2014–2015

Missing Markets for Innovation: Evidence from New Uses of Old Drugs

Eric Budish, Associate Professor of Economics and Neubauer Family Faculty Fellow

Summary: Economists have long argued that – in the absence of intellectual property rights policies such as patents – private firms would have little incentive to make investments in developing new technologies. However, this assumption is surprisingly hard to empirically test and quantify, because it requires finding a setting that offers an apples-to-apples comparison of what research investments would be observed in a world with patents relative to a world without patents. The key idea of this project is to take advantage of the conjectured “new uses” problem for pharmaceuticals as a source of variation in the effective patent terms provided to different potential discoveries (similar in spirit to Budish, Roin and Williams, 2014). This context will, we hope, enable us to make two kinds of contributions. First, this analysis will provide what is arguably the first credible empirical evidence on the classic economic question of how patents affect research investments. Second, by using a simple theoretical model to re-frame the “new uses” problem as a limitation of price discrimination technology, we will analyze potential policy levers that could be used to address these missing research investments.

Bank Lending Constraints in China and Their Real Impacts

Lin William Cong, Assistant Professor of Finance

Summary: This study investigates how regulations on bank lending impact the real economy. China has long implemented a loan quota and loan-deposit ratio system to control bank lending to the private sector. However, the conflicts between genuine market demand for credit and lending constraints triggered the emergence of various forms of "lending in the shadow", especially the ones involving Banker’s Acceptance contracts. We propose to exploit an unexpected policy change in China in 2012 regarding the use of Banker's Acceptance contracts, and combine data on bank loans and firm operations, in order to identify the impact of this policy shock on bank lending behavior and firm performance. The questions we explore include how bank lending responds to policy shocks, how loan-deposit ratio rule and loan quota system fare as macro-policy tools, and how lending constraints impact the real economy.

Why Do the Poor Buy Less Nutritious Food? Supply vs. Demand Forces and the Role of Public Policy

Jean-Pierre Dubé, Sigmund E. Edelstone Professor of Marketing

Summary: This project will study how and why nutrition decisions vary by income in the United States. First, we will document how purchasing patterns vary by income. Second, we will study the extent to which these differences are driven by supply- or demand-side forces. Our approach will consist of estimating the demand for groceries and the supply of grocery stores. We will combine several data sources including the Nielsen RMS and HomeScan data, nutrition facts, neighborhood demographic characteristics, and measures of the local density of grocery stores. To gauge the role of the demand side, we will compute the counterfactual equilibrium that assigns low-income households the preferences of higher-income households, holding the supply of stores fixed. To gauge the role of the supply side, we will compute the counterfactual equilibrium that assigns low income households the choice set (i.e. supply of store types) of higher-income households. These analyses can be used to predict the effects of proposed policies to increase supply of healthy foods in low-income neighborhoods.

Migrants, Trade and Investment

Tarek Hassan, Associate Professor of Finance and Economics and Neubauer Family Faculty Fellow

Summary: Informational frictions are prevalent in market economies, and they can prevent an optimal allocation of resources. While we have a good understanding of how markets can aggregate information through prices, there remain many dimensions of information that are not conveyed by prices. Nonmarket mechanisms are important channels that allow agents to circumvent such informational frictions. In this paper, we study one particular type of mechanism for information transmissions: migrant networks. Our premise is that information frictions represent a key barrier to international trade and investment. Building on previous work by ourselves and others, we document and quantify a causal effect of migrant networks on international trade and investment.

Social Structure of Governments and Firms

Tarek Hassan, Associate Professor of Finance and Economics and Neubauer Family Faculty Fellow

Summary: An expanding literature studies the social structure of the firm (Bennedsen, Nielsen, and Perez-Gonzalez, 2007, QJE; Bloom, Sadun, and van Reenen, 2012, QJE). This literature studies how firm management styles adapt to different economic conditions and institutional settings. Another, largely separate, literature in political economy studies how governments shape economic institutions, but ignores the social context in which these decisions are made. In this project, we attempt to bridge the gap between these two literatures: There should be a deep analogy between the sociology of the firm and the sociology of governments. Faced with similar problems, such as corruption, low trust, etc. both types of organizations may adapt in similar ways.

Prices and Promotions in the U.S. Retail Markets: Evidence from Big Data

Günter Hitsch, Professor of Marketing

Summary: We describe and analyze the extent of price variation in the U.S. retail market. Our study is based on weekly price and quantity data obtained from the Nielsen RMS scanner database. The data is comprehensive and covers 50,000 products accounting for more than 70 percent of store revenues in more than 30,000 supermarkets, drug stores, and mass merchandizers. We document a large degree of price dispersion for identical products. There is both persistent variation in price levels across stores, regions, and retail chains, and a high degree of temporal variation in the form of price promotions. We examine the sources of price dispersion, including region and chain fixed effects, local demographic factors, and the degree of local competition among retail chains. We also examine systematic factors affecting the promotion intensity and store price level variation across products, such as “loss leader” pricing to affect store traffic. We conclude by measuring the value to consumers from search or “smart shopping” that exploits the cross-­‐sectional and temporal price variation in local markets.

One Firm's Demand Shock is Another Firm's Supply Shock: Consequences of Sarbanes-Oxley for Private Firms

Michael Minnis, Associate Professor of Accounting

Summary: In this paper, we hypothesize that an important consequence of the Sarbanes-Oxley Act was that the substantial demand shock to auditing services for publicly held firms caused a significant supply shock for privately held firms. Our argument proceeds as follows. First, auditing services are both homogenous and inelastic in the short run. Second, SOX caused a substantial positive shift in the demand for audit firm services from public firms and because audit supply is inelastic in the short run, accounting firms reduced the number of audits for private firms. To test our hypothesis, we will use a large time series database of private firm financial statements to measure temporal fluctuations in audited financial statement production. Our research will make two contributions. First, we will show that public firm regulations have consequences for private firms. Second, we will provide evidence of economic forces affecting the equilibrium level of auditing in privately held firms, an area of recent regulatory debate.

Bad Company: The Reputational Implications of Cross-sector Interactions with a Stigmatized Firm

Elizabeth Pontikes, Associate Professor of Organizations and Strategy

Summary: Many of society's pressing problems require cross-sector interaction – such as associations between nonprofit and for-profit entities. But little is known about risks involved with these collaborations. This project investigates how not-for-profits are harmed if they are connected to a firm that experiences a scandal. Specifically, we study how ties to British Petroleum affected environmental NGOs in the wake of the BP oil spill, in terms of both social approval and financial performance. We are building a database that tracks connections between the NGOs and BP prior to oil spill, and measures of the NGOs' social approval and financial performance before and after the spill. These data can shed light on two research questions. First, what are the consequences to a non-profit when a corporation with which it has previously associated is involved in a scandal? Second, do contentious associations elicit the same spillover effects as collaborative associations?

Who Bears the Cost of Recessions? The Importance of Household Balance Sheets

Amir Sufi, Bruce Lindsay Professor of Economics and Public Policy

Summary: We review the literature on the effects of recessions across the income distribution, focusing on shocks to income, wealth, and consumption. One of the difficulties with the existing research is a lack of individual-level panel data on all of these outcomes. More specifically, the ideal data set would allow a researcher to sort households based on ex ante characteristics such as average income, and then track income, wealth, and consumption of individuals through the recession. We use zip code level data on the Great Recession as an imperfect proxy for the (non-existent) ideal data set. The preliminary results show that lowest income zip codes suffer the largest increase in unemployment, the biggest drop in housing wealth, and the largest decline in measures of consumption. The results are least conclusive on income shocks, but they suggest that the lowest income zip codes see larger losses in income with the exception of one group: the richest zip codes. However, the richest zip codes see the smallest drop in measures of consumption. Food stamps grow by much more in lower income zip codes. We believe that the evolution of household balance sheets is crucial to understanding these patterns. We cannot yet say much about the evolution of financial wealth in a zip code during the Great Recession.

Psychological and Economic Effects of Incentives on Motivation

Oleg Urminsky, Associate Professor of Marketing and Charles M. Harper Faculty Fellow

Summary: Classical economic theories assume that incentives are universally motivating, in proportion to the magnitude of the economic incentive, and that the way incentives are framed and presented is largely irrelevant. Psychological theories, on the other hand, emphasize the risks of incentives, particularly the potential for monetary incentives to "crowd-out" other motives, such as intrinsic motives. These views have contributed to an impasse, particularly in consequential domains like educational policy, prosocial behavior, and lifestyle changes where different policy makers are often convinced that incentivizing behavior will necessarily be either primarily beneficial or harmful. Using fine-tuned measures in controlled incentive-compatible experiments, our initial results suggest the psychological phenomenon of crowding-out exists but is short-lived, and the long-term effects of temporary incentives are positive. These results have the potential to reconcile the large literature in Psychology and Economics, and shed new light on our understanding of the theory of intrinsic motivation. We plan to do a large-scale field experiment using digital Pedometers that will capture minute-by-minute physical activity under different reward contingencies.

Arrested Development in China

Eric Zwick, Assistant Professor of Finance and Neubauer Family Faculty Fellow

Summary: What is the effect on the real estate market of “speculators”—investors who receive no direct utility flows from real estate? We seek to answer this question in the context of the Chinese real estate market, which is currently experiencing one of the largest real estate booms in world history. A literature in finance has argued that speculators amplify booms in asset prices in the presence of short-sales constraints. Our goal is to test this prediction in the Chinese real estate market. Our broad strategy is to exploit cross-sectional variation in the ease of speculating. Specifically, we will use differences across municipalities in land use policy and local government corruption as potential sources of exogenous variation in land available for development and speculation. We will use detailed micro data on house and land transactions from official Chinese records maintained by central and municipal authorities.