The art of the possible

Kevin Lewis

August 16, 2017

Declining Competition and Investment in the U.S.
Germán Gutiérrez & Thomas Philippon
NBER Working Paper, July 2017

The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.

On the misplaced politics of behavioural policy interventions
David Tannenbaum, Craig Fox & Todd Rogers
Nature Human Behaviour, July 2017

Government agencies around the world have begun to embrace the use of behavioural policy interventions (such as the strategic use of default options), which has inspired vigorous public discussion about the ethics of their use. Since any feasible policy requires some measure of public support, understanding when people find behavioural policy interventions acceptable is critical. We present experimental evidence for a ‘partisan nudge bias’ in both US adults and practising policymakers. Across a range of policy settings, people find the general use of behavioural interventions more ethical when illustrated by examples that accord with their politics, but view those same interventions as more unethical when illustrated by examples at odds with their politics. Importantly, these differences disappear when behavioural interventions are stripped of partisan cues, suggesting that acceptance of such policy tools is not an inherently partisan issue. Our results suggest that opposition to (or support for) behavioural policy interventions should not always be taken at face value, as people appear to conflate their attitudes about general purpose policy methods with their attitudes about specific policy objectives or policy sponsors.

Minimum Wage and Restaurant Hygiene Violation: Evidence from Food Establishments in Seattle
Subir Chakrabarti, Srikant Devaraj & Pankaj Patel
Indiana University Working Paper, June 2017

We assess the effects of rise in minimum wages on hygiene violation scores in food service establishments. Using a difference-in-difference analysis on hygiene rating of food establishments in Seattle [where minimum wage increased annually between 2010 and 2013] as the treated group and from New York City [minimum wage was constant] as the control group, we find an increase in real minimum wage by $0.10 increased total hygiene violation scores by 11.45 percent. Consistent with our theoretical model, an increase in minimum wage in Seattle has no influence in more severe (red) violations, and a significant increase in less severe (blue) violations. Our findings are consistent while using an alternate control group - Bellevue City, King County, located near Seattle.

The Effect of Content Providers' Ability to Charge End-Users on the Network Neutrality Debate
Abhinav Uppal & Jagmohan Raju
University of Pennsylvania Working Paper, June 2017

There is an ongoing global debate on network neutrality, a principle that prohibits Internet Service Providers (ISPs) such as Comcast from charging content providers like Netflix for preferential delivery of their content to end-users. In this paper, we shed new light on the debate by developing and analyzing a two-sided model of the Internet that not only allows the ISP to charge both end-users and content providers, but, in contrast to previous work, also incorporates the ability of content providers to charge end-users directly. We show that in this scenario, which is more realistic in today’s world, all players are equally well off with or without network neutrality. This is in stark contrast to the findings obtained in a scenario where we limit content providers to rely on advertising alone for revenue; in such a context, content providers are worse off but the ISP and end-users are better off without network neutrality. We show that our results continue to hold when the content providers command different advertising rates, suggesting that removing network neutrality does not favor stronger content providers over weaker ones. We also study a scenario where only one content provider can charge end-users directly while the other relies only on advertising revenue. In this scenario, while the players are no longer indifferent between the two regimes, content providers can be better off and total surplus can reduce without network neutrality, which is in contrast to the findings obtained when both content providers are constrained to rely only on advertising for revenue.

When Demand Increases Cause Shakeouts
Thomas Hubbard & Michael Mazzeo
NBER Working Paper, July 2017

Standard economic models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton’s (1991) model illustrates that in some cases, demand increases can catalyze competitive responses that bring about shake-outs. This paper provides empirical evidence of this effect in the 1960s-1980s hotel and motel industry, an industry where quality competition increasingly took the form of whether firms supplied outdoor recreational amenities such as swimming pools. We find that openings of new Interstate Highways are associated with increases in hotel employment, but decreases in the number of firms, in local areas. We further find that while highway construction is associated with increases in hotel employment in both warm and cold places, it only leads to fewer firms in warm places (where outdoor amenities were more valued by consumers). Finally, we find no evidence of this effect in other industries that serve highway travelers, gasoline retailing or restaurants, where quality competition is either less important or quality is supplied more through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between “natural” and “market-power-driven” increases in concentration.

Free to Be Happy: Economic Freedom and Happiness in US States
Jeremy Jackson
Journal of Happiness Studies, August 2017, Pages 1207–1229

While the measurement of subjective well-being and its usefulness as a policy objective is a matter of contention, a burgeoning field of happiness economics is emerging. This paper examines the relationship between the institutions of economic freedom and happiness as reported by respondents to the Generalized Social Survey (GSS) in the United States. GSS responses are matched via geocode to state of residence. This allows individual responses in the GSS to be matched to institutional characteristics of the state of residence. A novel contribution of this study is that analysis of the effect of economic freedom on reported happiness is conducted both at the individual level and using state averages. It is found that the level of economic freedom in US states has a positive effect on both individual reported happiness and state average happiness. Dynamic panel analysis is also conducted both as a robustness check and in an effort to control for endogeneity. This confirms the relationship as positive and is suggestive of a causal positive impact of economic freedom on average state happiness.

The Sharing Economy and Housing Affordability: Evidence from Airbnb
Kyle Barron, Edward Kung & Davide Proserpio
University of California Working Paper, July 2017

We assess the impact of home-sharing on residential house prices and rental rates. Using a comprehensive dataset on Airbnb listings from the whole United States, we regress zipcode level house prices and rental rates on the number of Airbnb listings, controlling for endogeneity using a shift-share instrumental variable strategy. We find that a 10% increase in Airbnb listings leads to a 0.39% increase in rents and a 0.64% increase in house prices. Moreover, we find that the effect of Airbnb is smaller in zipcodes with a larger share of owner-occupiers, suggesting that it is the absentee landlords who are on the margin of substituting their homes away from the rental market and into Airbnb. We present a simple model that rationalizes these findings.

Safety in Numbers? An Analysis of Market Concentration and Safety in the Commercial Railroad Industry
Michael Shashoua, Shrihari Sridhar & Vikas Mittal
Rice University Working Paper, July 2017

In this paper, we examine the relationship between market concentration and safety incidents in the freight railroad industry in the United States. We measure safety incidents as the number of accidents and market concentration as the Herfindahl Hirschman Index. We test the model in the context of the commercial railroad industry, using a comprehensive data set spanning 40 years. We systematically control for correlated unobservables, and the results consistently indicate that a 1% increase in market concentration yields an approximately .4% decrease in the number of accidents. These results are robust to different measures of concentration, various time aggregations, and numerous model specifications. Furthermore, using bootstrapping techniques, we show that the relationship between safety and market concentration is mediated by the level of investment in capital expenditures, the total number of employee hours, and the amount of freight switching between railroad companies. An important implication of this study is that mergers may provide substantial value by reducing the number of accidents. These findings are relevant for firms, regulators, and consumers across all industries that suffer from safety incidents.

Quadratic voting as an input to cost-benefit analysis
Jonathan Masur
Public Choice, July 2017, Pages 177–193

When agencies regulate, they must calculate the costs and benefits of their regulations. To do this, they must often price non-market goods — for instance, the value of protecting wildlife or the environment. Regulators have typically relied upon contingent valuation surveys to put prices on these types of goods. But contingent valuation surveys are fraught with error and often give rise to implausible valuations that cannot be trusted. Quadratic voting offers a better solution. Agencies should hold quadratic votes over nonmarket goods and use those votes to price the goods at issue.

What determines horizontal merger antitrust case selection?
Ning Gao, Ni Peng & Norman Strong
Journal of Corporate Finance, October 2017, Pages 51-76

U.S. antitrust agencies claim their antitrust enforcement mission is to protect consumers, promote fair competition, and maintain efficiency. Are antitrust practices consistent with this claim? We explore this question by examining antitrust selection of horizontal merger cases in the U.S. manufacturing sector during 1980–2009. We find that antitrust agencies are more likely to intervene when foreign import pressure is low, merger industry concentration hits a hurdle level, or local or less specialized rivals suffer unfavorable wealth effects. We find no evidence that antitrust agencies systematically respond to the wealth effects of either customers in general or more affected customers. Our findings can be a useful reference for calibrating the efficiency of antitrust regulation and enforcement.

Sharing is daring: An experiment on consent, chilling effects and a salient privacy nudge
Yoan Hermstrüwer & Stephan Dickert
International Review of Law and Economics, August 2017, Pages 38-49

Privacy law rests on the assumption that government surveillance may increase the general level of conformity and thus generate a chilling effect. In a study that combines elements of a lab and a field experiment, we show that salient and incentivized consent options are sufficient to trigger this behavioral effect. Salient ex ante consent options may lure people into giving up their privacy and increase their compliance with social norms − even when the only immediate risk of sharing information is mere publicity on a Google website. A right to be forgotten (right to deletion), however, seems to reduce neither privacy valuations nor chilling effects. In spite of low deletion costs people tend to stick with a retention default. The study suggests that consent architectures may play out on social conformity rather than on consent choices and privacy valuations. Salient notice and consent options may not merely empower users to make an informed consent decision. Instead, they can trigger the very effects that privacy law intends to curb.

Internet diffusion and free riding in insurance markets: An empirical investigation
Rajeev Goel
Managerial and Decision Economics, forthcoming

This paper studies the effect of internet diffusion on free riding in insurance markets, with a focus on automobile insurance. Internet usage affects both the demand and supply sides of insurance markets, while also having a bearing on institutions. Our cross-sectional analysis based on the United States supports the main hypothesis that greater internet diffusion reduced free riding by uninsured motorists. This response was fairly elastic and the reduction in the prevalence of uninsured motorists holds across different empirical specifications. Implications of these findings are discussed. 

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