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Research


Interests
Working Papers
Publications
Abstracts

Interests:

Applied microeconomics, industrial organization, regulatory economics, consumer and organizational decision making.


Working papers:

Publications:

Abstracts:

  • Social Capital and Traffic Fatalities
    I use a panel of U.S. states during 1997-2006 to examine the relationship between traffic fatalities per unit population and various measures of social capital (SC) – the strength or quality of social ties within a community. My results show that the traffic fatality rate varies negatively with several different manifestations of SC. The ability of SC to prevent fatalities appears to propagate through several pathways, with the functional pathways depending upon the SC manifestation. In particular, SC does not seem to work only through direct interaction among drivers, and manifestations that do not depend upon interaction are found to be more important in sparsely populated areas.

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  • Negative Externalities, Competition, and Consumer Choice
    Consumers sometimes make choices that impose greater external costs on those who do not make the same choice. This paper examines how the selectivity of negative externalities in such situations affects the competitive equilibrium and the desirability of an externality-reducing public policy. Selective negative externalities create network externalities, but outcomes may differ greatly from typical network effects. Price effects may cause the imposing product’s sales to decline with the size of the negative externality. Moreover, competitive effects may run counter to the externalities’ negative direct effects on welfare, such that a policy that enlarges the externality may improve welfare.

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  • Network Externalities, Mutuality, and Compatibility
    Positive network externalities can arise when consumers benefit from the consumption of compatible products by other consumers (user-positive consumption externalities) or, alternatively, when they incur costs from the consumption of incompatible products by other consumers (nonuser-negative consumption externalities). But whereas user-positive externalities are typically mutually imposed and imply mutual benefit because they relate to interoperability, with nonuser-negative externalities the costs of incompatibility may be imposed unilaterally and borne asymmetrically. For example, increased risks of death and injury on the roads due to the co-existence of large and small vehicles are imposed exclusively by the owners of the large vehicles and borne exclusively by the occupants of the small vehicles. This paper compares the social optimality of incentives for compatibility under regimes involving user-positive and nonuser-negative externalities. Earlier work with respect to user-positive externalities (e.g., Katz and Shapiro, 1985) suggests that firms with relatively small networks or weak reputations tend to be biased in favor of compatibility, while individual firms’ incentives for compatibility are suboptimal when their networks are closely matched in size. Meanwhile, intuition suggests that with nonuser-negative externalities incentives for incompatibility should always be excessive, reflecting the notion that activities involving unilaterally imposed negative externalities will always be overprovided by the market (in the absence of regulation or Coaseian mitigation). Using a “location” model of differentiated products, we find that, under both regimes, incentives for compatibility tend to be suboptimal when firms’ networks are close in size, and excessive for the small firm when the networks differ greatly in size. Surprising public policy implications with respect to externalities are discussed.

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  • Unobservable Qualities and Inept Consumer Appraisals
    Using the dietary supplement black cohosh to demonstrate our method, we use data on a product characteristic unobservable to consumers to decompose the contribution of observable characteristics to consumers’ valuations into surrogate indicator and direct components. One problem with respect to this meta-hedonic approach is that not all consumers are likely “expert appraisers” of the unobservable characteristic; hence the measured relationship of surrogate indicators to the unobservable quality is generally not the one consumers presume. The result is that biases that depend upon the nature of consumers’ ineptitude at appraisal are introduced in the estimation of components. Despite this conundrum, we are able to test hypotheses concerning the price effects of consumers’ use of surrogate indicators for eliciting the presence of unobservable qualities. In addition, we show that it is generally possible to deduce the extent of consumers’ unawareness concerning the unobservable characteristic and/or available surrogate indicators. Public policy implications with respect to the efficient flow of information and the potential for product fraud are discussed.

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  • Valuing a Credence Good: A Hedonic Analysis of Black Cohosh Dietary Supplements
    To explore how consumers value credence goods, we estimate hedonic price equations for a dietary supplement called black cohosh, taken by women for relief from menopausal symptoms. We find that consumers respond in expected ways to certain concrete characteristics: for example, paying a premium for a product labeled as suitable for vegetarians. But label words unrelated to concrete characteristics (e.g., “safe”) also affect valuations, suggesting that consumers view these words as surrogate indicators for unobservable qualities. We find additionally that consumers pay more for packages containing more units (e.g., tablets) even when the time supply of product is held constant; thus uncertainty concerning which characteristics of credence goods hold value may presage “money illusion,” that is, an overarching preference for nominal quantities.

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  • Driving a Juggernaut: A Network Effect in the Market for Sport Utility Vehicles and Pickup Trucks
    The paper shows that an accident risk-related network effect exists with respect to motor vehicle size: the more large vehicles there are on the roads, the greater a consumer’s propensity to seek protection against them by driving a large vehicle herself. I confirm through estimation that traffic fatality risks are a significant driver of the decision to purchase a light truck instead of a car; meanwhile, previous estimates by White (2004) suggest that light trucks impose increased fatality risks on other motorists relative to cars. Combining the two sets of results, I find that for each 1 million light trucks that replace cars, 1,441 to 3,309 would-be car buyers annually opt instead for “defensive” light-truck purchases. Since externalized risk drives sales, manufacturers’ incentives to make light trucks less hazardous to other motorists are compromised: 53 to 67 light-truck unit sales must be sacrificed per life saved. Implications for public policy are examined.

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  • Funding Shocks and Optimal University Admissions and Financial Aid Policies
    A positive shock to funding, such as a major donation, causes an optimizing university to raise its admissions standards and reduce tuition charges net of financial aid across all student categories. However, the shock’s effect on enrollment may not be uniform. Student categories given little weight in the university’s objective function may be treated as “inferior goods,” that is, positive shocks decrease their enrollments, while other student categories’ enrollments are increased. The paper’s findings shed light on the effect of federal direct-to-student aid on tuition levels, permitting a new perspective on William Bennett’s controversial hypothesis that aid accommodates tuition hikes.

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  • Understanding the Internet's Relevance to Media Ownership Policy: A Model of Too Many Choices
    Does the Internet provide a failsafe against media consolidation in the wake of an easing of media ownership rules? This paper posits a model of news outlet selection on the Internet in which consumers experience cognitive costs that increase with the number of options faced. Consistent with psychological evidence, these costs may be reduced by constraining one’s choice set to “safe bets” familiar from offline (e.g., CNN.com). It is shown that, as the number of outlets grows, dispersion of consumer visitation across outlets inevitably declines. Consequently, independent Internet outlets may fail to mitigate lost outlet independence on other media.

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  • An Exploratory Analysis of the Determinants of Cooperative Advertising Participation Rates
    The paper offers an exploratory empirical investigation of the determinants of cooperative advertising participation rates. Using data for 2,286 brands, we examine the relationship of participation rates to national advertising expenditures by brand. We also consider how participation rates vary with average manufacturers’ margins by industry, average retail margins by category, and additional category-level variables. Reflecting the discrete nature of the dependent variable, the analysis employs discrete choice estimation techniques instead of OLS regression. The results reveal a significant quadratic relationship between advertising and participation rates. We interpret this and other significant findings in the context of existing work.

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  • Regulation with an Agenda
    The dominant economic perspective on industrial (e.g., telecommunications) regulation is that it is governed by lobbying interests, such that all regulatory windfalls are shared among competing groups based on relative political power. This paper examines how the distributive outcomes of regulation differ if instead the regulator acts based on an “agenda” (i.e., a social welfare function that is a constant-weighted sum of constituent consumers’ utilities). Theoretical analysis is undertaken in a regulated monopoly framework modified to account for regulator preferences across consumer groups. It is observed that when (1) there is some group that would not be served at all but for subsidized rates, and (2) the regulator subsidizes rates sufficiently to induce consumption by the group, any increase in the regulator’s discretionary funds is captured entirely by that group, rather than being shared. Consequently, windfalls tend to exacerbate cross-subsidies, whereas reducing regulators’ discretionary funds reduces subsidies and promotes efficiency.

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  • A Lemons "Mirage": Erroneous Perceptions of Asymmetric Information in the Market for Arizona Ranchettes
    Owners of modest-sized, recreation-oriented ranch properties, known as “ranchettes,” appear to judge a key characteristic of the quality of their properties, the extent of vegetative “greenness,” based on their own observation, despite the greater reliability of publicly available climate data. The discrepancy between personal observation and public data is perceived erroneously by owners as reflecting an information asymmetry that favors the former. The consequence of this misperception is adverse selection: transplant owners, who are not familiar with long-term local weather patterns from direct observation, delay the sale of properties that are greener during their term of ownership. Econometric evidence is presented from the analysis of 694 ranchette sales in Yavapai County, Arizona during 1991-2000. The results demonstrate that the efficiency of the market mechanism is affected not just by the actual distribution of information on quality, but by its perceived distribution.

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  • Improving Judgmental Business Forecasts under Severe Organizational Constraints
    The paper offers a case study in business forecast improvement under conditions of limited data and resources. The practitioner’s objective was to forecast annual revenue for a medium-sized company based on salespersons’ judgmental predictions of success with respect to open sales opportunities. Unavailability of historic forecasts and matching actuals for revenue and its components rendered the standard optimal linear correction procedure for reducing forecast bias infeasible, while lack of organizational cooperation ruled out other popular techniques for forecast improvement, including Delphi and Estimate-Talk-Estimate. A feasible correction method using available data and based on behavioral analysis of the sales team and their prediction processes generated substantial improvement in forecast accuracy relative to no correction.

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  • Rather Bait Than Switch: Deceptive Advertising with Bounded Consumer Rationality
    This paper reviews some of the theory [e.g. Posner (1973)] on the incentives of firms to advertise deceptively. It argues that the widely held belief that these incentives are small and are outweighed by important disincentives is based on unjustified assumptions about consumer rationality. The paper presents a model of advertising and consumer reactions in which consumers manifest a form of bounded rationality. Given this, it is demonstrated that, under cogent assumptions about parameter values, some firms will have an incentive to advertise deceptively, causing a net welfare loss to society in the absence of corrective policy.

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