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Research


Interests
Working Papers
Publications
Abstracts

Interests:

Applied microeconomics, industrial organization, behavioral economics, social economics


Working papers:

Publications:

Abstracts:

  • Advertising and Self-Persuasion
    I develop a new theory of advertising in which consumers endeavor to improve their attitudes toward the products they intend to choose and advertising facilitates their efforts. Advertising raises prices, all else equal, if its facilitation effects fall selectively on inframarginal consumers and lowers them if instead those effects fall selectively on marginal consumers. But advertising also brings pre-existing market-wide patterns of consumer self-persuasion to fuller expression, thereby manifesting the price effects that those underlying patterns represent. The welfare implications of advertising reflect these conflicting influences. The theory offers improved predictions of advertising's effects relative to existing approaches that leave the primitives of persuasion under-specified.

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  • Incumbency, Generosity and the Valuation of Power: An Experimental Analysis
    We investigate the factors influencing the valuation of power using a custom-designed experiment in which laboratory participants play multiple rounds of a standard dictator game and then are permitted to engage in price-mediated role exchange. Measurable personal characteristics and market experiences are predictive both of participants' valuations of power and of the impact of current power ownership (i.e., incumbency) on their valuations. Our analysis reveals a robust endowment effect for power. Generosity in the dictator role is consistently associated with a significant reduction in the endowment effect. We discuss our findings in the context of prior results relating to the endowment effect and altruistic behavior.

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  • 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.

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  • An 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.

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  • Keeping You in Sight: The Role of Focusing Effort in Commitment to Goals
    Using a simple consumption-savings model with a β-δ agent, I consider how present-biased individuals remain committed to exogenous goals. I find that effort expended to maintain focus on future outcomes, represented as an increase to the δ that applies to the agent's next-period self, offsets the effects of present bias and increases progress toward the agent's goal. My model delivers this result without reference-dependent preferences. The greater the present bias, the more focus is necessary to achieve the same progress. While costless focusing brings perfect commitment, individuals fall short of full goal achievement when focusing is costly.

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  • Altruistic Arbitrage and Climate Change Mitigation: Rethinking the Role of Cap and Trade Policies
    We examine the implications for efficient public goods provision, stemming from the relationship between altruism and the endowment effect, focusing our analysis on the problem of climate change mitigation. We argue that the reduction in distortionary valuation (i.e., willingness-to-accept departing from willingness-to-pay) experienced by altruistic market participants implies an ability to mediate ignored trades and extract the gains from trade - an activity we call "altruistic arbitrage" - thereby improving the efficiency of markets. This activity, broadly speaking, restores the Coase Theorem in the context of WTA-WTP disparities. Moreover, it leads to previously unidentified benefits to when markets are employed to protect and foster public goods. On the basis of our findings, we recommend that market maker licenses be auctioned as a novel means to implement cap and trade markets for reducing the long-term effects of climate change.

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  • Focusing As Commitment
    I analyze the decisions of a β-δ consumer who, through effort invested in focusing on the future, sets the δ that will apply to her self in the next period. She has access to no other commitment technology. Because the model interprets dynamic inconsistency in a way that gives rise to the demand for costly self-control, it disambiguates the welfare benefit of commitment devices that limit future options. It explains why cognitive loading is associated with impulsivity, why U.S. savings rates have exhibited increased income stratification since the 1980s, and what visionary leadership and role models signify in economic terms.

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  • Police Unions, Race, and Trust in the Police
    It has long been recognized that trust critically influences the effective functioning of political institutions, yet the determinants of trust in the police - a classic order institution - are still not well understood. We examine the effect of police unionization on trust in the police and, in particular, in mediating the adverse impacts of police killings of civilians on trust within the U.S. multiracial context. We analyze trust responses and corresponding demographic data on approximately 5,000 respondents across 11 metropolitan statistical areas from the 2006 Social Capital Community Benchmark Survey, matched to relevant city- and state-level correlates from three additional datasets. Our results confirm prior studies' findings of a large gap between black and non-black trust. Whereas police killings of civilians normally reduce trust among non-blacks while leaving black levels of trust unaffected, we find that in jurisdictions where police bargain collectively the drop in non-black trust is effectively eliminated, suggesting that police unionization essentially abets the polarization of trust in the police between blacks and non-blacks

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  • Thoughts Matter: A Theory of Motivated Preference
    The paper develops a model of individual decision-making under bounded rationality in which discretionary cognitive adjustment creates a durable stock that complements choice of action. While it increases utility, adjustment also entails a cost because focusing attention optimally is effortful and mental resources are scarce. Associated behavioral phenomena are categorized based on whether the operative motivation in adjusting is forward-looking utility maximization or justification of prior action. The theory is in line with prior conceptions of cognitive dissonance, but also offers a more empirically consistent explanation of the endowment effect, persuasive advertising, and sunk-cost effects than existing accounts.

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  • Loving What You Get: The Price Effects of Consumer Self-Persuasion
    The paper considers how consumers' cognitive efforts at preference adjustment at the time of decision affect prices in competitive markets with differentiated products. Greater ease of self-persuasion implies higher prices when self-persuasion reinforces first impressions and lower prices when the best opportunities to persuade oneself exist for consumers with weak initial impressions. Exogenous interventions to ease decision-complementing cognition - e.g., advertising - predictably increase or reduce prices, depending upon how they are targeted. While facilitation of consumers' adjustment always improves welfare in a covered market, firms' appropriation of surplus may make consumers worse off even as they learn better to love what they get.

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  • 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.

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  • 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.

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  • Negative 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
    discussed.

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  • The Strategic 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.

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  • 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.

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  • Does 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.

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  • Playing Well with Others: The Role of Social Capital in Traffic Accident Prevention
    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.

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  • The Use of Indicators for Unobservable Product Qualities: 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.

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  • Negative 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.

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  • Pricing for 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.

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  • Funding Shocks and Optimal University Admissions and Financial Aid Policies
    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.

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  • Understanding the Internet's Relevance to Media Ownership Policy: A Model of Too Many Choices
    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.

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  • An Exploratory Analysis of 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.

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  • Regulation with an Agenda
    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.

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  • A Lemons "Mirage": Erroneous Perceptions of Asymmetric Information in the Market for Arizona Ranchettes
    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.

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  • Improving 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.

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  • Rather 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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