Applied microeconomics, industrial organization, behavioral economics, social economics
- "Assisted Self-Persuasion: Choice, Complementary Adjustment, and the Role of Advertising"
- "A Cognitive 'Thumb on the Scale': Compensatory Thinking and Escalation of Commitment" (For an impressionistic view of the paper's theory of complementary action and cognition, watch this music video.)
- "Competition with Price-Dependent Preferences"
- "An Economic Theory of Attitudes"
- "Negative Externalities, Network Effects, and Compatibility," International Journal of Economics and Finance, forthcoming.
- "Lonely Highways: The Role of Social Capital in Rural Traffic Safety" (with Nicholas J. Ward), Eastern Economic Journal, forthcoming.
- "Trading Off the Benefits and Costs of Choice: Evidence from Australian Elections," Journal of Economic Behavior & Organization, 114 (June 2015), 1-12.
- "The Strategic Significance of Negative Externalities" Managerial and Decision Economics, 35:4 (June 2014), 247-257.
- "On the Rationalizability of Observed Consumers’ Choices When Preferences Depend on Budget Sets: Comment," (with Robert H. Frank), Journal of Economics, 110:2 (October 2013), 187-198.
- "Does Social Capital Promote Safety on the Roads?" Economic Inquiry, 51:2 (April 2013), 1218-1231.
- "Playing Well with Others: The Role of Social Capital in Traffic Accident Prevention" Eastern Economic Journal, 39:2 (Spring 2013), 172-200.
- "The Use of Indicators for Unobservable Product Qualities: Inferences Based on Consumer Sorting" (with Fredi Kronenberg, Edward J. Kennelly, Bei Jiang, and Chunhui Ma), International Journal of Marketing Studies, 4:6 (December 2012), 19-34.
- "Negative Externalities, Competition, and Consumer Choice," Journal of Industrial Economics, 59:3 (September 2011), 396-421.
- "Pricing for a Credence Good: An Exploratory Analysis" (with Fredi Kronenberg, Edward J. Kennelly, and Bei Jiang), Journal of Product & Brand Management, 20:3 (2011), 238-249 .
- "Funding Shocks and Optimal University Admissions and Financial Aid Policies," Atlantic Economic Journal, 36:3 (September 2008), 345-358.
- "Understanding the Internet's Relevance to Media Ownership Policy: A Model of Too Many Choices," The B.E. Journal of Economic Analysis & Policy (Topics), 7:1 (2007), Article 29.
- "An Exploratory Analysis of the Determinants of Cooperative Advertising Participation Rates," Marketing Letters, 17:2 (April 2006), 91-102.
- "Regulation with an Agenda," Commentaries on Law & Economics, 2:1 (2006), 111-138.
- "A Lemons 'Mirage': Erroneous Perceptions of Asymmetric Information in the Market for Arizona Ranchettes" (with Daniel Edward Osgood), Mountain Plains Journal of Business and Economics, 7 (2006), 52-63.
- “Improving Judgmental Business Forecasts under Severe Organizational Constraints,” Review of Business Research, 6:2 (2006), 159-166.
- “Rather Bait Than Switch: Deceptive Advertising with Bounded Consumer Rationality,” Journal of Public Economics, 51:3 (July 1993), 359-378.
- Assisted Self-Persuasion: Choice, Complementary Adjustment,
and the Role of Advertising
The paper presents a theory of imperfect competition a la Hotelling in which consumers choose products and also whether and how much to adjust to (i.e., improve their attitude toward) what they choose. Advertising is modeled as reducing the cost of adjustment. When consumer tastes are distributed symmetrically with respect to products and the marginal costs of adjustment are similarly symmetric, advertising raises (lowers) prices when the marginal adjustment costs faced by successive consumers grow lower (higher) as one moves from the position of the indifferent consumer toward positions of extreme preference. Analogous price effects result from advertising-driven translations of the adjustment cost structure that result in a relative reduction (increase) in marginal adjustment costs toward the extremes. While price increases are a necessary condition for advertising to increase profit, firms advertise whenever the adjustment cost reduction due to first dollar of advertising is sufficiently large and the cost reduction function is sufficiently concave, thus prisoners’ dilemma equilibria are possible.
- A Cognitive 'Thumb on the Scale': Compensatory
Thinking and Escalation of Commitment
This paper presents a theory of sunk-cost bias that accounts for the complementarity of actions and thoughts about actions. Decision-makers choose not just what to do but, through an attention allocation process called elaboration, how much utility they will obtain from what they do. As in earlier models of sunk-cost biases, individuals exhibit a preference for consistency - posed here as "error aversion" - and limited memory. "Forward-looking" individuals optimally allocate elaborative efforts while those influenced by error aversion use them to compensate for, and thereby neutralize, past errors. Because decision-makers rely on remembered enjoyment from past choices as a memory kludge for product quality, the elaborative allocation biases arising from error aversion result in escalation of commitment. The results are robust to whether individuals are naive or sophisticated about their past error aversion and to whether or not they anticipate the influence of elaboration on future consumption choices and therefore behave strategically.
- Competition with Price-Dependent Preferences
In this paper, I develop a duopoly location model of differentiated products in which consumers' product preferences vary positively with product prices. The level of preference price-dependence (“PPD”) is allowed to vary across consumers. I find that equilibrium prices increase with the PPD level of the marginal, or “just indifferent,” consumer, but are not influenced by the PPD levels of other consumers. The marginal consumer's PPD increases the effect of exogenous product differentiation on price. When product differentiation is a choice variable of the firms, firms invest more in differentiating their products when the marginal consumer's PPD level is higher.
Economic Theory of Attitudes
This paper examines the role of a person’s attitude, or mental position with regard to an object, in explaining economic behavior. Observations drawn from research and “real-life” examples form the basis for a utility function that incorporates attitudes. Employing the utility function in a model of decision-making, I use comparative static analysis to examine the effect on economic outcomes of price-driven, and other exogenous, attitude changes. The model’s analysis is then applied to investigate the implications of attitudes for motivating people, fighting terrorism, and fighting the spread of AIDS. In each of these cases, incorporating attitudes substantially improves the ability of economic analysis to explain observed outcomes and provides the basis for developing more effective private strategies and public policies.
Externalities, Network Effects, and Compatibility
Positive network effects arise where incremental product use increases the utility of users of
compatible products (user-positive effects), but also in situations where product use imposes
negative externalities that selectively affect the adopters of incompatible alternatives (nonuser-
negative effects). This paper compares the social optimality of firms’ incentives for compatibility
under these two regimes. Using a “location” model of differentiated products, I find that, under
both regimes, incentives for unilateral action to increase compatibility tend to be suboptimal
when firms’ networks are close in size, but they may be excessive for small firms when networks
differ greatly in size. The result is consistent with prior analysis of the user-positive context (e.g.,
Katz and Shapiro 1985), but challenges the intuition that activities involving negative
externalities are always oversupplied in an unregulated market. Public policy implications are
- Lonely Highways: The Role of Social Capital in Rural Traffic Safety
Earlier work has found that social capital reduces traffic fatality risk (Nagler 2013a, 2013b). Recognizing that rural areas suffer from high traffic fatality levels despite a perceived high density of communal ties, we explore here whether social capital provides the same protection against traffic risks on rural roads as on urban roads, and what factors might explain differential effects. We estimate simultaneous equation systems of complementary traffic incident types on a 10-year panel of 48 U.S. states. Our results show that social capital has a significantly lower protective effect on rural roads than urban roads. Potentially relevant differentials in crash-type/context exposure (single- vs. multi-vehicle, junction- vs. non-junction) do not mediate this outcome. Rather it appears that the relative prevalence of certain risk behaviors, such as speeding, skew rural environments toward crash situations in which the critical safety factors are orthogonal to social capital influence.
- Trading Off the Benefits and Costs of
Choice: Evidence from Australian Elections
I investigate the robust predictions of a theory on the costs and benefits of dealing with increased numbers of choices in an election context. My data consist of a rich array of measures of voting behaviors and corresponding ballot and voter population characteristics for a panel of electoral districts from three Australian federal election cycles. I examine how the number of candidates and voting tickets on the ballot, as well as key moderating variables, affect the share of voters (1) opting for a simplified alternative to the baseline voting process; and (2) intentionally casting an invalid ballot. The findings indicate that incremental options can increase or decrease motivation to engage in a choice process; the overall pattern of results appears consistent with a diminishing returns model of expanded choice. Voters appear to trade off costs and benefits rationally in their decisions concerning how and whether to make choices. Public policies and private strategies should leverage moderating variables to encourage participation in choice processes and should account for opt-out tendencies at both ends of the choice spectrum.
Significance of Negative Externalities
Negative externalities can have competitive relevance in a market when they have selective impacts – as, for example, when a product in use imposes greater costs on consumers of rival products than on other people. Because managers have discretion over aspects of product design that affect external costs, the externality in such cases may be viewed as a strategic variable. This paper presents evidence of the existence of competitively-relevant negative externalities. I introduce a metric for the externality’s competitive effect, the external cost elasticity of demand, which I estimate econometrically using data from the motor vehicle industry. Managerial implications are considered.
- On the
Rationalizability of Observed Consumers' Choices When
Preferences Depend on Budget Sets: Comment
In a recent article, Bilancini (2011) demonstrates that assuming either price-dependent preferences or preferences that depend on the choices of other individuals can render the theory of revealed preference effectively unusable. Some readers might be tempted to infer that economists had better avoid such assumptions. In this note, we argue against that conclusion in favor of a less categorical and more pragmatic approach. In several domains, we identify fundamental weaknesses in revealed preference theory and argue that in those domains, nontraditional assumptions about preferences significantly enhance our ability to explain and predict behavior.
Social Capital Promote Safety on the Roads?
I present evidence that social capital reduces traffic accidents and related death and injury, using data from a ten-year panel of 48 U.S. states. The econometric challenge is to distinguish the causal effects of social capital from bias resulting from its correlation with unobservable characteristics by state that influence road risks. I accomplish this by employing snow depth as an instrument, and by restricting attention to summertime accidents. My results show that social capital has a statistically significant and sizable negative effect on crashes, traffic fatalities, serious traffic injuries, and pedestrian fatalities that holds up across a range of specifications.
Well with Others: The Role of Social Capital in Traffic Accident
Using data from a panel of 48 U.S. states during 1997-2006, I present evidence that social
capital reduces fatal traffic accidents by fostering pro-social behavior among drivers. I
estimate simultaneous equation systems that model the incidence of interpersonal
interaction-related versus non-interaction-related traffic outcomes, in which variation in
endogenous social capital is identified using snow depth. My results show that social
capital has a larger relative effect on multi-vehicle and junction-related fatalities and fatal
crashes, incidents with respect to which motorist interaction is most critical to outcomes.
The findings are robust to alternative specifications and measures of social capital.
Inferences Based on Consumer Sorting
We propose a method for measuring the conjectural errors that inexpert consumers make relative to experts in using observable product characteristics as surrogate indicators of a valued unobservable characteristic. Observations on the unobservable characteristic, available to the researcher but not consumers, are used to divide the data into high- and low-quality subsamples. Separate hedonic estimation on the subsamples enables measurement of the relative valuations and conjectures of experts and non-experts with respect to indicators under the assumption that consumers sort across quality grades based on their appraisal expertise. The method is demonstrated using a small sample of SKU-level data on the dietary supplement black cohosh. Our exploratory findings on this sample suggest that, relative to experts, inexpert consumers underestimate the value of most observable characteristics as indicators of black cohosh chemical authenticity; however they overweight therapeutic claims on the product label as a negative indicator of authenticity.
Externalities, Competition, and Consumer Choice
Consumers sometimes make choices that impose greater external costs on those who do not make the same choice. This paper examines how the selectivity of negative externalities in such situations affects the competitive equilibrium and the desirability of an externality-reducing public policy. Selective negative externalities create network externalities, but outcomes may differ greatly from typical network effects. Price effects may cause the imposing product’s sales to decline with the size of the negative externality. Moreover, competitive effects may run counter to the externalities’ negative direct effects on welfare, such that a policy that enlarges the externality may improve welfare.
a Credence Good: An Exploratory Analysis
To explore how consumers value credence goods, we estimate hedonic price equations for a dietary supplement called black cohosh, taken by women for relief from menopausal symptoms. We find that consumers respond in expected ways to certain concrete characteristics: for example, paying a premium for a product labeled as suitable for vegetarians. But surprising results occur for some nonspeciﬁc label words (e.g. “guaranteed” is associated with lower prices), suggesting that consumers view these words as indirect signals with respect to unobservable qualities. Additionally, consumers pay more for packages containing more units (e.g. tablets) even when the time supply of product is held constant; this outcome is consistent with the notion that sheer quantity reassures consumers about value and could indicate a reaction to uncertainty in the overall value proposition.
and Optimal University Admissions and Financial Aid
A positive shock to funding, such as a major donation, causes an optimizing university to raise its admissions standards and reduce tuition charges net of financial aid across all student categories. However, the shock’s effect on enrollment may not be uniform. Student categories given little weight in the university’s objective function may be treated as “inferior goods,” that is, positive shocks decrease their enrollments, while other student categories’ enrollments are increased. The paper’s findings shed light on the effect of federal direct-to-student aid on tuition levels, permitting a new perspective on William Bennett’s controversial hypothesis that aid accommodates tuition hikes.
Internet's Relevance to Media Ownership Policy: A Model of Too Many
Does the Internet provide a failsafe against media consolidation in the wake of an easing of media ownership rules? This paper posits a model of news outlet selection on the Internet in which consumers experience cognitive costs that increase with the number of options faced. Consistent with psychological evidence, these costs may be reduced by constraining one’s choice set to “safe bets” familiar from offline (e.g., CNN.com). It is shown that, as the number of outlets grows, dispersion of consumer visitation across outlets inevitably declines. Consequently, independent Internet outlets may fail to mitigate lost outlet independence on other media.
the Determinants of Cooperative Advertising Participation Rates
The paper offers an exploratory empirical investigation of the determinants of cooperative advertising participation rates. Using data for 2,286 brands, we examine the relationship of participation rates to national advertising expenditures by brand. We also consider how participation rates vary with average manufacturers’ margins by industry, average retail margins by category, and additional category-level variables. Reflecting the discrete nature of the dependent variable, the analysis employs discrete choice estimation techniques instead of OLS regression. The results reveal a significant quadratic relationship between advertising and participation rates. We interpret this and other significant findings in the context of existing work.
The dominant economic perspective on industrial (e.g., telecommunications) regulation is that it is governed by lobbying interests, such that all regulatory windfalls are shared among competing groups based on relative political power. This paper examines how the distributive outcomes of regulation differ if instead the regulator acts based on an “agenda” (i.e., a social welfare function that is a constant-weighted sum of constituent consumers’ utilities). Theoretical analysis is undertaken in a regulated monopoly framework modified to account for regulator preferences across consumer groups. It is observed that when (1) there is some group that would not be served at all but for subsidized rates, and (2) the regulator subsidizes rates sufficiently to induce consumption by the group, any increase in the regulator’s discretionary funds is captured entirely by that group, rather than being shared. Consequently, windfalls tend to exacerbate cross-subsidies, whereas reducing regulators’ discretionary funds reduces subsidies and promotes efficiency.
Erroneous Perceptions of Asymmetric Information in the Market for
Owners of modest-sized, recreation-oriented ranch properties, known as “ranchettes,” appear to judge a key characteristic of the quality of their properties, the extent of vegetative “greenness,” based on their own observation, despite the greater reliability of publicly available climate data. The discrepancy between personal observation and public data is perceived erroneously by owners as reflecting an information asymmetry that favors the former. The consequence of this misperception is adverse selection: transplant owners, who are not familiar with long-term local weather patterns from direct observation, delay the sale of properties that are greener during their term of ownership. Econometric evidence is presented from the analysis of 694 ranchette sales in Yavapai County, Arizona during 1991-2000. The results demonstrate that the efficiency of the market mechanism is affected not just by the actual distribution of information on quality, but by its perceived distribution.
Judgmental Business Forecasts under
Severe Organizational Constraints
The paper offers a case study in business forecast improvement under conditions of limited data and resources. The practitioner’s objective was to forecast annual revenue for a medium-sized company based on salespersons’ judgmental predictions of success with respect to open sales opportunities. Unavailability of historic forecasts and matching actuals for revenue and its components rendered the standard optimal linear correction procedure for reducing forecast bias infeasible, while lack of organizational cooperation ruled out other popular techniques for forecast improvement, including Delphi and Estimate-Talk-Estimate. A feasible correction method using available data and based on behavioral analysis of the sales team and their prediction processes generated substantial improvement in forecast accuracy relative to no correction.
Bait Than Switch: Deceptive Advertising
with Bounded Consumer Rationality
This paper reviews some of the theory [e.g. Posner (1973)] on the incentives of firms to advertise deceptively. It argues that the widely held belief that these incentives are small and are outweighed by important disincentives is based on unjustified assumptions about consumer rationality. The paper presents a model of advertising and consumer reactions in which consumers manifest a form of bounded rationality. Given this, it is demonstrated that, under cogent assumptions about parameter values, some firms will have an incentive to advertise deceptively, causing a net welfare loss to society in the absence of corrective policy.
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