2013–2014

Measuring the Effect of Price Advertising: Evidence from Fuel Price SIgns in the Italian Motorway

Pradeep Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing

Summary: Using the introduction of a mandatory price disclosure policy, which forces gas stations to post their prices on large electronic signs along the road, we seek to investigate the effect of price advertising on gasoline prices and on the purchase behavior of customers in the Italian motorway. We expect to find that the advertising reduces the average price of gasoline, and decreases price dispersion, as predicted by theory. By observing stations whose prices are advertised as well as those whose prices are not advertised, we can evaluate the effect of advertising of own prices, and also the effect of the advertising of other stations' prices. The analysis of the demand for gasoline should suggest an increase in consumers' price sensitivity, confirming the theoretical model that higher price knowledge is responsible for lower prices in equilibrium. The overall information conveyed by the price signs is expected to be worth several million dollars each year, reflecting the effectiveness of the advertising from a policy perspective, and suggesting its applicability to other markets.

A Study of the Geography of Online Startups in China

Pradeep Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing

Summary: Using data from China's largest online C2C platform between 11/2011-05/2013, we ask the following questions about China's e-commerce businesses: 1) What are the geographic patterns and dynamics of China's online startups? Four of its provinces account for more than 60% of online startups and sales revenues on this platform, supporting growing evidence of a "digital divide" in China. 2) What explains these patterns—do online startups in different geographies exhibit different success / failure rates? 3) If so, what explains these differences—different marketing tools, buyer preferences for geography, or intrinsic entrepreneurial abilities? 4) What are the managerial implications for online startups and for the C2C company, policy implications for China's policy makers, and welfare implications for buyers? On the one hand, given the prominence of this company, these geographic patterns may serve to exacerbate China's uneven regional economic development; on the other hand the presence of the platform provides access to a variety of goods for consumers in remote locations.

The Effects of Price Transparency Regulation on Prices in the Healthcare Industry

Hans Christensen, Associate Professor of Accounting
Mark Maffett, Assistant Professor of Accounting and Neubauer Family Faculty Fellow

Summary: Policymakers have enacted price transparency regulations (hereafter, “PTR”) in over thirty states during the past decade as an attempt to control rising healthcare costs. This proposed project seeks to provide empirical evidence on the effects of these regulations. By using micro data on actual healthcare purchases, and exploiting both between- and within-state variation to address endogeneity concerns, we intend to examine whether price transparency regulations reduce the price charged for common, uncomplicated, and elective procedures. We also plan to exploit cross-sectional variation in a sample of U.S. hospitals to further investigate the effect of PTR on the distribution of prices as well as the effect of hospital competition on patient search efforts. We intend to examine both the impact on charge prices, which are mainly relevant to uninsured patients, and actual payments by insured patients. We also have information on patients’ health insurance contracts, which will allow us to study the impact of the incentives provided by patient coinsurance.

Long Run Discount Rates

Stefano Giglio, Assistant Professor of Finance

CUSFTA's Impact on Produce Variety and Aggregate Productivity

Chang-Tai Hsieh, Phyllis and Irwin Winkelried Professor of Economics
Ralph Ossa, Associate Professor of Economics and Neubauer Family Faculty Fellow

Summary: What are the welfare effects of trade liberalization? In this paper, we shed new light on this classic question by analyzing the Canada-US-Free-Trade-Agreement (CUSFTA). In particular, we use newly available Canadian micro data to provide the first direct evidence on two key effects highlighted by the theoretical literature. The first is a product variety effect: what happens to the number of US products and the number of Canadian products available in the Canadian market? The second is an average productivity effect: what happens to the average productivity of US firms serving the Canadian market and the average productivity of Canadian firms serving the Canadian market? In conjunction with the basic import-price-lowering effects of trade liberalization, these two effects determine the magnitude of the gains from trade in state-of-the-art trade models.

The Response of Prices and Consumption during the Euro Zone Crisis

Brent Neiman, Associate Professor of Economics

Summary: Enormous differences in the economic performance of countries like Germany and Spain during the euro zone crisis offers a unique opportunity to examine classic issues in international economics. In the absence of nominal exchange rate movements across the countries, how has the external adjustment occurred? Did patterns of price stickiness change differentially in the countries, were there important differences in markups, and did traded and non-traded sectors adjust differently? Did otherwise similar households in Germany and Spain respond differently to common announcements about euro zone policies or to the underlying macroeconomic shock? This project uses a novel cross-country dataset with information on a large number of precisely identified goods as well as on the characteristics of those purchasing these goods to shed light on these classic questions.

Financial Sector Development and Structural Transformation

Jacopo Ponticelli, Assistant Professor of Finance

Summary: The growth path of most advanced economies was accompanied by a process of structural transformation. The early development literature has argued that increases in agricultural productivity are an essential precondition for the reallocation of employment from agriculture to the industrial and service sectors. Despite the centrality of structural transformation for economic development, there is scarce direct empirical evidence testing the mechanisms through which this process occurs. In this project we study one specific mechanism through which the adoption of new agricultural technologies can affect structural transformation: credit markets. Agricultural productivity growth can relax the borrowing constraints of entrepreneurs both by generating extra savings then invested in industry and services and by increasing the value of land that can be pledged as collateral. To explore these effects we focus on the adoption of genetically engineered (GE) crops. In the last two decades, GE crops have revolutionized agricultural production and have been widely adopted in the developing world. We plan to use detailed geo-referenced data on the adoption of GE soy by Brazilian farmers after its legalization in 2003 matched with data on bank deposits and bank loans to firms.

Identifying Riskiness in Lending due to the Community Reinvestment Act

Amit Seru, Professor of Finance

Can Relationship Banking Exacerbate Bank Liquidity Spirals?

Kelly Shue, Assistant Professor of Finance

Summary: Recent work suggests borrowers value relationships with their banks and repay partly in order to maintain these relationships. We hypothesize that if borrower repayment behavior is affected by the continuation value of a relationship, borrowers should become less likely to repay when this continuation value decreases. We use detailed data on all loan contracts and realized payments in Brazil to investigate this hypothesis. We use fluctuations in bank liquidity as a proxy for variation in the continuation value of a banking relationship. To account for the possibility that lender and borrower liquidity shocks are be correlated, we look at borrowers with loans from multiple banks, and whether borrowers are more likely to default on the bank with the worse liquidity shock.

Housing and the Rise of the Investor

Amir Sufi, Bruce Lindsay Professor of Economics and Public Policy

Summary: Housing markets since 2011 have seen an unprecedented increase in the share of investor purchases of single-family homes. In this project, I hope to accomplish two goals. The first is descriptive. What precisely is driving the rise in investor purchases? Is it just a reversal of the rise in homeownership from 1998 to 2006? Are investors simply purchasing foreclosed properties and renting them back out to the households that defaulted? The second is more fundamental: does the rise in investor purchases change the effect of house price growth on real economic activity? Anecdotal evidence suggests that investor-owned properties may mean smaller spillover effects of house price growth on economic activity--my research will attempt to evaluate this argument.

Interest Rates, Collateral Value, and Household Spending

Amir Sufi, Bruce Lindsay Professor of Economics and Public Policy

Summary: The response of household spending to shocks that might alter the allocation of consumption across time is a central question in the determination of aggregate demand in modern business cycle theory. Two channels emphasized in particular are the interest rate channel and the collateral value channel. Monetary and financial policy guidelines coming out of this literature depend in part on the relative strength of each of these channels. In this proposal, we focus on two projects that we hope will help us isolate how changes in interest rates and house prices affect household spending over the business cycle. Preliminary results suggest that the reduction of interest rates during economic downturns may not boost spending because only high credit score households are able to refinance their mortgages into lower rates.

Ownership, Management, Productivity, Profitability, and the Making of a Globally Competitive Industry

Chad Syverson, J. Baum Harris Professor of Economics

Summary: My coauthors and I are building an unusually detailed dataset to study how ownership and management are related to firms’ performance levels and how financial and physical capital are allocated across heterogeneous owners and managers. The data are from the Japanese cotton-spinning industry around the dawn of the 20th Century, an inherently interesting setting due to its unique status in economic development. The data’s detail lets us observe outcomes and mechanisms typically unseen by researchers, yielding new insights. This project has already led to a draft paper investigating how mergers and acquisitions affect the performance of both firms directly involved in the transaction and the broader industry. Future work will identify more specifically managerial ability’s role in firm performance and study how the industry’s owners and directors were able to mobilize funds needed for growth despite the relatively undeveloped nature of the Japanese economy at the time.

Price Discovery in the Municipal Bond Market

Regina Wittenberg-Moerman, Associate Professor of Accounting

Summary: In this paper, we investigate how information is impounded in the price of municipal bonds. The municipal bond market is extremely large, representing approximately $2.5 trillion in investments. However, the market is characterized by a lack of transparency and low quality financial reporting. Using data on the issuance prices of municipal bonds and their secondary trading, we study the relative importance of macroeconomic versus municipal-specific information in price formation. In particular, we examine the effect of municipalities' accounting-based financial performance measures on debt pricing in both the primary and secondary municipal bond markets and bond trading in the secondary market. Since municipal leaders face political and corruption incentives, we also investigate whether state-level corruption indices and the timeliness of financial reporting influence the relative importance of municipal-specific information and its effect on bond pricing. Overall, we contribute to the literature on municipal disclosure, on the role of political forces in capital markets and on price discovery in opaque markets.

How Managerial Bonuses are Determined?

Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow

Summary: