT advances. In response, the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline - lowering the long run growth rate.
Fewer players, fewer homes: Concentration and the new dynamics of housing supply
Jacob Cosman & Luis Quintero
Johns Hopkins University Working Paper, October 2019
Local homebuilding markets have become highly concentrated in the past decade. We document this increase in concentration and use IV regressions to show that it has led to lower production volume, fewer units in the production pipeline, and greater unit price volatility. These results are consistent with a theoretical model in which oligopolistic firms strategically set the timing, volume, and price of their new construction. Our estimates imply that market concentration has decreased the annual value of housing production nationwide by $106 billion. These findings provide further evidence that the secular decline in competitive intensity is altering macroeconomic dynamics.
"No More Credit Score": Employer Credit Check Bans and Signal Substitution
Joshua Ballance, Robert Clifford & Daniel Shoag
Labour Economics, forthcoming
In the past decade, most states have banned or considered banning the use of credit checks in hiring decisions, a screening tool that is widely used by employers. Using new Equifax data on employer credit checks, the Federal Reserve Bank of New York Consumer Credit Panel/Equifax data, and the LEHD Origin-Destination Employment data, we show that these bans shifted employment to people residing in census tracts with the lowest average risk score. We do this using both employment outcomes and changes in worker commuting patterns, which allow us to control for business cycle effects at very refined geographies. The largest shifts occurred in higher paying jobs and in the government sector. At the same time, using a large database of online job postings, we show that employers in low-credit municipalities subject to the ban differentially increased their demand for other signals of applicants' job performance, like education and experience. On net, the changes induced by these bans generate relatively worse outcomes for those with mediocre risk scores, for those under 22 years of age, and for blacks - groups commonly thought to benefit from such legislation, but which may suffer from statistical discrimination.
Ignorance is Bliss? Rent Regulation, Policy Awareness, and Labor Market Outcomes: Evidence from New York City
Johns Hopkins University Working Paper, November 2019
Rent regulation is central to the affordable housing policies of local municipalities and is on the rise in the United States and worldwide. In this paper I explore the unintended consequences of rent regulation on tenant labor market outcomes, along with the impact that policy awareness has on those outcomes, using a novel data set on rent stabilization in New York City. Recognizing the potential endogeneity of living in a rent-stabilized unit, I construct an instrumental variable that leverages variation in the availability of rent-stabilized units across New York boroughs over three decades of data. I then use the sorted effects method in Chernozhukov, Fernandez-Val, and Luo (2018) to investigate heterogeneous effects. I find that rent-stabilized tenants are more likely to be unemployed compared with tenants in private market-rate units, particularly among white and high-skilled tenants. Furthermore, I identify policy awareness using a unique feature of the data, and show that a large share of rent-stabilized tenants are either misinformed or unaware of their rent regulation status. The impact of rent stabilization on unemployment only exists among tenants who are aware of their regulation status.
A Welfare Analysis of Occupational Licensing in U.S. States
Morris Kleiner & Evan Soltas
NBER Working Paper, October 2019
We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.
Who Benefits from Surge Pricing?
Juan Camilo Castillo
Stanford Working Paper, November 2019
In the last decade, new technologies have led to a boom in dynamic pricing. I analyze the most salient example, surge pricing in ride hailing. Using data from Uber in Houston, I develop an empirical model of spatial equilibrium to measure the welfare effects of surge pricing. My model is composed of demand, supply, and a matching technology. It allows for temporal and spatial heterogeneity as well as randomness in supply and demand. I find that, relative to a counterfactual with uniform pricing, surge pricing increases total welfare by 3.66% of gross revenue. The gains mainly go to riders: rider surplus increases by 6.52% of gross revenue, whereas driver surplus and platform profits decrease by 1.63% and 1.18% of gross revenue, respectively. Disparities in driver surplus are magnified. Riders, on the other hand, are overwhelmingly better off.
The Distributional Impact of the Sharing Economy on the Housing Market
Harvard Working Paper, November 2019
What is the impact of the sharing economy, pioneered by companies such as Airbnb, on the housing market? In this paper, I estimate the welfare and distributional impact of Airbnb on the residents of New York City. I develop a model of an integrated housing market, where a landlord can offer a housing unit for rent on either the traditional long-term rental market or the newly available short-term rental market. By estimating a structural model of residential choice and linking it to detailed Airbnb usage data, I estimate the effect of such reallocation on the equilibrium rents across different housing types and demographic groups. In addition, to evaluate the gains from direct home-sharing, I estimate a supply system featuring heterogeneous costs. Overall, renters in New York City suffer a loss of $178mm per annum, as the losses from the rent channel dominate the gains from the host channel. I find that the increased rent burden falls most heavily on high-income, educated, and white renters, because they prefer housing and location amenities most desirable to tourists. Moreover, there is a divergence between the median and the tail, where a few enterprising low-income households obtain substantial gains from home-sharing. Thus, this paper delivers a more nuanced characterization of the winners and losers of the sharing economy, and provides a framework for understanding the consequences of regulating such technological innovations.
Price Caps as Welfare-Enhancing Coopetition
Patrick Rey & Jean Tirole
Journal of Political Economy, forthcoming
The paper analyzes the impact of price caps agreed upon by industry participants. Price caps, like mergers, allow firms to solve Cournot's multiple-marginalization problem, but unlike mergers, they do not stifle price competition in case of substitutes or facilitate foreclosure in case of complements. The paper first demonstrates this for nonrepeated interaction and general demand and cost functions. It then shows that allowing price caps has no impact on investment and entry in case of substitutes. Under more restrictive assumptions, the paper finally generalizes the insights to repeated price interaction, analyzing coordinated effects when goods are not necessarily substitutes.
Conflict of interest disclosure as a reminder of professional norms: Clients first!
Organizational Behavior and Human Decision Processes, September 2019, Pages 62-79
Conflicts of interest create an incentive for advisors to give biased advice, and disclosure is a popular remedy. Across a series of studies, with monetary stakes creating conflicts of interest, I show that disclosure of the conflict of interest can increase as well as decrease bias in advice. The effect of disclosure depends on whether the perceived norms of the context in which the advice is provided are "clients first" or "self-interests first." Disclosure increases the salience of these norms, which in turn, affects the level of bias in advice. As people draw on multiple sources of information to perceive norms, norms will vary by context and for expert versus non-expert advisors. For non-experts (research participants asked to play the role of advisors), disclosure tends to increase bias in settings in which self-interested advice is deemed to be the norm (e.g., giving financial advice) and decrease bias in settings in which placing advisees first is deemed to be the norm (e.g., giving medical advice). However, for experts (professional financial and medical advisors), whose norms often emphasize placing advisees' interests first, disclosure (typically) decreases bias in advice. When considering the benefits and pitfalls of disclosure, professional norms toward clients or self-interests appear to play an important role.
The Moral Limits of Predictive Practices: The Case of Credit-Based Insurance Scores
American Sociological Review, forthcoming
Corporations gather massive amounts of personal data to predict how individuals will behave so that they can profitably price goods and allocate resources. This article investigates the moral foundations of such increasingly prevalent market practices. I leverage the case of credit scores in car insurance pricing - an early and controversial use of algorithmic prediction in the U.S. consumer economy - to unpack the premise that predictive data are fair to use and to understand the conditions under which people are likely to challenge that moral logic. Policymaker resistance to credit-based insurance scores reveals that contention arises when predictions depend on mathematical distinctions that do not align with broader understandings of good and bad behavior, and when theories about why predictions work point to the market holding people accountable for actions that are not really their fault. Via a de-commensuration process, policymakers realign the market with their own notions of moral deservingness. This article thus demonstrates the importance of causal understanding and moral categorization for people accepting markets as fair. As data and analytics permeate markets of all sorts, as well as other domains of social life, these findings have implications for how social scientists understand the novel forms of stratification that result.
The political economy of (de)regulation: Theory and evidence from the US electricity industry
Journal of Institutional Economics, forthcoming
The choice of whether to regulate firms or to allow them to compete is key. If demand is sufficiently inelastic, competition entails narrower allocative inefficiencies, but also smaller expected profits, and thus weaker incentives to invest in cost reduction. Hence, deregulation should be found where cost reduction is less socially relevant and consumers are more politically powerful, and it should produce lower expected costs only when investment is not sufficiently effective. These predictions hold true under several alternative assumptions and are consistent with data on the deregulation initiatives implemented in 43 US state electricity markets between 1981 and 1999 and on the operating costs of the plants that served these markets. Crucially, these empirical results help rationalize the slowdown of the deregulation wave and are robust to considering the other determinants of deregulation emphasized by the extant literature, i.e. costly long-term wholesale contracts and excessive capacity accumulation.
Private government, property rights and uncertain neighbourhood externalities: Evidence from gated communities
Geoffrey Turnbull & Velma Zahirovic-Herbert
Urban Studies, forthcoming
Economists traditionally view public and private land use regulation as alternatives to each other. An alternative view argues that public and private regulation are not equally suited to accomplish the same outcomes. In particular, government regulation is easily changed while private regulation is not, making the latter better suited to control future externality risk. One implication of the alternative view is that more risk-averse households are drawn to gated neighbourhoods while their less risk-averse counterparts are not. This paper exploits exogenous differences in neighbourhood amenity uncertainty created by public school attendance zone changes to test this prediction of the alternative view. The results show that greater exogenous amenity uncertainty yields stronger house price capitalisation in gated subdivisions than in open neighbourhoods, a pattern consistent with the risk-aversion sorting hypothesis. The results are robust and are consistent with the key implication of the alternative view of private regulation.
The valley of trust: The effect of relational strength on monitoring quality
Brandy Aven, Lily Morse & Alessandro Iorio
Organizational Behavior and Human Decision Processes, forthcoming
Effective monitoring of firms by regulatory agencies is essential to maintaining economic sustainability, correcting information asymmetry in markets, and mitigating social and environmental externalities. Yet, monitoring failures often arise where the monitoring agent fails to detect or report infractions by the firms they monitor. Whereas organizational scholars cite weak relationships and a lack of trust between firms and monitors as a key source of monitoring failures, research in organizational deviance contends that increased trust in strong relationships promotes monitoring failures via negligence and collusion. Drawing on these two literatures, we propose that relationship strength exhibits a U-shaped relationship with monitoring quality, as mediated by trust: increasing relationship strength reduces monitoring failures to a certain point, but beyond which it increases monitoring failures. We test our theory with three studies: a field study using longitudinal archival data on financial restatements, a survey of Certified Public Accountants, and an experimental audit simulation.
No Replication, No Trust? How Low Replicability Influences Trust in Psychology
Tobias Wingen, Jana Berkessel & Birte Englich
Social Psychological and Personality Science, forthcoming
In the current psychological debate, low replicability of psychological findings is a central topic. While the discussion about the replication crisis has a huge impact on psychological research, we know less about how it impacts public trust in psychology. In this article, we examine whether low replicability damages public trust and how this damage can be repaired. Studies 1-3 provide correlational and experimental evidence that low replicability reduces public trust in psychology. Additionally, Studies 3-5 evaluate the effectiveness of commonly used trust-repair strategies such as information about increased transparency (Study 3), explanations for low replicability (Study 4), or recovered replicability (Study 5). We found no evidence that these strategies significantly repair trust. However, it remains possible that they have small but potentially meaningful effects, which could be detected with larger samples. Overall, our studies highlight the importance of replicability for public trust in psychology.