Job Market Paper: Quality Externalities on Platforms
[with Peter Coles, Steven Levitt, and Igor Popov] (2017).
In order to screen out low-quality sellers and incentivize higher quality, platforms
need a good measure of seller quality. Having high-quality sellers is particularly important if buyers on a platform have limited information about the sellers; buyers’ learning
means that the quality of a seller in any given transaction can affect whether and how
frequently that buyer returns to the platform. The number of times that a seller’s
buyers return to the platform is an externality that the seller exerts on other sellers
on the platform; we propose using this externality to measure seller quality. Using
data from Airbnb, a peer-to-peer accommodation platform, we calculate each listing’s
guest return propensity (GRP), defined as the average number of subsequent bookings a listing’s guests complete, controlling for guest and trip characteristics. There is
substantial variation in GRP across listings and its correlation with a listing’s average
rating is only .05. Using an instrumental variable analysis to account for unobservable
guest characteristics, we find that our measure of GRP has a causal effect on returns:
a one standard deviation increase in GRP causes guests to take an additional .34 trips
(a 17% increase). We discuss how platforms can increase overall seller surplus by directing buyers towards higher quality sellers, either by using Pigouvian subsidies for
quality or by prioritizing high-quality sellers in their search algorithms.
Price-Linked Subsidies and Health Insurance Markups
Mark Shepard] (2017).
Subsidies in many health insurance programs depend on prices set by competing
insurers – as prices rise, so do subsidies. We study the economics of these "price-
linked" subsidies compared to "fixed" subsidies set independently of market prices.
We show that price-linked subsidies weaken competition, leading to higher markups
and raising costs for the government or consumers. However, price-linked subsidies have
advantages when insurance costs are uncertain and optimal subsidies increase as costs
rise. We evaluate this tradeoff empirically using a model estimated with administrative
data from Massachusetts' health insurance exchange. Relative to fixed subsidies, price-
linking increases prices by up to 6% in a market with four competitors, and about twice
as much when we simulate markets with two insurers. For levels of cost uncertainty
reasonable in a mature market, we find that the losses from higher markups outweigh
the benefits of price-linking.
Taxation in Matching Markets
[with Arnaud Dupuy, Alfred Galicoh, and Scott Duke Kominers] (2017).
We analyze the effects of taxation in two-sided matching markets, i.e.~markets in which all agents have heterogeneous preferences over potential partners.
In matching markets, taxes can generate inefficiency on the allocative margin by changing who is matched to whom, even if the number of workers at each firm is unaffected.
While the allocative inefficiency of taxation need not be monotonic in the level of the tax when transfers flow in both directions, we show that it is weakly increasing in the tax rate for markets in which workers refuse to match without a positive wage.
We introduce a renormalization that allows for an equivalence between markets with taxation and markets without taxation but with adjusted match values.
We use our equivalence to show additional properties of matching markets with taxation and to adapt existing econometric methods to such markets. We then estimate the preferences in the college-coach US football matching market and show through simulations of tax reforms that the true deadweight loss can differ dramatically from that measured without accounting for the preference heterogeneity of the matching market.
In addition to highlighting the potential for allocative distortions from taxation, our model provides a continuous link between canonical models of matching with and without transfers.
Efficient Location Choice and the Returns to Agglomeration
[with Stephen Morris] (2017).
In this note we consider a scenario where agents must make a binary choice about where to locate. They have
heterogeneous preferences over locations. In addition, whichever
location an agent chooses, his utility also includes an agglomeration
effect that is increasing in the proportion of the population that
chooses that location. Each individual is uncertain about the distribution
of preferences in the population, but knows his own preferences, which
serve as a noisy signal of population preferences.
We show that if the marginal returns to agglomeration are sufficiently
decreasing in the proportion of the population co-locating (returns are more concave
than log) then there will be over-agglomeration in equilibrium, relative to the social optimum. If the agglomeration
function is less concave than log (for example, linear) there will
be under-agglomeration in equilibrium.
The Welfare Implications of Health Insurance
Anup Malani] (2017).
We analyze the financial value of insurance when individuals have access to credit markets. Loans allow consumers to smooth shocks across time, decreasing the value of the smoothing (across states of the world) provided by insurance. We derive a simple formula for the incremental value of insurance and show how it depends on individual characteristics and the features of available loans. Our central contribution is to derive formulas for aggregate welfare that can be taken to data from typical studies of health insurance. We provide both exact formulas that can be taken to data on the distribution of medical expenditures and income and an approximate formula for aggregate data on medical expenditure. Using the Medical Expenditure Panel Survey we illustrate how the incremental value of insurance is decreasing with access to loans. For consumers in the sickest decile, access to a five-year loan decreases the incremental value of insurance by $338 (6%) on average and $3,433 (36%) for the poorest consumers. We also find that our approximate formula is a reasonable proxy for the exact one in our data.
The Effect of Meeting Rates on Matching Outcomes
[with Simon Weber ] (2017).
We extend the classic matching model of Choo and Siow (2006) to allow for the possibility that rate at which potential partners meet affects their probability of matching. We investigate the implications on estimated match surplus and supermodularity.
How Facebook Can Deepen our Understanding of Behavior in Strategic Settings: Evidence
from a Million Rock-Paper-Scissors Games
John A. List,
Jeff Picel] (2017).
We make use of data from a Facebook application where hundreds of thousands of people played a simultaneous move, zero-sum game – rock-paper-scissors – with varying information to analyze whether play in strategic settings is consistent with extant theories. We report three main insights. First, we observe that
most people employ strategies consistent with Nash, at least some of the time. Second, however,
players strategically use information on previous play of their opponents, a non-Nash equilibrium behavior; they are more likely to do so when the expected payoffs for such actions increase. Third, experience matters: players with more experience use information on their opponents more effectively than less experienced players, and are more likely to win as a result. We also explore the degree to which the deviations from Nash predictions are consistent with various non-equilibrium models. We analyze both a level-k framework and an adapted quantal response model. The naive version of each these strategies – where players maximize the probability of winning without considering the probability of losing – does better than the standard formulation. While, one set of people use strategies that resemble quantal response, there is another group of people who employ strategies that are close to k1; for naive strategies the latter group is much larger.
How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Evidence from Thousands of Innovations
[with Kris Hult and
Tomas Philipson] American Journal of Health Economics, (Forthcoming).
Medical innovations have improved treatment for many diseases but have simultaneously raised spending on healthcare.
Many health economists believe that technological change is the major factor driving the growth of the healthcare sector. Whether quality has increased as much as spending – that is, whether new innovations raise or lower quality-adjusted prices in health care – is a central question for both positive and normative healthcare analysis. We do a systematic analysis of the impact of technological change on quality-adjusted prices, with over six thousand comparisons between innovations and incumbent technologies.
We observe each innovation's price and quality, as well as the price and quality of an
incumbent technology treating the same disease. We find that the innovations' quality-adjusted prices are higher than the incumbents' for about two-thirds of innovations. Nevertheless, we argue that quality-adjusted prices may fall or rise over time depending on the effect of competition on incumbents' prices over time. A 4% price decline due to competition would offset the cross-sectional price difference for a majority of indications. We discuss the conditions particular to healthcare that may cause increases in quality-adjusted prices over time rather than decreases as experienced in many other industries.
To Groupon or Not to Groupon: The Profitability
of Deep Discounts [with Benjamin Edelman and Scott Duke Kominers],
Marketing Letters. 27(39) (2016) (preprint) ▸ Abstract
examine the profitability and implications of online discount
vouchers, a relatively new marketing tool that offers consumers
large discounts when they prepay for participating firms’ goods
and services. Within a model of repeat experience good purchase,
we examine two mechanisms by which a discount voucher service
can benefit affiliated firms: price discrimination and
advertising. For vouchers to provide successful price
discrimination, the valuations of consumers who have access to
vouchers must generally be lower than those of consumers who do
not have access to vouchers. Offering vouchers tends to be more
profitable for firms which are patient or relatively unknown,
and for firms with low marginal costs. Extensions to our model
accommodate the possibilities of multiple voucher purchases and
firm price re-optimization. Despite the potential benefits of
online discount vouchers to certain firms in certain
circumstances, our analysis reveals the narrow conditions in
which vouchers are likely to increase firm profits.
The First Order Approach to Merger Analysis
[with E. Glen Weyl], American
Economics Journal: Microeconomics 5(4) (2013). (SSRN) ▸
information local to the premerger equilibrium, we derive
approximations of the expected changes in prices and welfare
generated by a merger. We extend the pricing pressure approach
of recent work to allow for non-Bertrand conduct, adjusting the
diversion ratio and incorporating the change in anticipated
accommodation. To convert pricing pressures into quantitative
estimates of price changes, we multiply them by the merger
pass-through matrix, which (under conditions we specify) is
approximated by the premerger rate at which cost increases are
passed through to prices. Weighting the price changes by
quantities gives the change in consumer surplus.
Discrete Choice Cannot Generate
Demand that is Additively Separable in Own Price [with Scott Duke Kominers], Economics
Letters 116(1) (2012). (preprint) ▸
that in a unit demand discrete choice framework with at least
three goods, demand cannot be additively separable in own price.
This result sharpens the analogous result of Jaffe and Weyl
(2010) in the case of linear demand and has implications for
testing of the discrete choice assumption, out-of-sample
prediction, and welfare analysis.
Price Theory and Merger Guidelines [with
E. Glen Weyl], CPI Antitrust
Chronicle 3(1) (2011). (preprint)
Linear Demand Systems are Inconsistent
with Discrete Choice
E. Glen Weyl],
B. E. Journal of Theoretical Economics 10(1) (Advances) Article
52 (2010). (SSRN)
that with more than two options, a discrete choice model cannot
generate linear demand.
Inequity and Unequalness in Health
More fair by design: Economic design responses to inequality
Ed. Scott Kominers and Alexander Teytelboym, (Forthcoming).
To Groupon or Not To Groupon: New Research on
Voucher Profitability [with Benjamin G. Edelman and Scott Duke Kominers], Harvard Business Review [Blog],
January 12, 2011.