Session 8: Market Failures and Public Policy

We examine the rapid growth of Brazil’s private online higher education sector and its impact on market structure and college enrollment. Exploiting regional and field-specific variation in online education penetration, we find that online programs increase enrollment for older students but divert younger students from higher-quality in-person pro-grams. Increased competition lowers the prices of in-person programs but leads to a decline in their provision. Using an equilibrium model of college education, we quantify that in the absence of online education, the average student would experience 3.4% higher value added. While young students benefit from fewer online options, older students are disadvantaged. Targeted policies limiting online education to older cohorts have the potential to improve value added across all groups.

I study how intermediary buyers, such as wholesalers and pharmacies, discipline quality in the market for generic prescription drugs. Consumers are uniquely uninformed about quality in this market, since generic drugs are conventionally assumed to be interchangeable. As in many settings where consumers lack product information, they implicitly rely on intermediaries to select high-quality goods. Using the universe of FDA manufacturing quality disclosures from 2000-2022, I first provide evidence that quality failures are pervasive, even in the U.S. market. The majority of manufacturers fail inspections, and 12% of drugs are recalled due to health risks, demonstrating that generics are not perfect substitutes. Next, I show that disclosing these failures through recall announcements reduces intermediary purchases of recalled drugs by 60%, with effects persisting for at least a decade. In contrast, disclosing inspection failures has little impact on purchases, suggesting that intermediaries penalize manufacturers more stringently for signals of supply disruptions than for low quality alone. To isolate the role of intermediaries, I develop a scoring auction model of generic procurement and an estimation technique that uses only transaction prices. I find that intermediaries are willing to pay a 2% premium for each 10% reduction in future recalls, which encourages manufacturers to compete on quality and increases the share of high-quality drugs by 27%. Finally, I show that counterfactual quality subsidies would improve static welfare, but reduce manufacturer competition and supply reliability in the long-run.

Since 2009, U.S. hospitals have faced chronic shortages of generic (off-patent) injectable drugs, defying theexpectation that competitive pressures would quickly resolve excess demand in this commodity-like market. Over the same period, production of generic drugs shifted dramatically to the Global South.  I document the causal impact of offshore facilities on U.S. shortages by constructing a novel dataset that maps the exact manufacturing location of injectable drugs sold in the U.S., thereby resolving pervasive traceability issues in globalized pharmaceutical supply chains. Drugs produced by Asian manufacturing plants face a 54 percentage-point higher probability of shortages compared to their U.S. counterparts, with shortages lasting 130 days longer on average. To shed light on the incentive mechanisms behind supply disruptions, I then develop and estimate a partial-equilibrium model of global procurement in which manufacturers trade off cost-cutting and reliability investments, endogenously translating into higher shortage risks in offshore locations.  I estimate the model by GMM to recover location‑specific disruption probabilities, demand and cost parameters, finding that hospital buyers place no weight on manufacturers' shortage history. Offshoring enables drug manufacturers to exploit laxer regulatory oversight and target higher disruption risks than permissible in the U.S., in exchange for lower production costs. The resulting increase in supply disruption risk, combined with price stickiness and lumpy production capacity in generic injectable markets, generates persistent shortage spells once production globalizes. Counterfactual simulations reveal that reshoring subsidies result in substantial price increases with limited consumer welfare gains. Spot-price increases during shortages fail to significantly increase consumer surplus as they do not address lumpy capacity adjustments. In contrast, enforcing failure-to-supply penalties in contracts improves consumer surplus by raising manufacturers' expected cost of a disruption, inducing ex-ante reliability investments and reducing shortage spells. Sharp reductions in patients forced into the outside option result in large welfare gains that are not offset by the associated price increases.

Incarcerated individuals in the U.S. purchase goods and services from monopoly ven-dors selected by their correctional authority. We study telecommunications, which have come under bipartisan scrutiny due to the high prices inmates pay for phone calls. Prospec-tive providers are evaluated on their technical capabilities, the prices they would charge, and the “commission” they would pay the correctional authority. Using data from public records requests, we estimate a first-score auction model with evaluation uncertainty and multi-dimensional bidder heterogeneity. The model indicates that reducing the role of com-missions in procurement lowers prices, whereas increasing competition among providers mainly raises commissions. Moreover, recent federal regulations that ban commissions and cap prices likely preserve providers’ profitability.

Product testing plays an important role in the functioning of markets for innovative new products, where uncertainty exists regarding the product’s safety, quality, or other attributes. Despite the importance of testing, in practice different products face a wide range of regulatory regimes and private testing incentives—even similar (or identical) products face disparate regulations and private incentives across geography and time. In this paper, we develop a dynamic model of innovation, testing, and competition between firms to examine the interplay between private incentives to test and regula-tory requirements. We calibrate the model using data from the medical device sector and then conduct several counterfactual comparative static exercises. In our calibrated model, we find that: Even in the absence of regulatory requirements, firms have sub-stantial private incentives to conduct their own product tests; this is especially the case for higher quality products. Greater competition tends to widen the gap between social and private testing incentives. Minimum testing regulations both deter entry by low quality products and increase testing by high quality products, with the latter effect the main determinant of optimal testing policy.

I show that most reductions in 401(k) plan fees over the past decade come from updating plan menus to incorporate newly introduced funds with lower fees. Because employer sponsors face transaction costs when selecting and switching plan providers, providers can delay menu updates, preventing participants from accessing these lower-fee funds. To quantify the impact of transaction costs, I develop a dynamic structural model of employers’ provider choice and providers’ fee competition. I estimate that transaction costs contribute 11 bps to plan fees on average or $1 billion in total. However, mitigating transaction costs has limited effects once forward-looking providers revise their fee strategies in response. By contrast, consolidating plans of small employers can generate substantial fee savings.

This paper analyzes the consumer-welfare effects of intermediaries in a pension and annuity market with adverse selection. Intermediaries provide advice, helping individuals improve decisions when understanding products is complex and costly, but may introduce distortions due to agency problems. In an insurance market, intermediary effects on choices can impact adverse selection and, through it, prices. I document the importance of intermediation and its connection to adverse selection in the Chilean pension market, where products are complex and intermediaries have a financial incentive to steer consumers toward annuities. To quantify the effects of potential intermediary regulations, I develop and estimate a dynamic demand model that includes life-cycle decisions, product, and intermediation choices. I find intermediaries have the potential to improve welfare: retirees would give up around 250 USD a year to eliminate frictions in product choices. Despite intermediaries steering a majority of their customers into annuities, a ban on intermediation is approximately consumer-welfare neutral. The variety of annuities allows intermediaries to recommend close substitutes to the outside option, limiting the harm from misaligned incentives. Decision costs without intermediaries and annuity price increases due to adverse selection erode any gains from a ban. In light of policy concerns regarding the role of intermediaries, my results highlight the potential value provided by advisors – even with biased incentives – when choices are complex and stakes are high.

Commission rates for housing transactions are twice as high in the United States than in other countries. Policymakers have raised concerns that the practice of sellers offering buyers’ brokers commissions can lead to high commissions and harm consumers. This paper empirically examines the equilibrium impacts of a proposed policy called “decoupling,” which would require buyers and sellers to each pay their respective brokers. I develop a structural model integrating buyers, sellers, and brokers to characterize the equilibrium house prices, com-missions, and to assess the welfare impacts of the policy. I estimate the model with rich observed heterogeneity and credible sources of identifying variation using shifters of house prices and commissions. I find that decoupling reduces commissions paid by 53%, as sellers no longer have to offer high commissions to attract buyers, and brokers compete for price-sensitive buyers. Sellers and buyers experience a surplus gain of 4% of the total transaction value from hav-ing higher net proceeds than the status quo. I find notable surplus gains for buyers across income groups as sellers pass through part of their commission savings to house prices.

In the last decade, large financial institutions in the United States have purchased hundreds of thousands of homes and converted them to rentals. This paper studies the welfare consequences of institutional ownership of single-family housing. We build an equilibrium model of the housing market with two sectors: rental and homeownership. The model captures two key forces from institutional purchases of homes: changes in rental concentration and reallocation of housing stock across sectors. To estimate the model, we construct a novel dataset of individual homes in metropolitan Atlanta, identifying institutional owners of each house and collecting house-level daily prices, rents, vacancies, web page views, and customer contacts from Zillow. Overall, we find that institutional acquisitions decrease rents and increase rental transactions, leading to large welfare gains for renters. This net benefit reflects two opposing forces: while higher concentration raises rents, higher rental supply lowers rents enough to more than offset the effect of concentration, pushing rents down overall. These renter gains come at the expense of homebuyers, whose welfare falls. On the supply side, institutional acquisitions benefit house sellers but harm the average landlord.

Occupational licensing is a widespread quality regulation that increases the quality of labor but reduces its quantity. We provide a framework to empirically quantify this trade-off and apply it to physician licensing, where both quality and access to care are critical concerns. Using quasi-exogenous variation driven mostly by a recent and unprecedented migration of physicians to Chile, we show that more physicians improve access and patient outcomes in tertiary care, including mortality. We also find that lower quality—as measured by physician performance on the licensing exam—worsens patient outcomes. Building on these findings, we evaluate the implications of locally changing the stringency of the current licensing policy.

Digital health technologies, such as Continuous Glucose Monitors (CGMs), are trans-forming the availability of patient-level data, potentially influencing healthcare markets more broadly. This paper examines how CGMs influence the insulin market, shedding light on the impact of digital health technologies on pharmaceutical demand, pricing, and innovation incentives. I develop and estimate a tractable model of supply and demand for insulin, embedding: (i) patient-specific learning about treatment performance through the digital device, (ii) physician-level learning about new insulin products based on patient experiences, and (iii) price bargaining by pharmaceutical companies and the regulator, both internalizing demand-side learning. Using comprehensive medical claims data from France, where expanded CGM coverage boosted technology adoption, I find that CGMs’ patient-specific information steered insulin demand towards newer products, with limited information spillover to nonusers. Manufacturers of drugs that benefited from higher per-ceived quality, thanks to the observability of these attributes, could negotiate higher drug prices. My findings indicate that the introduction of these new observable attributes into pharmaceutical demand can shift the relative profitability of drug innovation strategies, thereby shaping future pharmaceutical innovation.

We study the welfare consequences of choice architecture for online privacy using a field experiment that randomizes cookie consent banners. We present three ways in which firms or policymakers can influence choices: nudging users through banner design to encourage acceptance of cookie tracking; setting defaults when users dismiss banners; and implementing consent decisions at the website versus browser level. Absent design manipulation, users accept all cookies more than half of the time. Placing cookie options behind extra clicks strongly influences choices, shifting users toward more easily accessible alternatives. Many users dismiss banners without making an explicit choice, underscoring the importance of default settings. Survey evidence further reveals substantial confusion about default settings. Using a structural model, we find that among consent policies requiring site-specific decisions, consumer surplus is maximized when consent interfaces clearly display all options and default to acceptance in the absence of an explicit choice. However, the welfare gains from optimizing banner design are much smaller than those from adopting browser-level consent, which eliminates the time costs of repeated decisions.

We provide a theoretical characterization of the welfare effects of buyer and seller power in vertical relations and introduce an empirical approach for quantifying the contributions of each to the welfare losses from market power. Our model accom-modates both monopsony distortions from buyer power and double-marginalization distortions from seller power. Rather than imposing one of these vertical distortions by assumption, we allow them to arise endogenously based on model primitives. We show that the relative elasticity of upstream supply and downstream demand is the key determinant of whether buyer or seller power creates a market power distortion. Applying our framework to coal procurement by power plants in Texas, we attribute 74.9% of the distortion to monopoly power of coal mines, with the remainder attributed to the monopsony power of power plants.