Are Firms Sacrificing Flexibility for Diversity and Inclusion?
Abstract
https://papers.ssrn.com/abstract=4536237Follow link to find abstract and full text.
Topics in Industrial Organization
Lightning Round SessionSunday, Jan. 5, 2025 1:00 PM - 3:00 PM (PST)
- Chair: Yanyou Chen, University of Toronto
Follow link to find abstract and full text.
Booms, Busts, and Endogeneous Rigidities: Evidence from Containerships
Abstract
This paper investigates how endogenous rigidities inhibit efficient physical capital reallocation. We focus on the role of contract duration - a classic example of an adjustment rigidity. We argue that when agents choose to sign longer contracts in booms when asset markets are thin, they generate a contracting externality which further reduces available capacity and amplifies market thinness. This causes equilibrium contracts to be inefficiently long in booms and inhibits the adjustment of these markets to productivity shocks. We show evidence for these mechanisms in the market for containership leasing contracts. We provide a framework that captures the details of the market and illustrates the tradeoffs conceptually. Overall, the results have implications for policies in this industry like shipping subsidies, as well as the fragility of the supply-chain to shocks.Competing on Information in Selection Markets: Evidence from Auto Insurance
Abstract
This paper develops a novel method to empirically analyze imperfect competition in selection markets when firms offer differentiated products while having different cost structures and information precision. We develop a static model of price competition, where consumers have private information about their risks. Each firm draws a private signal about the consumer’s riskiness type; the dispersion of the signal distribution measures firm’s information precision. Our paper provides novel econometric techniques to identify and estimate demand parameters, heterogeneous information technology, cost structures, and pricing strategies across competing firms.We apply the method to study a representative sample of Italian auto insurance contracts and associated claims from 2013 to 2021. We find substantial differences in the precision of risk rating and cost structures across insurers. Companies with less accurate risk rating algorithms tend to have more efficient cost structures and attract more high-risk consumers.
If all insurers were to counterfactually adopt the least advanced information technology (for example, under more stringent privacy regulation), average consumer surplus would increase by 4.5%, and the gain primarily comes from high-risk drivers. Allowing all firms to share the best risk rating technology (i.e., policies requiring data/algorithm sharing) improves the efficiency of the insurer-insuree match. Insurers more efficient at processing claims now strategize to attract more high-risk consumers; overall, the cost to insure consumers in this market decreases by 4 euros per contract. We also find that information policies that aim at protecting consumer privacy or promoting competition may disproportionately benefit low-technology firms, which in our data include insurers with large market shares, and hence eventually create anti-competitive effects.
Do Rural Roads Promote Inclusive Entrepreneurship?
Abstract
Entrepreneurship is an important engine of growth. However, attaining inclusivity in entrepreneurship has been elusive. We investigate the impact of a national road construction program in India that brought access to previously unconnected villages on entrepreneurship across social groups categories utilizing the universe of firms in India that contains details on the owner's caste. Results show that construction of new feeder roads to a village increases the number of new firms across all caste categories in services sector, including the lower-caste groups. The increase in manufacturing entrepreneurship is only among the upper caste groups. The division of the entrepreneurial pie among caste groups remain unchanged in services sector, but tilts more towards the upper castes in manufacturing. In both services and manufacturing, the effects are concentrated on small, single-employee owner operated, and unregistered firms without power availability. The positive entrepreneurship effects among lower-caste groups are primarily in villages where bank-credit activity is prevalent suggesting that the formal financing channel is important for lower caste groups where network capital is absent unlike among upper caste groups.Flavorants and Addiction: An Empirical Analysis of Cigarette Bans and Taxation
Abstract
We evaluate the proposed FDA menthol cigarette ban using aggregate-level retail data and micro-level household data. The model incorporates addiction and household heterogeneity, with a focus on low-income households and the Black community, who consume menthol cigarettes the most. The ban reduces cigarette usage by 12.6\% and the Black smoking rate by 35\%, while demand for e-cigarettes and cessation products increases by 4.9\% and 1.7\%, respectively. A \$1.02-per-pack cigarette sales tax is as effective as the menthol cigarette ban, with a smaller reduction in consumer surplus across most demographic groups, especially Black Americans. Including non-tobacco flavored e-cigarettes in the ban reduces cigarette consumption similarly, while e-cigarette usage decreases by 46\%.Partisanship in Entrepreunerial Financing
Abstract
Venture capitalists play an active role in their portfolio companies and frequently interact face-to-face with CEOs during pitching, screening, contract negotiations, monitoring and post-investment. To examine whether VCs are more likely to invest with CEOs with whom they share political affiliation, we assemble a sample of X actual matches between start-ups and partners of VC firms who hold seats on the startup’s board of directors and counterfactual matches. We collect political donations data for each CEO and VC board member to gauge their political ideology. Using this data, we find that the similarity in political ideology positively predicts the initial VC-entrepreneur matching. This partisan bias, however, is associated with better performance, as firms with VC-CEO alignment are less likely to go bankrupt, have higher odds of successful exits, and have more patents. These results suggest increased trust and better information flow between the connected parties encourage riskier, more novel investments. Yet, we also document a lower likelihood of CEO turnover, which provides some evidence of in-group favouritism.Polarized Supply Chains
Abstract
We study whether political polarization increases partisan alignment in the supply chain. Using top executive campaign contributions, we find that customer firms are more likely to match with politically aligned supplier firms, and this trend increases over time. These results are robust to controlling for heterogeneous time-varying trends based on firm characteristics, industry, and location. Using a change in state law as an exogenous shock to supply chains, we show that the likelihood of matching with a politically aligned supplier increases after the shock.Using changes in state law and a natural disaster as shocks to the supply chain, we find that partisan matches are less likely to break during a supply chain disruption. Customer firms with more politically aligned suppliers have lower R&D and issue fewer patents and new products. Our results are consistent with the predictions of a simple model showing that partisan alignment along the supply chain can arise in response to increased uncertainty about the stability of such relationships in a politically polarized environment.
Strategic Complementarity in NGO Advocacy: Evidence from the European Commission
Abstract
This article analyzes the advocacy strategies of environmental non-governmental organizations (ENGOs). I develop a model in which ENGOs can engage in costly advocacy activities to foster pro-environmental policy changes on different dimensions. The model gives insights on their optimal advocacy strategies, and their reaction functions to lobbying from other actors. Combining data on meetings with European Commission members and textual analysis to measure lobbying efforts on different topics, I find support for strategic complementarity of efforts. ENGOs also seem to benefit from lobbying of the business sector on the same topics: it makes their effort more efficient as it contributes to bringing these topics up and helps them get meetings with time-limited attention policymakers.Trust Building Dynamics in Cartel Formation: A Structural Analysis
Abstract
This article empirically investigates a price-fixing cartel in Chile’s pharmaceutical sector. A dynamic game model is developed to explain the challenges of initiating collusion and addressing incentive and coordination problems.Firms started colluding in select markets, expanding over time. Trust is built as firms learn from initial collusive outcomes, easing further collusion. The study evaluates counterfactual antitrust policies, assessing their effectiveness against cartels. It highlights the significance of considering coordination in policy predictions.
JEL Classifications
- L1 - Market Structure, Firm Strategy, and Market Performance