Showing papers in "The RAND Journal of Economics in 2013"

China's land market auctions: evidence of corruption?

Abstract: This paper studies the urban land market in China in 2003—2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a “two stage auction”. The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are “cold”, which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

The impact of health information technology on hospital productivity

Abstract: Health information technology (IT) has been championed as a tool that can transform health care delivery. We estimate the parameters of a value-added hospital production function correcting for endogenous input choices to assess the private returns hospitals earn from health IT. Despite high marginal products, the total benefits from expanded IT adoption are modest. Over the span of our data, health IT inputs increased by more than 210% and contributed about 6% to the increase in value-added. Not-for-profits invested more heavily and differently in IT. Finally, we find no compelling evidence of labor complementarities or network externalities from competitors' IT investment.

The impact of credit scoring on consumer lending

Abstract: We study the adoption of automated credit scoring at a large auto finance company and the changes it enabled in lending practices. Credit scoring appears to have increased profits by roughly a thousand dollars per loan. We identify two distinct benefits of risk classification: the ability to screen high-risk borrowers and the ability to target more generous loans to lower-risk borrowers. We show that these had effects of similar magnitude. We also document that credit scoring compressed profitability across dealerships, and provide evidence consistent with the view that credit scoring may have substituted for varying qualities of local information.

Targeted advertising and advertising avoidance

Abstract: I examine how the increasing ability of firms to target their advertise- ments to particular individuals influences market outcomes when consumers have access to advertising avoidance tools. Today firms possess an unprecedented and rapidly improving ability to discover details about individuals and reach them with advertising based on this information. For instance, as many readers know, an individual's web browsing activities may be tracked via information stored in his browser as long as he "participates" by not regularly deleting it, allowing ads to be customized to him upon visiting a web site. 1 Less well known may be that new technology allows Internet Service Providers (ISPs) to target ads by directly tracking which websites consumers visit, meaning that not participating is not an option for consumers. 2 Similarly,

Estimating Network Economies in Retail Chains: A Revealed Preference Approach

Abstract: Many industries are characterized by a small number of rms making many entry decisions over a large choice set. Nowhere is this more true than in the case of the discount retail sector, where Target, Wal-Mart, and Kmart compete in a national market. Traditional discrete choice models of rm entry are ill-suited to this high dimensional choice problem. We instead draw upon recent innovations in the application of maximum score estimators to models of revealed preference (Bajari and Fox (2006), Fox (2007)). Unlike previous work on this sector, our approach allows us to consider any number of potential rivals, any number of stores per location, the endogeneity of the distribution network, and unobserved (to the econometrician) location attributes that might cause rms to cluster their stores. Moreover, we show how recent innovations in set identication and inference can be used to separate the role of these unobservables from observed location attributes like population. We nd that all

Trading and enforcing patent rights

Abstract: We study how the market for innovation affects enforcement of patent rights. We show that patent transactions arising from comparative advantages in commercialization increase litigation, but trades driven by advantages in patent enforcement reduce it. Using data on trade and litigation of individually owned patents in the United States, we exploit variation in capital gains tax rates across states as an instrument to identify the causal effect of trade on litigation. We find that taxes strongly affect patent transactions, and that trade reduces litigation on average, but the impact is heterogeneous. Patents with larger potential gains from trade are more likely to change ownership, and the impact depends critically on transaction characteristics.

Entry, exit, and the determinants of market structure

Abstract: This article estimates a dynamic, structural model of entry and exit for two US service industries: dentists and chiropractors. Entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are important determinants of long-run firm values, firm turnover, and market structure. In the dentist industry entry costs were subsidized in geographic markets designated as Health Professional Shortage Areas (HPSA) and the estimated mean entry cost is 11 percent lower in these markets. Using simulations, we find that entry cost subsidies are less expensive per additional firm than fixed cost subsidies

Public-private partnerships versus traditional procurement: Innovation incentives and information gathering

Abstract: A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public-private partnership, the tasks of building and managing are bundled, whereas under traditional procurement, these tasks are delegated to separate private contractors. The two provision modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. The government agency's preferred mode of provision depends on the information gathering costs, the costs of innovation efforts, and on the degree to which effort is contractible.

Unobserved heterogeneity and reserve prices in auctions

Abstract: This article has benefited from helpful conversations with and insight from Robert Porter, Igal Hendel, Ali Hortacsu, Aviv Nevo, John Asker, Federico Bugni, Matthew Gentzkow, Phil Haile, Ben Handel, Joel Horowitz, Tom Hubbard, Rosa Matzkin, Ryan McDevitt, Kanishka Misra, Jason O'Connor, Mallesh Pai, Aaron Sojourner, Andrew Sweeting, Elie Tamer, Xun Tang, Glen Weyl, and numerous seminar participants. Finally, I thank Joonsuk Lee for being so gracious in providing the data used in the article. Financial support from Duke University and the Center for the Study of Industrial Organization at Northwestern University is greatly appreciated. Any errors are my own.

Incentives for experimenting agents

Abstract: We examine a repeated interaction between an agent who undertakes experiments and a principal who provides the requisite funding. A dynamic agency cost arises�the more lucrative the agent's stream of rents following a failure, the more costly are current incentives, giving the principal a motivation to reduce the project's continuation value. We characterize the set of recursive Markov equilibria. Efficient equilibria front-load the agent's effort, inducing maximum experimentation over an initial period, until switching to the worst possible continuation equilibrium. The initial phase concentrates effort near the beginning, when most valuable, whereas the switch attenuates the dynamic agency cost.

The effect of Internet distribution on brick-and-mortar sales

Abstract: I examine the introduction of an online shopping service by a large supermarket chain also operating a network of brick-and-mortar stores The establishment of the Internet channel led to a 13 percent increase in overall revenues, with limited cannibalization of traditional sales I study the mechanisms underlying this result, focusing on two areas First, I demonstrate the importance of the reduction of customers' travel costs in the attraction of new business Second, I provide some evidence that revenues increase more in markets where the chain faces more competitors, suggesting that the online channel can help divert business from rival supermarkets

Targeted search and the long tail effect

Abstract: We develop a search model to explain the long tail effect. Search targetability, or the quality of search, is explicitly modelled. Consumers are searching for the right products within the right categories. As search costs decrease, or search targetability increases, additional variety of goods catering to long tail consumers will be provided, and the concentration of sales across different categories of goods decreases. The effects of a decrease in search costs or an increase in search targetability on consumer utility, prices, and profits depend on whether the type coverage increases. Decreases in search costs and increases in search targetability have different qualitative effects.

On the asymptotic distribution of the transaction price in a clock model of a multi‐unit, oral, ascending‐price auction within the common‐value paradigm

Abstract: Using a clock model of a multi-unit, oral, ascending-price auction, within the common-value paradigm, we analyze the behavior of the transaction price as the numbers of bidders and units gets large in a particular way We find that even though the transaction price is determined by a fraction of losing drop-out bids, that price converges in probability to the true, but ex ante unknown, value Subsequently, we demonstrate that the asymptotic distribution of the transaction price is Gaussian Finally, we apply our methods to data from an auction of taxi license plates held in Shenzhen, China

Internal control system, earnings quality, and the dynamics of financial reporting

Abstract: Using an earnings management model in which managers manipulate information when the firm’s control system fails, I introduce a measure of earnings quality, based on the notion of integral precision, that has solid theoretical foundations. A trade-off between the frequency and the magnitude of overstatements is shown: overstatements are larger when misreporting is less likely. Overall, the model generates a distribution of earnings announcements similar to its empirical analogue and provides a structural method to identify the likelihood and magnitude of misreporting by exploiting information from the moments of the distribution of reported earnings.

Fear of Rejection? Tiered Certification and Transparency

Abstract: Product quality certifiers may not reveal the identity of unsuccessful applicants/sellers for three reasons. First, they respond to the desire of individual sellers to avoid the stigma from rejection. Second, nontransparency helps a certifier to increase his market power by raising the stigma from lower-tier certification. Third, transparency does not help screen among heterogeneous sellers. Strategic complementarities arise as sellers move down the certification pecking order and lead to the stigmatization of the lower tiers. Mandating transparency benefits the sellers but has an ambiguous impact on buyers, who actually become less informed about product quality.

Patent quality and incentives at the patent office

Abstract: Patent examination is a problem of moral hazard followed by adverse selection: examiners must have incentives to exert effort, but also to truthfully reveal the evidence they find. I develop a theoretical model to study the design of incentives for examiners. The model can explain the puzzling compensation scheme in use at the U.S. patent office, where examiners are essentially rewarded for granting patents, as well as the variation in compensation schemes and patent quality across patent offices. It also has implications for the retention of examiners and for administrative patent review.

Strategic information revelation when experts compete to influence

Abstract: We consider a persuasion game between a decision-maker and a set of experts. Each expert is identified by two parameters: (i) �quality� or his likelihood of observing the state (i.e., learning what the best decision is) and (ii) �agenda� or the preferred decision that is independent of the state. An informed expert may feign ignorance but cannot misreport. We offer a general characterization of the equilibrium. From the decision-maker's standpoint, (a) higher quality is not necessarily better, (b) extreme agendas are always preferred, and (c) the optimal panel may involve experts with identical (rather than conflicting) agendas.

Does retailer power lead to exclusion

Abstract: This article examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers (who have no bargaining power) from obtaining adequate distribution. In contrast to the findings of Marx and Shaffer (2007), who show that all equilibria involve limited distribution (i.e., exclusion of a retailer), we show that there is always an equilibrium in which full distribution is obtained, provided that full distribution is the industry profit-maximizing outcome. The key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff.

Days on market and home sales

Abstract: In April 2006, the real estate listing service in Massachusetts adopted a new policy that prohibits home sellers from resetting their properties’ \days on market" through relisting. We study the eect of this new policy on home sales along the MassachusettsRhode Island border, using homes in Rhode Island, which did not change its relisting policy, as the control group. We nd that Massachusetts homes that were on the market at the time of the policy change suered an average reduction of $16,000 in sale price relative to their Rhode Island counterparts. Homes that were revealed to be slow-moving suered a greater reduction, but fresher listings only had a small increase in sale price. One reason is that some buyers were unaware of sellers’ manipulation of days on market and were thus unable to recognize home listings that were authentically fresh. A direct homeowner survey conrmed that buyer awareness was indeed lacking. Sellers reacted to the new policy by lowering their initial listing price to sell fast. However, in towns where listing price history was more transparent, sellers set a higher listing price to dampen the negative signal of slow sales.

Search Costs, Demand-Side Economies and the Incentives to Merge under Bertrand Competition

Abstract: We study the incentives to merge and the aggregate implications of mergers in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. When search frictions are substantial, firms have an incentive to merge and to retail their products within a single store, which induces consumers to begin their search there. Such a merger lowers the profits of the outsiders and may benefit consumers due to more efficient search. Overall welfare may even increase. If the merged entity limits itself to coordinating the prices of the constituent firms, merging may not be profitable.

Patent pools and innovation in substitute technologies—evidence from the 19th‐century sewing machine industry

Abstract: Patent pools, which combine complementary patents of competing firms, are expected to increase overall welfare but potentially discourage innovation in substitutes for the pool technology. This article exploits a new historical data set on changes in patenting and firm entry for a clearly defined pool technology and substitutes in the 19th-century sewing machine industry. This analysis reveals a substantial increase in innovation for an�albeit technologically inferior�substitute technology. Historical evidence suggests that the creation of a pool-diverted innovation toward an inferior substitute technology by creating differential license fees and litigation risks.

Mixed strategies in discriminatory divisible-good auctions ∗

Abstract: We introduce the concept of an offer distribution function to analyze randomized offer curves in multi-unit procurement auctions. We characterize mixed-strategy Nash equilibria for pay-as-bid auctions where demand is uncertain and costs are common knowledge; a setting for which pure-strategy supply function equilibria typically do not exist. We generalize previous results on mixtures over horizontal offers as in Bertrand-Edgeworth games, and we also characterize novel mixtures over partly increasing supply functions. We show that the randomization can cause considerable production inefficiencies.

Theoretical and experimental investigations of the performance of keyword auction mechanisms

Abstract: Two keyword auction mechanisms, the Generalized Second-Price auction (GSP) and the Vickrey-Clarke-Groves mechanism (VCG), were compared theoretically and experimentally. The former is widely used in practice; the latter is not, but it has a dominant strategy equilibrium where all participants bid their true values. In the theoretical investigation, by applying the �locally envy-free Nash equilibrium� to the VCG, we found that the allocations are efficient and that upper and lower bounds of the auctioneer's revenue coincide in the two mechanisms. A laboratory experiment, in which the revenues and efficiencies were similar in both mechanisms, supported this result

The impact of advertising regulation on industry: the cigarette advertising ban of 1971

Abstract: This article studies the impact of the 1971 TV/radio advertising ban on the cigarette industry. Data indicate that industry advertising spending decreased sharply immediately following the ban but recovered and actually exceeded the preban level within five years. A dynamic oligopoly model of advertising is developed to incorporate two potential explanations. The estimated model fully accounts for the puzzling trend, with 74% of the postban advertising spending increase explained by industry dynamics, and 26% explained by learning. Furthermore, this article uses the new concept of nonstationary oblivious equilibrium to handle intractable state space and accelerate equilibrium computation.

Stairway to heaven or highway to hell: Liquidity, sweat equity, and the uncertain path to ownership

Abstract: We study a setting in which a principal contracts with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and privately observes the sequence of cost realizations. We formulate the principal’s problem as a dynamic program in which the state variable is the agent’s continuation utility, which is naturally interpreted as his equity in the firm. The optimal incentive scheme resembles what is commonly regarded as a sweat equity contract, with all rents back loaded. Payments begin when the agent effectively becomes the owner, and from this point on, all production is efficient. These features are shown to be similar to features common in real-world work-to-own franchising agreements and venture capital contracts.

Unobserved Investment, Endogenous Quality, and Trade

Abstract: A seller can make investments that affect a tradable asset’s future returns. The potential buyer of the asset cannot observe the seller’s investment prior to trade, nor does he receive any signal of it, nor can he verify it in anyway after trade. Despite this severe moral hazard problem, this paper shows the seller will invest with positive probability in equilibrium and that trade will occur with positive probability. The outcome of the game is sensitive to the distribution of bargaining power between the parties, with a holdup problem existing if the buyer has the bargaining power. A consequence of the holdup problem is surplus-reducing distortions in investment level. Perhaps counterintuitively, in many situations, this distortion involves an increase in the expected amount invested vis-`a-vis the situation without holdup.

Inefficient sales delays by a durable-good monopoly facing a finite number of buyers

Abstract: This article offers a new explanation for unscheduled price cuts and slow adoption of durable goods. We study a standard durable-good monopoly model with a finite number of buyers and show that this game can have multiple subgame perfect equilibria in addition to the Pacman outcome�including the Coase conjecture. Of particular interest is a class of equilibria where the seller first charges a high price and only lowers that price once some�but not all�high-valuation buyers purchase. This price structure creates a war of attrition between those buyers, which delays market clearing and rationalizes unscheduled purchase and price cut dates.

Contracts offered by bureaucrats

Abstract: We examine the power of incentives in bureaucracies by studying contracts offered by a bureaucrat to her agent. The bureaucrat operates under a fixed budget, optimally chosen by a funding authority, and she can engage in policy drift, which we define as inversely related to her intrinsic motivation. Interaction between a fixed budget and policy drift results in low-powered incentives. We discuss how the bureaucrat may benefit from stricter accountability as it leads to larger budgets. Low-powered incentives remain even in an alternative centralized setting, where the funding authority contracts directly with the agent using the bureaucrat to monitor output.

Search, bargaining, and signalling in the market for legal services

Abstract: Over the last eight centuries, lawyers in common law countries have generally been precluded from buying their clients’ cases. Recently, a number of economists and lawyers have argued that sale should be allowed so as to eliminate moral hazard, particularly when contingent fees are used; this argument is based on full-information reasoning. However, if the lawyer has private information about the case value, then compensation demands potentially signal this value when the client can search over lawyers. We provide a formal model and a family of computational examples that show that allowing (possibly partial) purchase can reduce expected social efficiency.

Multidimensional heterogeneity and the economic importance of risk and matching: evidence from contractual data and field experiments

Abstract: We measure the cost of risk and the benefits of matching heterogeneous workers to risk levels within a firm that pays its workers piece rates. The workers of this firm are heterogeneous in two dimensions: risk preferences and ability. Our results suggest that workers’ willingness to pay to avoid risk is heterogeneous. It can attain 40% of their expected net earnings but averages to only 1%. Moreover, the benefits to the firm of matching are relatively small: profits are predicted to increase by only 2.3%, 4% if we restrict attention to cases where matching is possible. Although labor-market sorting contributes to this result (the workers in this firm are relatively risk tolerant), it is not the primary cause. More important is the relative homogeneity of risk conditions in this firm that give rise to limited opportunities for matching.