Publications
Publications
Journal Articles
49. “Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets,” with Antonio Falato and Itay Goldstein, forthcoming, v. 123, Journal of Monetary Economics, October 2021, pp. 35-52. (link)
Abstract
Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a “bond-fund fragility channel” whereby the Fed liquidity backstop transmits to the real economy via funds.
48. “Prices and Promotions in U.S. Retail Markets: Descriptive Evidence from Big Data,” with Guenter Hitsch and Xiliang Lin, forthcoming, Quantitative Marketing and Economics. (link to be added when published)
47. “Random-Coefficients Logit Demand Estimation With Zero-Valued Market Shares,” with Jean-Pierre Dube and Joonhwi Joo, v. 40, no. 4, Marketing Science, April 2021, pp. 593-812. (link)
Abstract
Although typically overlooked, many purchase datasets exhibit a high incidence of products with zero sales. We propose a new estimator for the Random-Coefficients Logit demand system for purchase datasets with zero-valued market shares. The identification of the demand parameters is based on a pairwise-differencing approach that constructs moment conditions based on differences in demand between pairs of products. The corresponding estimator corrects nonparametrically for the potential selection of the incidence of zeros on unobserved aspects of demand. The estimator also corrects for the potential endogeneity of marketing variables both in demand and in the selection propensities. Monte Carlo simulations show that our proposed estimator provides reliable small-sample inference both with and without selection-on-unobservables. In an empirical case study, the proposed estimator not only generates different demand estimates than approaches that ignore selection in the incidence of zero shares, it also generates better out-of-sample fit of observed retail contribution margins. [/learn_more}
Fire sales induced by investor redemptions have powerful spillover effects among funds that hold the same assets, hurting peer funds’ performance and flows, and leading to further asset sales with negative bond price impact. A one-standard-deviation increase in our fire-sale spillover measure leads to a 45 (90) bp decrease in peer fund returns (flows) and a two percentage point increase in the likelihood of a large bond price drop. The results hold in a regression-discontinuity design addressing identification concerns. Timing, heterogeneity, instrumental-variable, and placebo tests further support the price-impact mechanism. Model-based counterfactual and stress-test analyses quantify the financial stability implications.
46. “Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada,” with Jason Allen and Jakub Kastl, forthcoming, AEJ: Microeconomics. (link to be added when published)
45. “Fire Sale Spillovers in Debt Markets,” with Antonio Falato, Dan Li, and Chaehee Shin, v. 76, no. 6, Journal of Finance, September 2021, pp. 3055-3102. (link)
Abstract
44. “Assortative matching and reputation in the market for first issues,” with Tony Cookson and Oktay Akkus, forthcoming, Management Science. (link)
Abstract
Using a tractable structural model of the matching equilibrium between underwriters and equity-issuing firms, we study the determinants of value in underwriter–firm relationships. Our estimates imply that high underwriter prestige is associated with 5.3%–14.1% greater equilibrium surplus. According to the structural model, high prestige exhibits a significant certification effect throughout the sample (1985–2010), but there is also a countervailing effect of underwriter prestige that reflects subscriber preferences for more underpricing. Consistent with trading off profits from issuers and subscribers, high-prestige underwriters underprice more in hot markets when rents to catering to subscribers are greatest.
43. “Estimating the Fraction of Unreported Infections in Epidemics with a Known Epicenter: an Application to COVID-19,” with Jiarui Liu and Timothy Schwieg, Journal of Econometrics, v. 220, no.1, January 2021, pp. 106-129. (pdf).
Abstract
We develop an analytically tractable method to estimate the fraction of unreported infections in epidemics with a known epicenter and estimate the number of unreported COVID-19 infections in the U.S. during the first half of March 2020. Our method utilizes the covariation in initial reported infections across U.S. regions and the number of travelers to these regions from the epicenter, along with the results of an earlyrandomized testing study in Iceland. Using our estimates of the number of unreportedinfections, which are substantially larger than the number of reported infections, wealso provide estimates for the infection fatality rate using data on reported COVID-19fatalities from U.S. counties.
42. “The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines,” with Aaron Flaaen and Felix Tintelnot, American Economic Review, v.110, no.7, July 2020, pp. 2103 – 27. (pdf)
Abstract
We analyze several rounds of U.S. import restrictions against washing machines. Using retail pricendata, we estimate the price effect of these import restrictions by comparing the price changes of washers with those of other appliances. We find that in response to the 2018 tariffs on nearly all source countries, the price of washers rose by nearly 12 percent; the price of dryers— a complementary good not subject to tariffs—increased by an equivalent amount. Factoring in the effect of dryers and price increases by domestic brands, our estimates for the 2018 tariffs on washers imply a tariff elasticity of consumer prices of between 110 and 230 percent. The 2016 antidumping duties against China—which accounted for the overwhelming majority of U.S. imports—led to minor price movements due to subsequent production relocation to other export platform countries. Perhaps surprisingly, the 2012 antidumping duties against Korea led to relocation of production to China, actually resulting in lower washer prices in the United States. We find that our measure of the tariff elasticity of consumer prices may differ in sign and magnitude from conventional pass-through estimates which are based on a regression of country-specific import price changes on country-specific tariff changes. Production relocation effects, price changes by domestic brands, and price changes of complementary goods all contribute to the differences between these measures.
41. “Monetary Incentives on Inter-caste Marriages in India: Theory and Evidence,” with Il-Myoung Hwang and Divya Mathur, Journal of Development Economics, v.141, November 2019. (link)
Abstract
We study the effect of a policy in India that offers monetary incentives to inter-caste marriages, in which one of the spouses is of historically disadvantaged castes, i.e., Scheduled Castes, and the other is not. We show that, in theory, the monetary incentives increase the incidence of exogamy, but may reduce the welfare of certain caste or gender. Building on our theoretical analysis, we estimate the effect of the monetary incentives on the incidence of exogamy, the welfare and inter-spousal transfers using National Family and Health Survey data. We find that a 10,000-rupee increase in the incentive raises the exogamy between Scheduled Caste men and non-Scheduled Caste women by 4 percent in rural India; however, we also find that the same increase reduces the welfare of women in rural areas.
40. “Strategic Ability and Productive Efficiency in Electricity Markets,” with Fernando Luco, Steven Puller and Dongni Zhu, American Economic Review, v.109, no.12, December 2019, pp. 4302-42. (pdf)
Abstract
Oligopoly models of price competition predict that strategic firms exercise market power and generate inefficiencies. However, heterogeneity in firms’ strategic ability also generates inefficiencies. We study the Texas electricity market where firms exhibit significant heterogeneity in how they deviate from Nash equilibrium bidding. These deviations, in turn, increase the cost of production. To explain this heterogeneity, we embed a Cognitive Hierarchy model into a structural model of bidding and estimate firms’ strategic sophistication. We find that firm size and manager education affect sophistication. Using the model, we show that mergers that increase sophistication can increase efficiency despite increasing market concentration.
39. “How Wide is the Firm Border?” with Enghin Atalay, Mary Jialin Li, and Chad Syverson, Quarterly Journal of Economics, v. 134, no. 4, November 2019, pp. 1845-1882. (pdf).
Abstract
We examine the within- and across-firm shipment decisions of tens of thousands of goodsproducing and goods-distributing establishments. This allows us to quantify the normally unobservable forces that determine firm boundaries; that is, which transactions are mediated by ownership control, as opposed to contracts or markets. We find firm boundaries to be an economically significant barrier to trade: Having an additional vertically integrated establishment in a given destination ZIP code has the same effect on shipment volumes as a 40 percent reduction in distance. These effects are larger for high value-to-weight products, for faraway destinations, for differentiated products, and for IT-intensive industries.
38. “Trade, Merchants and Lost Cities of the Bronze Age,” with Gojko Barjamovic, Thomas Chaney, and Kerem Coşar, Quarterly Journal of Economics, v. 134, no.3, August 2019, pp. 1455-1503. (pdf).
Abstract
We analyze a large data set of commercial records produced by Assyrian merchants in the nineteenth century BCE. Using the information from these records, we estimate a structural gravity model of long-distance trade in the Bronze Age. We use our structural gravity model to locate lost ancient cities. In many cases, our estimates confirm the conjectures of historians who follow different methodologies. In some instances, our estimates confirm one conjecture against others. We also structurally estimate ancient city sizes and offer evidence in support of the hypothesis that large cities tend to emerge at the intersections of natural transport routes, as dictated by topography. Finally, we document persistent patterns in the distribution of city sizes across four millennia, find a distance elasticity of trade in the Bronze Age close to modern estimates, and show suggestive evidence that the distribution of ancient city sizes, inferred from trade data, is well approximated by Zipf’s law.
37. “The Impact of Big Data on Firm Performance: An Empirical Investigation,” with Patrick Bajari, Victor Chernozhukov, and Junichi Suzuki, American Economic Association Papers and Proceedings, v. 109, May 2019, pp. 33-77. (pdf).
Abstract
In academic and policy circles, there has been considerable interest in the impact of “big data” on firm performance. We examine the question of how the amount of data impacts the accuracy of Machine Learned models of weekly retail product forecasts using a proprietary data set obtained from Amazon. We examine the accuracy of forecasts in two relevant dimensions: the number of products (N), and the number of time periods for which a product is available for sale (T). Theory suggests diminishing returns to larger N and T, with relative forecast errors diminishing at rate 1/√𝑁𝑁 + 1/√𝑇𝑇. Empirical results indicate gains in forecast improvement in the T dimension; as more and more data is available for a particular product, demand forecasts for that product improve over time, though with diminishing returns to scale. In contrast, we find an essentially flat N effect across the various lines of merchandise: with a few exceptions, expansion in the number of retail products within a category does not appear associated with increases in forecast performance. We do find that the firm’s overall forecast performance, controlling for N and Teffects across product lines, has improved over time, suggesting gradual improvements inforecasting from the introduction of new models and improved technology.
36. “Limits to Arbitrage in Electricity Markets: An Empirical Analysis of MISO,” with John Birge, Michael Pavlin, Ignacia Mercadal, Energy Economics, v. 75, September 2018, pp. 518-533. (pdf).
Abstract
As in most commodities markets, deregulated electricity markets allow the participation of purely financial (virtual) traders to enhance informational and productive efficiency. The presence of financial players is expected, among other things,to help eliminate predictable pricing gaps between forward and spot prices, which may arise in the presence of market power and are linked to productive inefficiency. However, we find that the impact of financial players on reducing pricing gaps has been limited, even using credibly exogenous variation in financial activity to address potential exogeneity. A forward premium persists. We show that financial traders effect on the premium was limited by two barriers. First, arbitrageurs do not have unlimited access to capital. Trading was reduced during the financial crisis, when capital availability was restricted. The second is regulation, as high transaction costs imposed by the regulator restricted arbitrage. Moreover, during this period we observe that some financial players appear to be betting in exactly the opposite direction of the pricing gap, sustaining large losses while doing so. We find evidence consistent with participants using forward market bids to affect congestion and thus increase the value of their Financial Transmission Rights (FTR), i.e. these financial players incur losses with one financial instrument to make larger profits with another, introducing artificial congestion to the system.
35. “Empirical Work on Auctions of Multiple Objects,” with David McAdams, Journal of Economic Literature, v. 56, no. 1, March 2018, pp. 157-84. (pdf).
Abstract
Abundant data has led to new opportunities for empirical auctions research in recent years, with much of the newest work on auctions of multiple objects, including: (1) auctions of ranked objects (such as sponsored search ads), (2) auctions of identical objects (such as Treasury bonds), and (3) auctions of dissimilar objects (such as FCC spectrum licenses). This paper surveys recent developments in the empirical analysis of such auctions.
34. “Bid Shading and Bidder Surplus in U.S. Treasury Auctions,” with Jakub Kastl and Allen Zhang, American Economic Review, v. 108, no.1, January 2018, pp. 147-69. (pdf).
Abstract
We analyze bidding data from uniform price auctions of U.S. Treasury bills and notes between July 2009-October 2013. Primary dealers consistently bid higher yields compared to direct and indirect bidders. We estimate a structural model of bidding that takes into account informational asymmetries introduced by the bidding system employed by the U.S. Treasury. While primary dealers’ estimated willingness-to-pay is higher than direct and indirect bidders’, their ability to bid-shade is even higher, leading to higher yield/lower price bids. Total bidder surplus averaged to about 3 basis points across the sample period along with efficiency losses around 2 basis points.
33. “Power to Choose: An Analysis of Consumer Behavior in the Texas Retail Electricity Market,” with Seyed Ali Madanizadeh and Steven Puller, American Economic Journal: Economic Policy, v. 9, no. 4, 2017, pp. 192-226. (pdf).
Abstract
Many jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decisio nmaking can diminish consumer benefits of retail competition. Using household level data from the Texas residential electricity market, we document evidence of consumer inertia. We estimate an econometric model of retail choice to measure two sources of inertia: (1) search frictions/inattention, and (2) a brand advantage that consumers afford the incumbent. We find that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus.
32. “Sales Force and Competition in Financial Product Markets: The Case of Mexico’s Social Security Privatization,” with Justine Hastings and Chad Syverson, Econometrica, v. 85, no. 6, 2017, pp. 1723-61. (pdf).
Abstract
This paper examines how sales force impact competition and equilibrium prices in the context of a privatized pension market. We use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico’s privatized social security system, where fund managers had to set prices (management fees) at the national level, but could select sales force levels by local geographic areas. We develop and estimate a model of fund manager choice where sales force can increase or decrease customer price sensitivity. We find exposure to sales forcelowered price sensitivity, leading to inelastic demand and high equilibrium fees. We simulate oftproposed policy solutions: a supply-side policy with a competitive government player and ademand-side policy which increases price elasticity. We find that demand-side policies arenecessary to foster competition in social safety net markets with large segments of inelasticconsumers.
31. Advertising, Consumer Awareness, and Choice: Evidence from the U.S. Banking Industry (with Elisabeth Honka and Maria Ana Vitorino), forthcoming, RAND Journal of Economics. (pdf).
Abstract
Does advertising serve to (i) increase awareness of a product, (ii) increase the likelihood that the product is considered carefully, or (iii) does it shift consumer utility conditional on having considered it? We utilize a detailed data set on consumers’ shopping behavior and choices over retail bank accounts to investigate advertising’s effect on product awareness, consideration, and choice. Our data set has information regarding the entire “purchase funnel,” i.e., we observe the set of retail banks that the consumers are aware of, which banks they considered, and which banks they chose to open accounts with. We formulate a structural model that accounts for each of the three stages of the shopping process: awareness, consideration, and choice. Advertising is allowed to affect each of these separate stages of decision-making. Our model also endogenizes the choice of consideration set by positing that consumers undertake costly search. Our results indicate that advertising in this market is primarily a shifter of awareness, as opposed to consideration or choice. We view this result as evidence that advertising serves aprimarily informative role in the U.S. retail banking industry.
30. Deposit Competition and Financial Fragility: Evidence from the U.S. Banking Sector (with Mark Egan and Gregor Matvos), forthcoming, American Economic Review. (pdf)
Abstract
We develop a structural empirical model of the U.S. banking sector. Insured depositors and run-prone uninsured depositors choose between differentiated banks. Banks compete for deposits and endogenously default. The estimated demand for uninsured deposits declines with banks’ financial distress, which is not the case for insured deposits. We calibrate the supply side of the model. The calibrated model possesses multiple equilibria with bank-run features, suggesting that banks can be very fragile. We use our modelto analyze proposed bank regulations. For example, our results suggest that a capital requirement below 18% can lead to significant instability in the banking system.
29. Advertising and Competition in Privatized Social Security: The Case of Mexico (with Justine Hastings and Chad Syverson), forthcoming, Econometrica. (pdf).
Abstract
This paper examines how sales force impact competition and equilibrium prices in the context of a privatized pension market. We use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico’s privatized social security system, where fund managers had to set prices (management fees) at the national level, but could select sales force levels by localgeographic areas. We develop and estimate a model of fund manager choice where sales force can increase or decrease customer price sensitivity. We find exposure to sales force lowered price sensitivity, leading to inelastic demand and high equilibrium fees. We simulate oft-proposed policy solutions: a supply-side policy with a competitive government player, and a demand-side policy which increases price elasticity. We find that demand-side policies are necessary to foster competition in social-safety-net markets with large segments of inelastic consumers.
28. Search with Learning (with Babur de los Santos and Matthijs Wildenbeest), forthcoming, JBES. (pdf).
Abstract
This paper provides a method to estimate search costs in a differentiated product environment in which consumers are uncertain about the utility distribution. Consumers learn about the utility distribution by Bayesian updating their Dirichlet process prior beliefs. The model provides expressions for bounds on the search costs that can rationalize observed search and purchasing behavior. Using individual-specific data on web browsing and purchasing behavior for MP3 players sold online we show how to use these bounds to estimate search costs as well as the parameters of the utility distribution. Our estimates indicate that search costs are sizable. We show that wrongfully assuming consumers are not learning while searching can lead to severely biased search cost and elasticity estimates.
27. Determinants of Bank Mergers: A Revealed Preference Analysis (with Tony Cookson and Oktay Akkus), forthcoming, Management Science. (pdf).
Abstract
We use revealed preference of buyer and target banks in a two-sided matching market with endogenous transfers to estimate the determinants of value in bank mergers. To estimate the bank merger value function, we develop a maximum score estimator that uses data from buyer-to-target transfers. Using data from 1995 to 2005, the estimated merger value increases when the buyer and target have matching bank charters, many overlapping markets, and many branches and assets. We estimate a significant cost to using multiple agencies to regulate banks, 20 to 50 percent of the value created by bank mergers in a typical year.
26. Trading experience modulates anterior insula to reduce the endowment effect (with Lester Tong, Karen Ye, Seda Ertac, John List and Howard Nusbaum), Proc. National Academy of Sciences , v.113(33), 2016, 9238-43. (e-pub).
Abstract
People often demand a greater price when selling goods that they own than they would pay to purchase the same goods—a well-known economic bias called the endowment effect. The endowment effect has been found to be muted among experienced traders, but little is known about how trading experience reduces the endowment effect. We show that when selling, experienced traders exhibit lower right anterior insula activity, but no differences in nucleus accumbens or orbitofrontal activation, compared with inexperienced traders. Furthermore, insula activation mediates the effect of experience on the endowment effect. Similar results are obtained for inexperienced traders who are incentivized to gain trading experience. This finding indicates that frequent trading likely mitigates the endowment effect indirectly by modifying negative affective responses in the context of selling.
25. Vertical Integration and Input Flows (with Enghin Atalay and Chad Syverson), American Economic Review , 104(4), 2014, 1120-48. (pdf).
Abstract
We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate firms’ ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: roughly one-half of upstream establishments report no shipments to downstream establishments within the same firm. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intrafirm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that, after a change of ownership, an acquired establishment begins to resemble the acquiring firm along multiple dimensions.
24. Indirect Costs of Financial Distress in Durable Goods Industries: The Case of Auto Manufacturers (with Chad Syverson, Gregor Matvos, and Sriram Venkataraman), Review of Financial Studies , 26(5), 2013, 1248-90. (pdf).
Abstract
Financial distress can disrupt a durable goods producer’s provision of complementary goods and services such as warranties, spare parts and maintenance. This reduces consumers’ demand for the core product, causing indirect costs of financial distress. We test this hypothesis in the market for used cars sold at wholesale auctions. An increase in a manufacturer’s credit default swaps significantly decreases the prices of its cars at auction, especially cars with longer expected service lives. Our estimates imply substantial indirect costs of financial distress for car manufacturers. These costs have occasionally even exceeded the tax savings benefits for General Motors and Ford.
23. The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds, (with Nuno Cassola and Jakub Kastl), Econometrica , 81(4), 2013, 1309-45. (pdf).
Abstract
We study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks’ bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that, for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. The funding costs we estimate using bidding data are also predictive of market- and accounting-based measures of bank performance, reinforcing the usefulness of “revealed preference” information contained in bids.
22. Valuing Dealers’ Informational Advantage: A Study of Canadian Treasury Auctions (with Jakub Kastl), Econometrica , 80(6), 2012, 2511-42. (pdf).
Abstract
In many financial markets, dealers have the advantage of observing the orders of their customers. To quantify the economic benefit that dealers derive from this advantage, we study detailed data from Canadian Treasury auctions, where dealers observe customer bids while preparing their own bids. In this setting, dealers can use information on customer bids to learn about (i) competition, that is, the distribution of competing bids in the auction, and (ii) fundamentals, that is, the ex post value of the security being auctioned. We devise formal hypothesis tests for both sources of informational advantage. In our data, we do not find evidence that dealers are learning about fundamentals. We find that the “information about competition” contained in customer bids accounts for 13–27% of dealers’ expected profits.
21. Testing models of consumer search using data on web browsing and purchasing behavior (with Babur De los Santos and Matthijs Wildenbeest), American Economic Review , 102(6), 2012, 2955-80. (pdf).
Abstract
Using a large data set on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various classical search models. We find that the benchmark model of sequential search with an a priori known distribution of prices can be rejected based on both the recall patterns we observe in thedata as well as the absence of dependence of search decisions on observed prices. Our findings suggest that fixed sample size search provides a more accurate description of observed consumer search behavior. We then utilize the fixed sample size search model to estimate demand elasticities of online book stores in an environment where consumers’ store preferences are heterogeneous.
20. Mental attributes and temporal brain dynamics during bargaining: EEG source localization and neuroinformatic mapping (with Burak Guclu, Seda Ertac and John List), Social Neuroscience , 7(2), 2012, 159-77. (pdf).
Abstract
It was previously shown by fMRI studies that unfair offers during an ultimatum bargaining game activate regions in the brain associated with emotions and conflict, leading to decisions inconsistent with standard economic theory. The temporal dynamics of emotional processing and mental attributes were not clear due to the coarse temporal resolution in those studies (∼2 s). Here, the ultimatum game was studied by EEG recorded from the responders in 19 channels. EEG time series were first in-put to independent component analysis. An equivalent current dipole model was used to localize the sources of the independent components in EEGLAB. The Talairach coordinates of the dipoles were matched with references in the Brede neuroinformatics database. Dipole magnitudes, anatomical regions, and mental attributes were used to explain the rejection of the offers by applying multiple regression as a function of time in epochs with a median resolution of 250 ms. The results are consistent with previous studies regarding responder behavior and activated regions (e.g., anterior cingulate cortex, frontal gyrus, insular cortex). There are three main findings observed with the higher temporal resolution: (1) regression results from fine-scale temporal data showed activations not captured when the analysis was done by using time-averaged data; (2) temporal analysis detected the individual significant epochs and fluctuations (positive and negative correlations) in regions and for the associated mental attributes (e.g., reward/harm perception, anger, unfairness); (3) there was a sequential activation of anterior cingulate cortex and insular cortex, respectively, leading to the rejection response. Overall, regression models could explain a large percentage (∼80%) of out-of-sample behavioral responses. The results are promising for the prospect of using EEG and source localization techniques in neuroeconomics to study finer temporal dynamics of neural activation.
19. Recent Progress in the Empirical Analysis of Multi-Unit Auctions, International Journal of Industrial Organization , v. 29, Issue 3 (EARIE 2010 Special Issue), May 2011, p. 345-349. (pdf).
Abstract
I discuss some recent progress in the empirical analysis of multi-unit auctions, through which a number of important commodities (Treasury bills and bonds, electricity, emission permits, monetary infusions by some central banks) are allocated.
18. Is an Automaker’s Road to Bankruptcy Paved with Customers’ Beliefs? (with Gregor Matvos, Chaehee Shin, Chad Syverson, and Sriram Venkataraman), American Economic Review Papers and Proceedings , v.101(3), May 2011, p. 93-97. (pdf).
Abstract
We explore the role the feedback loop between firms’ financial health and consumers’ demand for their products plays in the auto market. We construct a simple model of an automaker making pricing and debt service (continuation) decisions while recognizing that consumers are sensitive to whether it stays in business. We show that multiple equilibria can exist in such a model, and calibrate it to match stylized facts surrounding GM’s recent bankruptcy. The results suggest that while the impact of financial distress on demand substantially reduced GM’s profit, bank-run-like multiple equilibria do not appear likely in this market.
17. On the Network Structure of Production (with Enghin Atalay, James Roberts, and Chad Syverson) , Proceedings of the National Academy of Sciences , v. 108, no.13, March 29, 2011, p. 5199-5202. (full text).
Abstract
Complex social networks have received increasing attention from researchers. Recent work has focused on mechanisms that produce scale-free networks. We theoretically and empirically characterize the buyer–supplier network of the US economy and find that purely scale-free models have trouble matching key attributes of the network. We construct an alternative model that incorporates realistic features of firms’ buyer–supplier relationships and estimate the model’s parameters using microdata on firms’ self-reported customers. This alternative framework is better able to match the attributes of the actual economic network and aids in further understanding several important economic phenomena.
16. Entry into Auctions: An Experimental Analysis (with Seda Ertac and James Roberts), International Journal of Industrial Organization , v. 29, no. 2, March 2011, p. 168-178. (pdf).
Abstract
This paper investigates entry decisions into first and second price auctions using an experimental design to extract information on willingness-to-pay to enter (WTE). We find that subjects tend to overpay to enter both auction formats. In particular, if the subjects believe they will be bidding against bidders following the risk-neutral Nash strategy, their WTE is greater than the optimal risk-neutral amount 97% of the time for first-price auctions (FPA) and 90% for second-price auctions (SPA). If they believe that they are bidding against subjects who bid as do the other subjects, they submit a WTE that is too high 92% of the time for FPA and 69% of the time for SPA. We also find, in line with previous studies, significant overbidding in both the FPA and SPA. We then investigate whether introducing risk aversion (RA) or “joy of winning” (JOY) can explain the joint observation of over-entry and overbidding. In particular, using bid data alone, we structurally estimate three models, one allowing RA only, one allowing for JOY only and one allowing for both RA and JOY. While a model with JOY alone overestimates WTE, we find that RA alone can explain 38% of WTE but a model with both RA and JOY (where RA is estimated using FPA bids, and JOY is estimated using SPA bids) can explain 65% of WTE. Moreover, JOY appears to explain nearly all of the of the male WTE but only 44% of the female WTE.
15. What Makes You Click? Mate Preferences in Online Dating (with Guenter Hitsch and Dan Ariely). Appendix (pdf) , Quantitative Marketing and Economics, v. 8, no. 4, December 2010, p. 393-427. See also “Matching and Sorting in Online Dating” below. (pdf)
Abstract
We estimate mate preferences using a novel data set from an online dating service. The data set contains detailed information on user attributes and the decision to contact a potential mate after viewing his or her profile. This decision provides the basis for our preference estimation approach. A potential problem arises if the site users strategically shade their true preferences. We provide a simple test and a bias correction method for strategic behavior. The main findings are (i) There is no evidence for strategic behavior. (ii) Men and women have a strong preference for similarity along many (but not all) attributes. (iii) In particular, the site users display strong same-race preferences. Race preferences do not differ across users with different age, income, or education levels in the case of women, and differ only slightly in the case of men. For men, but not for women, the revealed same-race preferences correspond to the same-race preference stated in the users’ profile. (iv) There are gender differences in mate preferences; in particular, women have a stronger preference than men for income over physical attributes.
14. Commentary: Do Bids Equal Values on eBay? (with Eric Nielsen), Marketing Science , v. 29, no. 6, November-December 2010, pp. 994-997. (pdf).
Abstract
We argue that the Zeithammer and Adams paper [Zeithammer, R., C. Adams. 2010. The sealed-bid abstraction in online auctions. Marketing Sci. 29(6) 964-987] successfully documents consistent patterns in eBay bidding data that cast doubt on the common assumption that bidders in such auctions follow a “bid = value” strategy. These anomalies lend support to the authors’ alternative model in which some bidders bid reactively and consequently bid below their valuation most of the time. The consistency of the authors’ findings as well as the ability of their alternative explanation to account for all of their test results lends great support to their thesis. However, we think that several of their empirical tests examine ancillary assumptions about bidder behavior and do not test the bid = value assumption directly. Furthermore, although their reduced-form model incorporating “reactive” bidders is a good first attempt at expanding the canonical framework, we worry that their counterfactual pricing analysis using the reactive model is suspect because the parameters they estimate are not structural. Overall, the Zeithammer and Adams paper is a carefully argued critique of empirical methods used to study online auctions and provides valuable ideas to improve on these methods.
13. Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market (with David McAdams), Journal of Political Economy , v. 188, no.5, October 2010, p. 833-865. (pdf).
Abstract
We propose an estimation method to bound bidders’ marginal valuations in discriminatory auctions using individual bid-level data, and apply the method to data from the Turkish Treasury auction market. Using estimated bounds on marginal values, we compute an upper bound on the inefficiency of realized allocations as well as bounds on how much additional revenue could have been realized in a counterfactual uniform price or Vickrey auction. We conclude that switching from a discriminatory auction to a uniform price or Vickrey auction would not significantly increase revenue. Moreover, sucha switch would increase bidder expected surplus by at most 0.02%.
12. E-commerce and the Market Structure of Retail Industries (with Maris Goldmanis, Chad Syverson and Onsel Emre), Economic Journal , 120(545), June 2010. (pdf).
Abstract
This paper examines the effect of the advent and diffusion of e-commerce on supply-side industry structure. We specify a general industry model involving consumers with differing search costs buying products from heterogeneous producers. We interpret e-commerce as a reduction in consumers’ search costs. We show how it reallocates market shares from high-cost to low-cost producers. We test the model using US data for three industries: travel agencies, bookstores, and new auto dealers. Each industry exhibits the market share shifts predicted by the model, but the mechanisms vary, ranging from aggregate factors in the travel industry to local-market factors in the other two industries.
11. Matching and Sorting in Online Dating (with Guenter Hitsch and Dan Ariely), American Economic Review , 100(1), March 2010. (pdf).
Abstract
Using data on user attributes and interactions from an online dating site, we estimate mate preferences, and use the Gale-Shapley algorithm to predict stable matches. The predicted matches are similar to the actual matches achieved by the dating site, and the actual matches are approximately efficient. Out-of- sample predictions of offline matches, i.e., marriages, exhibit assortative mating patterns similar to those observed in actual marriages. Thus, mate preferences, without resort to search frictions, can generate sorting in marriages. However, we underpredict some of the correlation patterns; search frictions may play a role in explaining the discrepancy. (JEL C78, J12)
10. Dynamics of Seller Reputation: Theory and Evidence from eBay (with Luis Cabral), Journal of Industrial Economics , 58(1), March 2010. (pdf).
Abstract
We construct a panel of eBay seller histories and examine the importance of eBay’s reputation mechanism. We find that, when a seller first receives negative feedback, his weekly sales rate drops from a positive 5% to a negative 8%; subsequent negative feedback ratings arrive 25% more rapidly than the first one and don’t have nearly as much impact as the first one. We also find that a seller is more likely to exit thelower his reputation is; and that, just before exiting, sellers receive more negative feedback than their lifetime average. (JEL C78, J12)
9. The Geography Trade on eBay and MercadoLibre (with Asis Martinez-Jerez and Jason Douglas), American Economic Journal: Microeconomics , 1(1), February 2009, 53-74. (pdf).
Abstract
We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong “home bias” towards trading with counterparties located in the same city. Further analyses suggest that location-specific goods, such as opera tickets; cultural factors; and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias.
8. Understanding Strategic Models of Bidding in Deregulated Electricity Markets: A Case Study of ERCOT, (with Steve Puller), RAND Journal of Economics 39(1): 86-114, Spring 2008. (Previously circulated as “Testing Strategic Models…”). (pdf).
Abstract
We examine the bidding behavior of firms in the Texas electricity spot market, where bidders submit hourly supply schedules to sell power. We characterize an equilibrium model of bidding and use detailed firm-level data on bids and marginal costs to compare actual bidding behavior to theoretical benchmarks. Firms with large stakes in the market performed close to the theoretical benchmark of static profit maximization. However, smaller firms utilized excessively steep bid schedules significantly deviating from this benchmark. Further analysis suggests that payoff scale has an important effect on firms’ willingness and ability to participate in complex, strategic market environments.
7. On the Empirical Content of Quantal Response Equilibrium (with Philip Haile and Grigory Kosenok ), American Economic Review, March 2008, 98(1), 180-200. (pdf).
Abstract
The quantal response equilibrium (QRE) notion of Richard D. McKelvey and Thomas R. Palfrey (1995) has recently attracted considerable attention, due in part to its widely documented ability to rationalize observed behavior in games played by experimental subjects. However, even with strong a priori restrictions on unobservables, QREimposes no falsifiable restrictions: it can rationalize any distribution of behavior in any normal form game. After demonstrating this, we discuss several approaches to testing QRE under additional maintained assumptions. (JEL C72, C52, C90)
6. Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (with Chad Syverson), Journal of Political Economy , May 2007. (pdf).
Abstract
This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich plant-level data set of cement and ready-mixed concrete producers that spans several decades to perform a detailed case study. There is little evidence that vertical foreclosure effects are quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism: namely, higher productivity producers are more likely to vertically integrate, and as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to the fact that they benefit from improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not tied to firms’ vertical structure per se: non-vertical firms with large local concrete operations have similarly high productivity levels.
5. Are Structural Estimates of Auction Models Reasonable? Evidence from Experimental Data (with Patrick Bajari ), Journal of Political Economy , v. 113, Aug. 2005, 703-741. (pdf).
Abstract
Recently, economists have developed methods for structural estimation of auction models. Many researchers object to these methods because they find the rationality assumptions used in these models to be implausible. In this paper, we explore whether structural auction models can generate reasonable estimates of bidders’ private information. Using bid data from auction experiments, we estimate four alternative structural models of bidding in first-price sealed-bid auctions: 1) risk neutral Bayes-Nash, 2) risk averse Bayes-Nash, 3) a model of learning and 4) a quantal response model of bidding. For each model, we compare the estimated valuations and the valuations assigned to bidders in the experiments. We find that a slight modification of Guerre, Perrigne and Vuong’s (2000) procedure for estimating the risk neutral Bayes-Nash model to allow for bidder asymmetries generates quite reasonable estimates of the structural parameters.
4. Economic Insights from Internet Auctions (with Patrick Bajari), Journal of Economic Literature , v.42, June 2004, p. 457-486. (pdf).
Abstract
This paper surveys recent studies of internet auctions. Four main areas of research are summarized. First, we survey several studies that document and attempt to explain the frequently observed sniping, or last-second bidding behavior, in these auctions. Second, we summarize several methods proposed to quantify the distortions caused by asymmetric information in these markets, most notably due to the winner’s curse. Third, we explore research about the role of reputation mechanisms installed to help combat these distortions. Finally, we discuss what internet auctions have to teach us about auction design.
3. Product Differentiation, Search Costs and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds (with Chad Syverson ), Quarterly Journal of Economics , v.119, May 2004, p.403-456. (pdf).
Abstract
We investigate the role that non-portfolio fund differentiation and information/search frictions play in creating two salient features of the mutual fund industry: the large number of funds and the sizeable dispersion in fund fees. In a case study, we find that despite the financial homogeneity of S&P 500 index funds, this sector exhibits the fund proliferation and fee dispersion observed in the broader industry. We show how extra-portfolio mechanisms explain these features. These mechanisms also suggest an explanation for the puzzling late-1990s shift in sector assets to more expensive (and often newly entered) funds: an influx of high-information-cost novice investors.
2. Winner’s Curse, Reserve Prices and Endogenous Entry: Empirical Insights from eBay (with Pat Bajari ) RAND Journal of Economics , Summer 2003, pp. 329-355. Hal Varian graciously mentioned this paper in his New York Times column. (pdf).
Abstract
Internet auctions have recently gained widespread popularity and are one of the most successful forms of electronic commerce. We examine a unique dataset of eBay coin auctions to explore the determinants of bidder and seller behavior. We first document a number of empirical regularities. We then specify and estimate a structural econometric model of bidding on eBay. Using our parameter estimates from this model, we measure the extent of the winner’s curse and simulate seller revenue under different reserve prices.
1. Cyberspace Auctions and Pricing Issues: A Survey of Empirical Findings (with Pat Bajari), in the New Economy Handbook. (pdf).
Abstract
This article surveys empirical findings from recent studies of Internet auctions and summarizes the theoretical insights gained from these findings. The main questions answered in this article are: What are the price formation mechanisms used in Internet auctions? What are the main causes of informational asymmetry in these online environment, and how can the extent of these asymmetries be quantified? Does observed bidder behavior conform to the theoretical predictions from game theory? How do the findings regarding bidder behavior on Internet auctions shape our theories on mechanism design?
Other Publications
1. “Cyberspace Auctions and Pricing Issues: A Review of Empirical Findings,” with Patrick Bajari, in New Economy Handbook, Derek Jones (ed.), Elsevier, 2003. (pdf)
Abstract
This article surveys empirical findings from recent studies of Internet auctions and summarizes the economic insights gained from these findings. The main questions addressed in this article are: What are the rules of the game used in online auctions and how do these rules influence bidding behavior, such as sniping or bid shading? Is a good reputation, as measured by a seller’s feedback, valued by bidders and is feedback important in making online markets function well? Is the “winner’s curse” present in online auctions? How do minimum bids and secret reserve prices affect bidding and final sale prices?
2. “Empirical search and consideration sets,” with Elisabeth Honka and Matthijs Wildebeest, in Handbook of the Economics of Marketing, Jean-Pierre Dube and Peter Rossi (ed.), Elsevier, 193-257, 2019. (link)
Abstract
This chapter provides an overview of the recent and growing econometric literature studying how consumers search for products. We begin with a brief review of theoretical models of search that have been influential in guiding empirical work. We then discuss the marketing literature on consideration sets and early econometric literature on consumer search, leading up to more recent work that combines the two approaches by formulating search as the process through which consumers form consideration sets. The recent literature also offers econometric tests between search methods. We conclude with a discussion of current and potential future directions for work in this area, which we expect to be greatly enriched by the availability of large data sets containing granular information on consumer search behavior across a variety of online and offline contexts.