Empirical Implementation of Theoretical Models of Strategic Interaction and Dynamic Behavior

We examine identification of differentiated products demand when one has “micro data” linking individual consumers’ characteristics and choices. Our model nests standard specifications featuring rich observed and unobserved consumer heterogeneity as well as product/market-level unobservables that introduce the problem of econometric endogeneity. Previous work establishes identification of such models using market-level data and instruments for all prices and quantities. Micro data provides a panel structure that facilitates richer demand specifications and reduces requirements on both the number and types of instrumental variables. We address identification of demand in the standard case in which non-price product characteristics are assumed exogenous, but also cover identification of demand elasticities and other key features when product characteristics are endogenous. We discuss implications of these results for applied work.

Using a unique data set from the sale of train tickets in Sweden, we study the “declining price anomaly” in sequential auctions theoretically and empirically. First, our reduced form analysis suggests that a model with ambiguity averse bidders fits the observed bidder behavior in these auctions better than other existing models. Motivated by this, we study sequential second-price auctions that closely resemble the auction mechanism for train tickets and assume bidders have maxmin expected utilities over multiple priors. In the unique symmetric equilibrium, bidders use their worst-case conditional beliefs to evaluate their payoffs. The equilibrium generates declining prices due to an underestimation of future payoffs that is brought on by ambiguity aversion. We also provide a new revenue ranking between some common multi-unit auction formats and show that ambiguity raises the seller’s revenue despite declining prices.Finally, we non-parametrically estimate both the true distribution of valuations and the worst-case beliefs using a novel identification technique that exploits bidders’ inter-temporal first order conditions. Our estimation uncovers a first-order stochastic dominance relationship between beliefs and the true distribution, which is consistent with ambiguity aversion. Our counterfactuals show that, while ambiguity increases the seller’s revenue by at least 18% compared to the common prior case, switching to sequential first-price auctions would further increase revenue by at least 11%.

This paper presents an empirical framework to study the assignment of children into foster homes and its implications on placement outcomes. The empirical application uses a novel dataset of confidential foster care records from Los Angeles County, CA. The estimates of the empirical model are used to examine policy interventions aimed at improving placement outcomes. In general, it is observed that market thickness tends to improve expected placement outcomes. If placements were assigned across all the administrative regions of the county, the model predicts that (i) the average number of foster homes children go through before exiting foster care would decrease by 8% and (ii) the distance between foster homes and children’s schools would be reduced by 54%.

We study the effects of M&A on efficiency and provide evidence on the mechanisms. Utilizing a rich dataset on hourly productivity and ownership changes from US power plants, we find an average of three percent efficiency increase within the eight months following the acquisition. Three-quarters of this efficiency gain is explained by increased productive efficiency; the rest comes from improved capacity utilization at the unit level and allocative efficiency at the portfolio level. The effect is heterogeneous across acquisition types; acquisition at the parent company level leads to one percent, at the subsidiary level leads to four percent efficiency gain. Finally, we find that more efficient   underperforming plants from less efficient owners, and after the acquisition, the productivity of the acquired plants becomes similar to the productivity of existing plants in the acquirer’s portfolio.

We investigate the relationship between the interest rates offered to consumers in a deposit banking market and the contact that banks in that market have with each other in other markets. We show, in a simple theoretical model, that such overlapping relationships lead to less competitive behavior by banks. Furthermore, we empirically test this result across U.S. deposit banking markets and find that markets in which banks have many other points of contact with each other act significantly less competitive. Our results are particularly alarming as multimarket contact has increased significantly over the last two decades while the passthrough rate between the Federal Funds rate and deposit banking rates has fallen dramatically.

This paper shows that product attributes shape search frictions, and studies the incentives of intermediaries to leverage this channel to increase their rents in the context of the US municipal bond market. About half of municipal bonds are designed via negotiations between a local government and its underwriter, and they are traded in an over-the-counter market, where the underwriter often also acts as an intermediary. Exploiting variations instate regulations to limit government officials’ conflict of interests, we provide suggestive evidence that including special provisions to a bond decreases its liquidity and price, while it increases the market share of underwriters in the secondary market trades. Motivated by these findings, we build and estimate a model of bond origination and trades to quantify market inefficiency driven by underwriters’ dual role in both primary and secondary markets, as well as government officials’ conflict of interest, and discuss policy implications.

This paper studies how to design electricity markets to reduce emissions and prevent blackouts. Zero-emission renewable energy sources, such as wind and solar, are intermittent, which can lead to blackouts if the addition of renewables causes more reliable power plants to retire. To quantify the impact of electricity market policies, I build a structural equilibrium model of investment and dis-investment in generators of different energy sources. Oligopolistic firms make dynamic decisions to build or retire generators based on the profits they receive from wholesale electricity markets, which respond to the composition of generators supplying electricity. Using data from the electricity market in Western Australia, I estimate this model and use it to simulate investment and production under counterfactual policies. Carbon taxes reduce emissions but, for certain values, can result in an increase in blackouts by causing retirement of coal and gas plants. Subsidizing capacity prevents this from occurring, but at the expense of higher emissions. Using both policies together, however, keeps reliable, emissions-intensive generators in the market and prevents them from being used unless necessary, substantially lowering emissions while keeping the likelihood of blackouts low. I also explore alternative environmental policies, which are less effective at reducing emissions but have a lower cost to consumers.