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This thesis consists of two essays that exploit algorithmic techniques to solve two matching market design problems. The first essay introduces a simple benchmark model of dynamic matching in networked markets, where agents arrive and depart stochastically and the network of acceptable transactions among agents forms a random graph. The main insight of our analysis is that waiting to thicken the market can be substantially more important than increasing the speed of transactions. We also show that naive local algorithms that maintain market thickness by choosing the right time to match agents, but do not exploit global network structure, can perform very close to optimal algorithms. Finally, our analysis asserts that having information about agents' departure times is highly valuable. To elicit agents' departure times when it is private, we design an incentive-compatible continuous-time dynamic mechanism without transfers. The second essay extends the scope of random allocation mechanisms, in which the mechanism first identifies a feasible "expected allocation" and then implements it by randomizing over nearby feasible integer allocations. Previous literature had shown that the cases in which this is possible are sharply limited. We show that if some of the feasibility constraints can be treated as goals rather than hard constraints then, subject to weak conditions that we identify, any expected allocation that satisfies all the constraints and goals can be implemented by randomizing among nearby integer allocations that satisfy all the hard constraints exactly and the goals at least approximately. We show that by adding ex post utility goals to random serial dictatorship, we can construct a strategy-proof mechanism with the same ex ante utility that is nearly ex post fair.
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This dissertation studies inference in network-formation models with game-theoretic foundations. These are discrete-choice models in which the binary outcome represents whether or not a pair of nodes forms a link. Strategic interactions result from "network externalities, " meaning that the surplus that a node pair enjoys from forming a link may depend on the existence of other links in the network. Estimation of strategic models faces two core difficulties. The first is that network externalities can generate link "autocorrelation, " since an ego's decision to form a link with an alter may depend on the alter's other link-formation decisions and vice versa. Moreover, we typically observe only a few networks in the data and often only a single network. Hence, it is nontrivial to obtain a central limit theorem in the strategic context. The development of a sampling theory for large networks remains an open problem and is a central theme of this dissertation. The second core difficulty is incompleteness due to multiple equilibria. For a fixed vector of node primitives there may be multiple networks consistent with the equilibrium restrictions imposed by the model. If the econometrician is unwilling to take a stance on the mechanism by which nodes coordinate on a particular equilibrium, then the model likelihood depends on an infinite-dimensional nuisance parameter, and the model may only be partially identified. The first chapter of this dissertation analyzes strategic models of network formation with incomplete information. We show that in a setting without unobserved heterogeneity, by conditioning on commonly known attributes, we can eliminate autocorrelation among links. Moreover, we show that equilibrium beliefs can be estimated directly from the data under the restriction that the observed equilibrium is symmetric. Then the structural parameters can be estimated using a simple two-step estimator that augments commonly used "dyadic regression" models with an additional nonparametric first step to account for network externalities. The second chapter studies models with complete information, allowing for unobserved heterogeneity. This chapter considers models that obey a weak "component externalities" restriction on network externalities. We derive conditions under which certain node-level functions of the network constitute alpha-mixing random fields, objects for which central limit theorems exist. In particular, homophily plays an important role in reducing autocorrelation. Our results enable the estimation of certain network moments that are useful for inference. The third chapter studies models with complete information under a stronger "local externalities" restriction on network externalities. Whereas a central limit theorem under component externalities requires a "subcritical" network comprised of a large number of small components, we show that a class of models obeying local externalities can generate sparse networks with giant components, properties consistent with real-world social networks. Further, we develop conditions under which certain network statistics, converge to their expectations as the size of the network goes to infinity. A key requirement is that nodes are homophilous with respect to a set of attributes and that the degree of homophily increases with the size of the network at a particular rate. That is, nodes are increasingly selective about their partners the larger the pool of available partners. The rate at which selectivity increases in part determines the "realism" of global properties of large networks and the possibility of a law of large numbers. We derive rates that are compatible with both objectives. We also develop moment inequalities for inference that are "sharp" in the sense that they fully exhaust the empirical implications of the equilibrium restrictions.
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This dissertation examines a few empirical questions in public economics, labor economics and corporate finance. Chapter 1 studies the negative externality from the uninsured drivers on the insured in terms of insurance premium. When the uninsured drivers are determined at fault in an accident, they could ultimately declare bankruptcy due to limited liability and thus refuse payment of damage. The damaged incurred by them will then have to be paid by the insurance companies to the insured driver. An empirical analysis of this negative externality channel face two major challenges, one is the measurement error in the local uninsured drivers rate, and the other is a host of endogeneity concerns. Most prominent of the endogeneity concerns is the reverse causality, that fewer people buy insurance as insurance premium are high for other reasons. Using a novel panel data set and a staggered policy change that introduces exogenous variation in the rate of uninsured drivers at the county level in California, we find that uninsured drivers lead to higher insurance premia: a 1 percentage point increase in the rate of uninsured drivers raises premia by roughly 1\%. We calculate the monetary fine on the uninsured that would fully internalize the externality and conclude that actual fines in most US states are inefficiently low. This chapter is coauthored with my classmate Constantine Yannelis. Chapter 2 studies whether credit constraints affect demand for higher education in the United States. And it uses staggered bank branching deregulation across states in the United States to examine the impact of the resulting increase in the supply of credit on college enrollment from the 70s to early 90s. Our research design produces estimates that are not confounded by wealth effects due to changes in income or housing value. We find that lifting branching restrictions raises college enrollment by about 2.6 percentage points (4.9\%). Our results rule out alternative interpretations to the credit constraints channel. The effects are statistically significant for low and middle income families, while insignificant and close to zero in magnitude for upper income families as well as bankrupt families who would have been unaffected by the increased access to private credit. We find similar effects for two-year college completion as well as four-year college completion. We also show that household educational borrowing increased as a result of lifting branching restrictions. Our results provide novel evidence that credit constraints play an important role in determining household college enrollment decisions in the United States. This chapter is also coauthored with my classmate Constantine Yannelis. Chapter 3 identify the causal effect of managerial ownership on firm performance exploiting the 2003 Dividend Tax Cut in a quasi-natural experiment, which increased the net-of-tax effective managerial ownership. Consistent with predictions from agency theory, we find a significant and hump-shaped improvement in firm performance measured by Tobin's Q with respect to the level of managerial ownership due to the tax cut. Further, the relation between managerial ownership and firm performance relies on the level of moral hazard inside the firm proxied by investment intensity and asset tangibility as well as the strength of other co-existing channels of corporate governance. In particular, only firms with weak internal corporate governance proxied by G-Index or E-Index are significantly affected in a hump-shaped manner by the tax cut. The increase in performance is more pronounced for firms with weak alternative governance mechanisms such as institutional blockholders and firm leverage. These findings strengthen our interpretation that the improvement in firm performance is due to increased managerial incentive. Our results are robust to examination of pre-trend and placebo tests, accounting measures of firm performance as well as other considerations. This chapter is coauthored with my classmate Xing Li. Chapter 4 examines the effect of increased creditor governance well before the state of bankruptcy on corporate innovation by exploiting the state of debt contract covenant violation and the institutional feature that creditors obtain increased control right of the firm. Consistent with the view that increased creditor monitoring has disciplining effect on the managers, we find no significant change in the R\& D spending, significant but modest decrease in the total patent counts two years forward as well as significant and large positive impact on the citation counts of the patents. Our results demonstrate that increased creditor governance is overall beneficial to firm innovation.
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This dissertation examines a few theoretical questions in financial economics, mechanism design, and contract theory. Chapter 1 studies how competitive middlemen affect bid-ask spreads and investor welfare in a dynamic limit order market. Both middlemen and ordinary investors can choose between providing liquidity and taking liquidity. I find that although the presence of competitive middlemen tightens the average bid-ask spread, its consequence on total and investor welfare is mixed due to multiple competing effects. Middlemen provide counter-parties to investors when there is order imbalance, increasing total welfare. However, the uncertainty of their liquidity and their speed advantage relative to investors may crowd out liquidity-providing investors and/or create additional picking-off risk for investors, reducing social surplus and investor welfare. Moreover, although middlemen compete in price when supplying liquidity, the competition to pick off investors' stale orders is in speed. Thus, they may extract surplus from investors when taking liquidity, also reducing investor welfare. I characterize conditions under which each of the above effects dominates. Chapter 2 investigates implementability of allocation rules in quasilinear environments when the agent has private information about his preference. It is well known in static mechanism design that an allocation rule can be implemented if and only if it is monotonic. Recently, Pavan, Segal, and Toikka (2014) show that monotonicity is also sufficient for implementability in dynamic mechanism design if the environment is Markov. I show in an example that monotonicity is not sufficient for implementation in non-Markov environments due to the possibility of successive lying. The difference is that in Markov environments, if the agent does not want to lie after truthful reports, he does not want to lie after lies either. However, this is not true in non-Markov environments, where the agent's realized types in earlier periods directly affect his reporting incentive. In a 2-period non-Markov setting, I derive a sufficient condition for implementability in direct, deterministic and continuous mechanisms. It can be viewed as a generalized monotonicity condition on the allocation rule, taking into account the agent's optimal sequential lie after lying in the first period. Using this generalized monotonicity condition, I also derive two other sufficient conditions for implementability which do not directly use the agent's sequentially optimal reporting strategy and thus are easier to check. Chapter 3 studies the role of commitment in long-term agency relationships when the agent's efforts in each period affect both current and future output distributions. It is well known in the dynamic adverse selection literature that second-best contracts are often not implementable without commitment. Fudenberg, Holmstrom, and Milgrom (1990) provide conditions such that commitments are unnecessary in long-term agency relationships. One of the conditions is that recontracting takes place when preference and technology are common knowledge. Can second-best contracts still be implemented if this condition is not satisfied? In a finite horizon setting, I consider a simple history-dependent technology where the cumulative distribution function of outputs in each period is a linear combination of two cumulative distribution functions. These two functions are determined respectively by the effort exerted in the current period and the effort exerted in the previous period. I show that even with a history-dependent technology, second-best contracts can still be implemented in the absence of commitments if the history dependence is small enough. The intuition is that, when the effects of the agent's efforts on future outputs are small, the incentive compatibility constraints of the second-best contract are satisfied with equality. This implies that there is no excessive risk at the beginning of each period, and thus no need for the contracting parties to renegotiate.
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This dissertation in applied microeconomics examines supply-side behavior, particularly responses to policy changes. The first chapter studies the supply response of urban private schools to public school funding changes in New York City. We find that private schools whose public school competitors received larger funding increases were more likely to close in the subsequent two years. These closures amplified student sorting and undid some of the funding reform's positive achievement effects. The second chapter investigates how stimulus-motivated federal funding directed to universities affected their revenues, expenditures, employment, tuition, student aid, endowment spending, and receipt of state government appropriations. We find that private universities spent additional funding on many categories of expenditures while public universities used federal funds as leverage to gain independence from state governments-gaining the ability to set tuition and other prices closer to market-based rates but losing state appropriations in the bargain. Overall, the stimulus apparently caused universities to increase their investments in research and human capital. The third chapter examines how online platform design interacts with consumer search and seller price-setting to affect market outcomes. We use browsing data from eBay to estimate a model of consumer search and price competition when retailers offer homogeneous goods. We find that retail margins are on the order of 10%, and use the model to analyze the design of search rankings. Our model explains most of the effects of a major re-design of eBay's product search, and allows us to identify conditions where narrowing consumer choice sets can be pro-competitive.
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This dissertation describes my research in several related areas of behavioral and experimental economics. In the first chapter, I use subjective and hypothetical responses to show that opt-in choice framing leads to greater organ donor designation rates than active choice framing. I use the same methodology to accurately predict behavior in settings where standard models of social preferences fail. In the second chapter, I show that machine learning models and economic models predict equally well in domains of risk, but economic models fall behind when ambiguity is introduced. In the final chapter, I present a field experiment that shows that making a commitment choice public increases demand for the device, indicating that participants believe they can reveal something positive about themselves by using the device.
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This dissertation consists of three self-contained essays. The first essay reconciles two seemingly competing explanations of context-dependent choice, one invoking psychological mechanisms, and the other Bayesian learning. We prove that standard context effects are features of the optimal solution to a general dynamic stochastic resource-acquisition problem. The model has two key ingredients: intertemporal substitution and learning about the environment. Interpreted as a description of animal foraging behavior, it explains why context effects might be adaptive in nature. Interpreted as a description of consumer choice problems, it suggests that context effects might result from rational inference. We ran a simple experiment to show that the latter interpretation sometimes holds. The second essay investigates the performance of rotating savings and credit associations (ROSCAs) in investment acceleration and welfare promotion for small-business entrepreneurs. In a model of privately observed investment returns, random ROSCAs improve upon autarky, while bidding ROSCAs can achieve efficiency. By relaxing the assumption of homogeneous agents calculating equilibria, it is shown that an expected-utility maximizer prefers some bidding ROSCAs to random ROSCAs regardless of her belief about others' strategies. Such analysis respects the Wilson doctrine, putting forth a novel framework for comparing mechanisms. The results highlight why more ROSCAs may embrace auction designs as economic development differentiates economic opportunities. The third essay explores the frontier between possibility and impossibility results in social choice theory by analyzing different combinations of "pro-socialness" and "consistency" conditions. This exercise delivers stronger versions of four classical impossibility theorems, and offers a thorough understanding of connections among them. We also characterize social choice functions that are "independent of irrelevant alternatives, " which makes evident that the fundamental difficulty of social choice lies in "pairwise" consistency requirements. We also introduce a concise pedagogical approach to classical impossibility theorems.
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This dissertation presents three essays in health economics and industrial organization. In the first essay, titled "Entry and Long-Run Market Structure in Nongroup Health Insurance, " I examine why there are many highly concentrated markets for nongroup (individual) health insurance in the United States. I do this by estimating a static model of entry, with which I show two results. First, incumbent insurers attract disproportionately high market share but do not get a disproportionate share of the most profitable consumers via underwriting (screening). Due to their high market share, they partially deter entry by other more marginal insurers, contributing to high market concentration. Second, rural areas have low population, unprofitable demographics (low-income, high disease incidence), and higher fixed costs of entry (isolated, few physicians). All three confluent factors at once cause rural areas to face significantly more market concentration than others. I use the estimated model to simulate the long-run changes in market concentration under the Affordable Care Act. Most urban areas face a decline in market concentration, but most rural areas - which were already highly concentrated - face an increase in market concentration. In the second essay, titled "Competition and Innovation: Did Monsanto's Entry Encourage Innovation in GMO Crops?, " I examine the relationship between competition and innovation using Monsanto's entry into agricultural biotechnology. In 1996, Monsanto - then a chemical firm - bought a plant breeder that had developed a new corn hybrid, which could withstand Monsanto's powerful herbicide Roundup. Due to the pre-existing structure of the US plant-breeding industry, this acquisition and Monsanto's acquisition of five other corn breeders meant that Monsanto had also entered soy breeding, in addition to corn. As a result, the market structure of soy breeding shifted from a quasi monopoly (by Pioneer Hi-Bred) to a duopoly with a competitive fringe. At the same time, Monsanto's acquisitions created no significant change in the market structure for other crops, such as wheat or cotton. Using new data on field trials, I study the effects of these changes on innovation. These data indicate that Pioneer and the competitive fringe innovated less in response to Monsanto's entry. Data on patent applications, however, indicate that Pioneer and the competitive fringe patented more after Monsanto entered. In the third essay, titled "Studying State-Level Variation in Nongroup Health Insurance Regulation: Insurers' Incentives to Screen Consumers, " I compare different state-level regulations for nongroup (individual) health insurance, and I use the comparison to show how regulation may affect insurers' incentives to screen and reject high-cost consumers. The study is possible because of historical variation in regulation - various states instituted high-risk pool (HRP), community rating (CR), and guaranteed issue (GI) regulation in the 1990s. I compare rejections of individual insurance applications across the different regulatory regimes. Rejections do not decline under HRP regulation. Historically, HRPs have generated little change to demand for private nongroup insurance among high-cost consumers, leaving underwriting (i.e. screening) unchanged. CR by itself (without GI) increases rejections. Insurers have a stronger incentive to underwrite when it is allowed but pricing is restricted. GI (with CR) decreases rejections, but they are not fully eliminated - a non-zero fraction of consumers are still rejected. Insurers face substantial incentive to screen consumers, which may outweigh the implicit cost of screening that regulation imposes. In light of insurers' behavior under these three regulations, future policy should decrease insurers' incentives to screen consumers. This reduces wasted resources devoted to underwriting.
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This dissertation studies the determinants of global trade patterns and strategic tariff negotiation in trade policy. The first essay examines why firms and countries indirectly export through trade intermediaries, with an emphasis on the role of financial frictions. I show theoretically and empirically that financially more constrained exporting firms and financially less developed countries are more likely to use trade intermediaries. The empirical analysis uses firm-level data on indirect exports for 118 countries and country-level data on entrepot trade through Hong Kong for over 50 countries. Calibrating a two-country version of the model in general equilibrium for China and US reveals important gains from trade intermediation. The second essay studies exporting countries' choice of trade partners, and shows that financial development is again an important determinant. The paper provides new, systematic evidence that at the aggregate level, countries follow a hierarchy, or pecking order, of export destinations. This pecking order is governed by the market potential of destinations such as market size and trade costs. Financially more developed countries have more trade partners and go further down the pecking order, especially in sectors that rely heavily on the financial system. The last essay studies tariff negotiation with a dynamic bargaining inefficiency known as forward manipulation. Forward manipulation is formalized in a non-cooperative game where countries negotiate over tariff levels in a sequential, bilateral fashion. The common party across the negotiation rounds has an incentive not to lower its tariff in the earlier stages of the game so that it can manipulate the threat points of negotiation partners in later stages. Forward manipulation is applied to explain gradualism, the observed pattern of tariffs declining slowly and gradually, for the early GATT rounds.
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The first chapter of this dissertation asks whether forming a business group enhances the export competitiveness of its member firms through a financial channel. More precisely, I claim that forming a business group lowers default risks by diversifying profit sources across various industries and thus allows its member firms to borrow at lower interest rates; in turn, the member firms export more in intensive and extensive margins. I build a model, derive its theoretical implications, and test these implications with Korean firm-level data against alternative explanations. The empirical results suggest that the financial benefit through diversification plays an important role in Korean business groups' superior export performance. The second chapter, coauthored with Kyle Bagwell, analyzes trade policy in a symmetric, two-country version of the Melitz-Ottaviano (2008) model. Our characterizations are influenced by three driving forces corresponding to the selection effect, the firm-delocation effect, and the entry-externality effect. Starting at global free trade, we show that a country gains from the introduction of (1) a small import tariff; (2) a small export subsidy, if transportation costs are low and the dispersion of productivities is high; and (3) an appropriately combined small increase in its import and export tariffs. The welfare of its trading partner, however, falls in each of these three cases. We also offer characterizations of efficient and Nash trade policies. We find that global free trade is generally not efficient, even within the class of symmetric trade policies; and we establish that the import tariff exceeds the export tariff in a symmetric Nash equilibrium. We also provide conditions under which efficient symmetric trade policies entail a total tariff that is positive but below that in a symmetric Nash equilibrium; and we show that, starting at the symmetric Nash equilibrium, countries can mutually gain by exchanging small reductions in import tariffs, export tariffs or combinations thereof. The last chapter, coauthored with Yong Suk Lee, examines how the uncertainty, that arises when countries vie for political influence via economic sanctions, impacts international trade. By separately examining the threat stages of sanctions from the actual impositions, we distinguish the impacts of political uncertainty on trade from that of actual trade disruption. Using a detailed dataset that identifies the timing of sanction threats and impositions, we construct a monthly panel of US sanction cases and bilateral trade between 1992 and 2005. We find that US sanctions significantly reduce US exports to and imports from target countries during the threat stages. The impacts are larger when the target countries are non-democratic states. Furthermore, sanctions motivated by political causes, e.g., war, weapons proliferation, humanitarian crises, etc., tend to have larger impacts than sanctions caused by economic disputes. Our findings suggest that efforts to politically influence other countries generate substantial uncertainty enough to hinder trade flows between sender and target countries.
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This dissertation evaluates the impact of government policies using macroeconomic tools. The first policy I study is Government-Sponsored Enterprises (GSEs). I use an assignment model to estimate the potential impact on the housing market if GSEs were eliminated. Because GSEs provide target subsidies to low quality segments of the housing market, their elimination would affect those segments the most. The second policy I study is the U.S. sanctions on Iran. I employ econometric tools to estimate the effect of the sanctions on inflation, GDP, and exchange rate in Iran.
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This dissertation in macroeconomics comprises three chapters. In the first chapter, ``The Macro Impact of Short-Termism, '' I study a pervasive tradeoff between the short-term and long-term performance of firms. In the United States, long-term investment, like R& D, must be expensed from short-term earnings figures. Therefore benchmarks for short-term performance, such as analyst earnings forecasts, may cause managers to underinvest in the long term. The second chapter, ``Alternative Methods for Solving Heterogeneous Firm Models, '' compares four algorithms for the solution of a canonical neoclassical heterogeneous firms model with fixed capital adjustment costs and firm-level productivity shocks. Trade between low-cost, low-wage countries like China and the developed world has increased substantially in recent decades. Recent empirical research suggests that firms exposed to this liberalization engage in more innovation. In a third chapter entitled ``Trapped Factors and China's Impact on Global Growth, '' which is joint work with Nick Bloom, Paul M. Romer, and John Van Reenen, we build a product-cycle model of growth and trade which seeks to both rationalize this micro-level response of firm innovation to low-cost competition as well as quantify the dynamic or growth based gains from trade liberalization.
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Mechanism design theories have established basic framework in studying economic problems where agents have private information and behave in their own interests. This framework provides a workhorse for exploring how to implement social choice rules in general. One typical issue is to analyze the decision-making by a social planner or a designer who aims to achieve efficient outcomes that maximize the joint welfare of all agents. Not surprisingly, efficiency essentially requires that the designer know the agents' private information and then choose the corresponding socially optimal outcome. However, the difficulty of mechanism design problem is to characterize these incentive constraints where agents find it optimal to reveal their private information truthfully. Specifically, sufficiently rich private information could entail non-implementability of efficient social choice rules. To overcome this difficulty, this dissertation considers a class of semi-exclusive information structures where agents may observe signals about payoff signals, and a class of problems where agents may have wrong beliefs or the mechanism designer is not informed about the agents' valuation functions, and proposes mechanisms that implement efficient allocations.
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This thesis is composed of three empirical papers in the field of labor and public economics. The first paper uses historical data from the New-York Stock Exchange to investigate the importance of ethnic discrimination, ethnic networks and ethnic homophily in the field of finance. The second paper studies the role of parental insurance on the job search behavior of new entrants in the labor market. It also uses parental shocks around the time of the child's entry into the labor force as an instrument to test for the existence of persistent effects from a temporary increase in job search effort at the beginning of a worker's career. The third paper takes advantage of an important tax reform that took place in Belgium in 2006 to answer a longstanding question in the field of public economics and corporate finance: what is the role of corporate taxes in determining the observed levels of leverage among incorporated firms.
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This dissertation contains three essays on the economics of education and innovation. In the first essay, I study the effects of increased access to higher education by examining a dramatic 1961 Italian reform that increased university enrollment in science, technology, engineering, and math (STEM) fields by more than 200 percent in a few years. The peculiar features of the reform allow me to identify students who were unaffected, directly affected, and indirectly affected. They also allow me to identify key channels through which the effects ran. Using data I collected from tax returns and hand-written transcripts on more than 27,000 students, I show that the direct effects of the reform were as intended: many more students enrolled and many more obtained degrees. However, I also find that those induced to enroll earned no more than students in earlier cohorts who were denied access to university. I reconcile these surprising results by showing that the education expansion reduced returns to skill and lowered university learning through congestion and peer effects. I also demonstrate that apparently inframarginal students were significantly affected: the most able of them abandoned STEM majors rather than accept lower returns and lower human capital. The promotion of STEM education, realized by inducing more students to enroll in university STEM majors, might have large positive externalities by fostering the production of innovation. In the second essay (joint work with Michela Giorcelli), we use the 1961 Italian reform of college admissions as a positive shock to the amount of STEM workers in the economy. We isolate the effect of the policy on invention using a variety of techniques. At the individual level, we link the school and income data of students that were in school around the policy implementation with information on each Italian patent that they owned or developed. At the national level, we exploit differential increases of STEM skills in municipalities that were at varying distance from a STEM school. In both cases, we do not find strong evidence that easier access to university STEM majors led to higher level of patenting. In the third essay (joint work with Joerg Baten and Petra Moser), we investigate whether compulsory licensing - which allows governments to license patents with- out the consent of patent-owners - discourages invention. Our analysis exploits new historical data on German patents to examine the effects of compulsory licensing under the US Trading-with-the-Enemy Act on invention in Germany. We find that compulsory licensing was associated with a 28 percent increase in invention. Historical evidence indicates that, as a result of war-related demands, fields with licensing were negatively selected, so that OLS estimates may underestimate the positive effects of compulsory licensing on future inventions.
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Trading in financial markets has changed dramatically over the past decade: it has become largely automated and orders of magnitudes faster, and it has become spread out across many venues. Chapters 1 and 2 of this dissertation investigate how this transformation has affected market outcomes. Chapter 1 studies the effect of speed on market outcomes in a setting where information acquisition is endogenous. An increase in trading speed crowds out information acquisition by reducing the gains from trading against mispriced quotes. Thus, faster speeds have two effects on traditional measures of market performance. First, the bid-ask spread declines, since there are fewer informational asymmetries. Second, price efficiency deteriorates, since less information is available to be incorporated into prices. A tradeoff exists between the dual objectives of minimizing the bid-ask spread and maximizing price efficiency. We characterize the frontier of this tradeoff and evaluate several trading mechanisms within this framework. Despite its popularity, the limit order book mechanism generally does not induce outcomes on this frontier. We consider two alternatives: first, a small delay added to the processing of all orders except cancellations, and second, frequent batch auctions. Both induce equilibrium outcomes on this frontier. Chapter 2 investigates how an increase in the number of exchanges affects the bid-ask spread. The welfare consequences of increased exchange competition are theoretically ambiguous. While competition does place downward pressure on the bid-ask spread, this force may be outweighed by increased adverse selection that stems from additional arbitrage opportunities. We investigate this ambiguity empirically by estimating key parameters of the model using detailed trading data from Australia. The benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared to the prevailing duopoly, we predict that the counterfactual spread under a monopoly would be 23 percent lower. Further, market design variations on the continuous limit order book would eliminate profits from cross-venue arbitrage strategies and reduce the spread by 51 percent. Finally, eliminating off-exchange trades, so-called dark trading, would reduce the spread by 11 percent. Chapter 3 introduces two new equilibrium refinements for finite normal form games. Both refinements incorporate the intuitive idea that a costless deviation by one player is more likely than a costly deviation by the same or another player. These refinements lead to new restrictions in games with three or more players. Furthermore, these refinements are applied to two well-known auction games: the generalized second price auction and the first-price menu auction. Both refinements select interesting equilibria in these games, and may be interpreted as providing a strategic foundation for the selections that others have made.
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In this dissertation I study a series of questions in economics of online markets and innovation. In the first chapter, joint work with Zoe Cullen, we study a central economic problem for peer-to-peer online marketplaces: how to create successful matches when demand and supply are highly variable. Specifically, we present and estimate a parsimonious model of a frictional matching market for services, which lets us derive the elasticity of labor demand and supply, the split of surplus between buyers and sellers, and the efficiency with which requests and offers for services are successfully matched. In the second chapter, joint work with Liran Einav, Jonathan Levin, and Neel Sundaresan, we explore the decline of internet auctions in favor of posted prices. We use data from eBay to separate the effect of a shift in buyer demand away from auctions, and the effect of a general narrowing of seller margins due to increased competition. In the third chapter, I test and confirm the positive relationship between patent economic value and citations, an often assumed hypothesis in the economics literature on innovation.
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Trading in public equity markets has changed drastically over the past decade: it has become largely automated and orders of magnitudes faster, and it has become spread out across many venues. This dissertation investigates how this transformation has affected market outcomes. Chapter 1 investigates the effect of the proliferation of exchanges on the bid-ask spread. The welfare consequences of increased exchange competition are theoretically ambiguous. While com- petition does place downward pressure on the bid-ask spread, this force may be outweighed by increased adverse selection of liquidity providers that stems from additional arbitrage opportunities. We investigate this ambiguity empirically by estimating key parameters of the model using detailed trading data from Australia. The benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared to the prevailing duopoly, we predict that the counterfactual spread under a monopoly would be 23 percent lower. Further, market design variations on the continuous limit order book would eliminate profits from cross-venue arbitrage strategies and reduce the spread by 51 percent. Finally, eliminating off-exchange trades, so-called dark trading, would reduce the spread by 11 percent. Chapter 2 studies the effect of trading speed on market outcomes in a setting where information acquisition is endogenous. An increase in trading speed crowds out information acquisition by reducing the gains from trading against mispriced quotes. Thus, faster speeds have two effects on traditional measures of market performance. First, the bid-ask spread declines, since there are fewer informational asymmetries. Second, price efficiency deteriorates, since less information is available to be incorporated into prices. A general tradeoff exists between low spreads and price efficiency. We characterize the frontier of this tradeoff and evaluate several trading mechanisms within this framework. The prevalent limit order book mechanism generally does not induce outcomes on this frontier. We consider two alternatives: first, a small delay added to the processing of all orders except cancellations, and second, frequent batch auctions. Both induce equilibrium outcomes on this frontier. Chapter 3 investigates the consequences of information arrival on market outcomes in an environment where both high-frequency traders and slow traders engage in liquidity provision. To that end, we develop a model that predicts that fast traders achieve a relative increase in profits obtained from liquidity provision following a news event, which they achieve both by (i) trading smaller volumes at mispriced quotes, and (ii) winning the race to supply liquidity at updated quotes. We find strong support for these model predictions using data from NASDAQ and the Toronto Stock Exchange. The identification strategy is based on an unanticipated news event in which the Twitter feed of the Associated Press falsely reported a successful terrorist attack.
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This dissertation is comprised of three chapters. The first chapter examines the effects of private equity investment on the firms that receive this investment in India. While private equity (PE) is expanding rapidly in developing countries, there is little academic research on this subject. In this chapter I exploit two new data sources and employ two distinct empirical strategies to identify the impact of PE on Indian firms. I compare the investments made by one of India's largest PE firms to the investments that just missed (deals that made it to the final round of internal consideration). I also combine four large PE databases with accounting data on 34,000 public and private firms and identify effects using differences in the timing of investments. I find three results consistently in both databases. First, larger, more successful firms are more likely to receive PE investment. Second, firms that receive investment are more likely to survive and also have greater increases in revenues, assets, employee compensation, and profits. Third, somewhat surprisingly, these firms' productivity and return on assets do not improve after investment. This is consistent with PE channeling funding to high productivity firms rather than turning around low productivity firms. PE, at least in India, appears to alleviate expansion constraints and improve aggregate productivity through reducing misallocation rather than by increasing within-firm TFP. The second chapter, co-authored with Michael Dinerstein, examines the effects of a public school policy on local private schools and the market structure of the schooling market. On the order of 12% of urban private schools open or close every two years, yet the source and consequences of this churn are understudied. We consider how the supply response interacts with New York City's Fair Student Funding reform, which changed the budgets of the city's public schools starting in the 2007-08 school year. We find that relative to the schools that did not receive additional funding, elementary public schools that benefited from the reform saw an estimated increase in enrollment of 6.5%. We also find evidence of private school exit in response to the reform by comparing private schools located close to or far from public schools that received additional funding. A private school located next to a public school that received an average (6%) increase in its budget was an estimated 1.5 percentage points, on a base of 12%, more likely to close in the subsequent two years. We estimate a concise model of demand for and supply of private schooling and estimate that 30% of the total enrollment increase came from increased private school exit and reduced private school entry. Finally, we assess the reform's impact on aggregate achievement. We find that while the reform improved school quality at the public schools that received additional funding, the sorting of some students from private to public schools led them to lower-quality schools. This sorting undid much of the reform's positive achievement effect. The third chapter explores patterns of ownership and management in Indian firms and their associations with firm outcomes and productivity. While researchers have long been interested in the dynamics of firms that are owned and/or managed by families, data on such firms is scarce and it is even more difficult to follow such firms through time. In this Chapter I create three new measures of family ownership and family management in India and describe how these measures correlate with firm performance. Using my definitions, the percentage of listed family owned firms as well as the percentage of listed family managed firms has stayed fairly constant in India through time. Family owned firms are smaller, less productive, and have higher ROA than other firms in the economy suggesting that they could profitably expand. In contrast, firms that are managed by two or more individuals with a common surname are larger, more productive, and have higher returns than other firms. Firms in which owners are connected to top executives perform worse than firms that are family managed or firms that are family owned.
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Book
1 online resource.
This dissertation contains three essays on Sovereign Debt and Monetary Economics. The first chapter, entitled 'Sovereign Debt, Domestic Banks and the Provision of Public Liquidity' studies the effect of a sovereign default in the domestic economy and its implications for the government's incentives to repay its debt. I explore two mechanisms through which a sovereign default can disrupt the domestic economy via its banking system. First, a sovereign default creates a negative balance-sheet effect on banks, which reduces their ability to raise funds and prevents the flow of resources to productive investments. Second, default undermines internal liquidity as banks replace government securities with less productive investments. I quantify the model using Argentinean data and find that these two mechanisms can generate a deep and persistent fall in output post-default, which accounts for the government's commitment necessary to explain observed levels of external public debt. The balance-sheet effect is more important because it generates a larger output cost of default and a stronger ex-ante commitment for the government. Post-default bailouts of the banking system, although desirable ex-post, are welfare reducing ex-ante since they weaken government's commitment. Imposing a minimum public debt requirement on banks is welfare improving as it enhances commitment by increasing the output cost of default. The second chapter, entitled 'Sovereign Debt Maturity Structure Under Asymmetric Information' studies the optimal choice of sovereign debt maturity when investors are unaware of the government's willingness to repay. Under a pooling equilibrium there is a wedge between the borrower's true default risk and the default risk priced in debt, and the size of this wedge differs with the maturity of debt. Long-term debt becomes less attractive for safe borrowers since it pools more default risk that is not inherent to them. In response, safe borrowers issue low levels of debt with a shorter maturity profile -relative to the optimal choice under perfect information- and risky borrowers mimic the behavior of safe borrowers to preclude the market from identifying their type. In times of financial distress, the default risk wedge of long-term debt relative to short-term debt increases which makes borrowers reduce the amount of debt issuance and shorten its maturity profile. I present empirical evidence on sovereign debt maturity choices and sovereign spreads for a panel of emerging economies that is consistent with the model's implications. The third chapter, entitled 'Price Setting Under Uncertainty About Inflation', is based on a working paper coauthored with Andres Drenik. This chapter provides an empirical assessment of the effects of the availability of public information about inflation on price setting. We exploit an event in which economic agents lost access to information about the inflation rate: starting in 2007 the Argentinean government began to misreport the national inflation rate. Our difference-in-difference analysis reveals that this policy led to an increase in the coefficient of variation of prices of 18% with respect to its mean. This effect is analyzed in the context of a general equilibrium model in which agents make use of publicly available information about the inflation rate to set prices. We quantify the model and use it to further explore the effects of higher uncertainty about inflation on the effectiveness of monetary policy and aggregate welfare. We find that monetary policy becomes more effective in a context of higher uncertainty about inflation and that not reporting accurate measures of the CPI entails significant welfare losses.
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