Category: empirical research

Handbook of the Economics of Wine

Today I received my copy of Volume 2 of the Handbook of the Economics of Wine, edited by Orley Ashenfelter, Olivier Gergaud, Karl Storchmann and William Ziemba. Volume 2 contains chapters (essay, papers) regarding reputation, regulation, and market organization issues in the global wine industry. It includes a paper I published with a former MS/JD student, Gina Riekhof, on “Politics, Economics, and the Regulation of Direct Interstate Shipping in the Wine Industry“, which originally appeared in the May 2005 issue of the American Journal of Agricultural Economics.

The Handbook of the Economics of Wine is actually Volume 6 of the “World Scientific Handbook in Financial Economics Series”, and includes two volumes of its own. Volume 1, a copy of which I did not receive, is focused on issues of price, financing, and expert opinions. Not sure I’m going to shell out the cost to have Volume 1 on the shelf. But it does look like an interesting collection of articles. The Handbook has been a long time in the making. It’s nice to see it finally in print. Nice work, editors all.

The Case for Doing Nothing About Common Ownership

“Common ownership,” the case of investors owning shares in more than one company–specifically, in shares of companies that compete in the same industry–is currently a hot topic in the antitrust arena. In particular, the alleged effects of common ownership on industry competition are receiving a lot of attention.

Einer Elhague, in the Harvard Law Review, proclaimed “[a]n economic blockbuster has recently been exposed.” Eric Posner, Fiona Scott Morton and Glen Weyl, in the Antitrust Law Journal, assert that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  These claims are based on a handful of empirical studies claiming to have identified a causal relationship between the degree of common ownership and such competitive yardsticks as airline prices, banking fees, executive compensation, and even corporate disclosure patterns.

Of course, such a blockbuster antitrust challenge deserves an aggressive policy response, ideas for which both Elhague and Posner, et al., are more than happy to provide.

However, it’s not so clear that the problem is as big as suggested–if it exists at all. It’s also not clear that the proposed policy solutions would make anyone better off (except perhaps antitrust law “experts”)–and could possibly make many people worse off.

Thom Lambert and I recently posted a new paper that takes on both the claims of a major problem and the proposed solutions. In The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms, we explain the problems with the problem itself–both the theoretical logic and the empirical evidence–and the problems with the proposed policy responses.  Over the next several days we’re going to unpack those arguments over at Truth on the Market. Thom already made the introductory post that goes into a bit more detail on the issue.

If you’re interested, I encourage you to click over to TOTM and read the posts there. Once we’re done, I’ll post a summary and set of links to each of them here. For now, the abstract of our paper is available below:

Recent empirical research purports to demonstrate that institutional investors’ “commonownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare.

With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ commonownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified and rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from commonownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences.

Even if institutional investors’ commonownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs.

In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach — at least, on the current empirical record — is to do nothing about institutional investors’ commonownership of small stakes in competing firms.

Why Who the Boss Is Matters (At Least for Franchises)

A few weeks ago I wrote about the Save Local Businesses Act (H.R. 3441), which has passed the U.S. House of Representatives and is currently sitting in the Senate. At the heart of that Act is defining the term “joint employer” for National Labor Relations Board purposes, an issue with tremendous potential implications for the franchising industry, among others. If passed, the Act would codify a long-standing interpretation of franchisees as being the sole employer of their local employees. For reasons I explain in the previous post, that would be a good thing for preserving and facilitating the benefits of franchising.

Franchising is an important business model in the U.S. Franchised local businesses represent the fastest growing segment for employment, and are expected to continue that trend. Franchising obviously offers benefits for both the franchisor and the franchisee.

In a forthcoming paper in Cornell Hospitality Quarterly, Matt Sveum and I find evidence for at least one of the major benefits of franchising. Namely, franchising helps to reduce agency costs and to improve performance incentives at the local establishment level. From the abstract:

A central theme in much of the franchising literature is that franchising mitigates the principle-agent problems between the owner of the franchise company and the operator of the local establishment by making the operator the owner-franchisee of the establishment. Despite the centrality of that assumption in the literature, there is little empirical evidence to support it. We use Census of Retail Trade data for essentially all full- and limited-service restaurants in the US to test whether franchisee ownership affects performance at the establishment level. We find a strong and robust franchise effect for full-service restaurants, but little effect among limited-service restaurants. We argue this difference is consistent with agency costs given differences in work processes and the importance of managerial discretion.

Full citation:
Sveum, Matthew and Sykuta, Michael E., “The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry,” forthcoming in Cornell Hospitality Quarterly; US Census Bureau Center for Economic Studies Paper No. CES-WP- 16-54. Available at SSRN: https://ssrn.com/abstract=2883267 or http://dx.doi.org/10.2139/ssrn.2883267

To “Nudge” or Not To “Nudge”

Congratulations to Alessandro Lizzeri and Leeat Yariv for receiving the American Economic Journal: Microeconomics “2018 AEJ Best Paper” award for their paper titled “Collective Self-Enforcement.” in which they model the desirability of various forms of ‘collective action’ in the form of government intervention to influence individuals’ self-control decisions. The abstract of the paper reads:

Behavioral economics presents a “paternalistic” rationale for a benevolent government’s intervention. We consider an economy where the only “distortion” is agents’ time-inconsistency. We study the desirability of various forms of collective action, ones pertaining to costly commitment and ones pertaining to the timing of consumption, when government decisions respond to voters’ preferences via the political process. Three messages emerge. First, welfare is highest under either full centralization or laissez-faire. Second, introducing collective action only on consumption decisions yields no commitment. Last, individuals’ relative preferences for commitment may reverse depending on whether future consumption decisions are centralized or not.

Lizzeri, Alessandro, and Leeat Yariv. 2017. “Collective Self-Control.” American Economic Journal: Microeconomics, 9 (3): 213-44. DOI: 10.1257/mic.20150325

Enforcement of Non-Compete Clauses and Productivity

Non-compete clauses (or ‘covenants not to compete’, CNCs) in contracts restrict parties from working or doing business in particular industries or geographic markets for some period of time after the termination of the contract. These clauses seem to be getting more common (even for fast food restaurants). There are some economic justifications for CNCs, particularly if an employee has access to proprietary information that is central to the employee’s role or if things like client lists or industry contacts are key strategic assets. CNCs can help align the incentives of both the employee and the employer–since having those protections may increase information sharing within the firm. My colleague, Harvey James, Jr., has a nice piece (ungated version here) on employment contracts that discusses some of these incentive issues.

Ultimately, however, CNCs are subject to State law and State enforcement–and not all States enforce CNCs with equal rigor. So what are the effects of State enforcement (and thereby, of CNCs themselves)?

A recent study in Human Resource Management by Smriti Anand, Iftekhar Hasan, Priyanka Sharma and Haizhi Wang explores the effect of State enforceability of CNCs on firm productivity.  The results seem rather interesting. The abstract reads:

Noncompete agreements (also known as covenants not to compete [CNCs]) are frequently used by many businesses in an attempt to maintain their competitive advantage by safeguarding their human capital and the associated business secrets. Although the choice of whether to include CNCs in employment contracts is made by firms, the real extent of their restrictiveness is determined by the state laws. In this article, we explore the effect of state-level CNC enforceability on firm productivity. We assert that an increase in state level CNC enforceability is detrimental to firm productivity, and this relationship becomes stronger as comparable job opportunities become more concentrated in a firm’s home state. On the other hand, this negative relationship is weakened as employee compensation tends to become more long-term oriented. Results based on hierarchical linear modeling analysis of 21,134 firm-year observations for 3,027 unique firms supported all three hypotheses.

Certification, Teacher Quality, and Click-bait Academic Publishing

Today’s email brought a content alert from Economic Inquiry on a newly accepted paper titled “New Evidence on National Board Certification as a Signal of Teacher Quality”. The abstract of the paper reads:

“Using longitudinal data from North Carolina that contains detailed identifiers, we estimate the effect of having a National Board for Professional Teaching Standards (NBPTS) teacher on academic achievement. We identify the effects of an NBPTS teacher exploiting multiple sources of variation including traditional-lagged achievement models, twin- and sibling-fixed effects, and aggregate grade-level variation. Our preferred estimates show that students taught by National Board certified teachers have higher math and reading scores by 0.04 and 0.01 of a standard deviation. We find that an NBPTS math teacher increases the present value of students’ lifetime income by $48,000.” (emphasis added)

Based on the abstract, one might infer that having NBPTS certification makes for a better teacher and that having NBPTS certification allows math teachers to have a meaningful lifetime income effect on students. If you read just a bit further, you might feel comfortable that you made the right inference when you read:

With aggregation and school-by-year fixed effects only variation between cohorts is used to identify the effect of NBPTS on test scores.

Unfortunately, if you concluded that being NBPTS certified has a meaningful relevance to student performance, you’d be completely wrong–as the paper itself explains.

Reading the abstract, the first question one should ask is “How does one become NBPTS certified, and what does that have to do with teacher quality?” In statistical terms, there’s a significant question of endogeneity and causation. Namely, does getting certified make one a better teacher, or do only better teachers get certified? If the latter, then whether or not one is certified has nothing to do with academic outcomes. It might provide a signal that the teacher is already a good teacher, but having the certification would have no meaningful effect on academic outcomes or lifetime earnings.

And indeed, that is exactly the case, as the authors themselves explain if you read just a little further than the statement about their method “to identify the effect of NBPTS on test scores.” What matters is the teacher and the teacher’s skills and practices. The certification itself is superfluous to the academic achievement result.

“Comparisons of teacher performance before and after certification suggest that greater average effectiveness of certified teachers reflects fixed quality differences identified by the certification as opposed to human capital effects. Implementing policies with a primary goal to modify the effectiveness of teachers should place little weight on the NBPTS certification as a potential facilitator. Rather the certification can be used to reward more effective teachers where use of direct evidence on performance in the districts is not feasible.” (emphasis added)

In other words, it’s the teacher-effect, not the NBPTS effect, that matters–to the point that the authors specifically say that little weight should be place on NBPTS certification as a potential facilitator (i.e., a policy tool) for improving student outcomes.

What the authors really purport to show, as the paper title alludes, is that being NBPTS certified is a pretty good indicator that a teacher is a good teacher. The NBPTS standards appear to be well-aligned with effective teaching practices. But if that’s the actual research objective, then the authors should also have looked at the causation from the other direction and tried to sort out the selection bias in who wants to get certified and why.

It’s unfortunate that the abstract of the paper is so misleading, because many people economize on their time by only reading the abstracts of articles to get a sense of the paper’s results. After all, that’s the purpose of an abstract. In this case, however, the abstract is written so poorly that it buries the actual results beneath a misleading presentation and might be perceived as a serious case of ‘bait and switch’. While the title of the paper is still correct–having national board certification is a signal of teacher quality–the abstract’s wording risks painting a false picture of the relevance of certification for student achievement. And that false picture is perpetuated by their description of their methods.

The editors of Economic Inquiry should be a bit ashamed for allowing such a bait and switch. The authors should as well. At best, it’s carelessly poor writing. At worst, it’s the academic equivalent of click-bait. Unfortunately, some people may look no further than the abstract as the basis for what would ultimately be a misguided potential education policy.

 

Corporate Tax Policy and Productivity Growth

An article by Colin Davis and Ken-ichi Hashimoto in the latest Economic Inquiry seems relevant to the current GOP tax reform proposals. The paper, titled “Corporate Tax Policy and Industry Location with Fully Endogenous Productivity Growth,” purports to show the effects of differential corporate tax policy on business location choice, productivity and innovation. The abstract follows:

This paper considers how national corporate tax policy affects productivity growth through adjustments in geographic patterns of industry in a two-country model of trade. With trade costs and imperfect knowledge spillovers between countries, production concentrates partially and innovation concentrates fully in the country with the lowest tax rate. A rise in the international corporate tax differential accelerates productivity growth through an increase in the production share of the low-tax country that improves knowledge spillovers from industry to innovation. The paper also investigates the relationship between the corporate tax differential and the level of market entry, and analytically characterizes the effects of changes in tax policy on national welfare.

Given the U.S. has one of the highest corporate tax rates among developed nations, the results of this study would seem to support efforts to lower that tax rate to be more in line with international peers. And lest the result seem too politically convenient, an ungated copy of an earlier draft of the paper (from 2015) is available here.