Research Papers
Categorical Consideration: Theory, Evidence and Market Implications [download]
A growing body of evidence demonstrates that consumers often make purchase decisions that are difficult to reconcile with neoclassical models of choice. In addition the large amounts of money and effort expended by firms on non-informational advertising and marketing activities suggests that these behaviors are both economically significant and non-random. In an attempt to reconcile these observations with a tractable model of consumer decision-making, I present a model of boundedly rational choice in which decision makers sequentially apply a single well-behaved preference relation at different levels of aggregation. This model is based on the idea that if evaluation of an alternative is costly, individuals may find it inefficient to compare all available alternatives. Instead, when faced with an unfeasibly large choice set, individuals compare groups of alternatives (i.e. categories) to reduce the choice set into a more manageable set of relevant alternatives. I explore the implications of this model for both individual behavior and equilibrium firm behavior in market settings. Under certain conditions, the existence of some categorical considerers in the market causes firms to utilize strategies different from what would be optimal in a market of fully rational consumers. This simple model generates predictions about behavior consistent with several new field experiments, and offers possible explanations for several common marketing activities, excess spatial product differentiation, and brand name premiums.
Judge Specific Difference in Chapter 11 and Firm Outcomes (with Antoinette Schoar) [download] (updated 11/24/08)
An efficient bankruptcy process must strike a delicate balance between delivering ex-post efficient outcomes while preserving ex-ante incentives by penalizing managers and equity holders in the bankruptcy state. Using the information on Chapter 11 filing for almost 5,000 private companies across five district courts, we exploit the within-district random assignment of cases to judges to test the ex-post efficiency of the current US bankruptcy process. We show that some judges appear to rule persistently more favorably towards creditors or debtors and that a pro-debtor bias leads to increased rates of re-filing and firm shutdown as well as lower post-bankruptcy credit ratings and lower annual sales growth up to five years after the original bankruptcy filing. These results show that judges who are more lenient to debtors actually contribute to worse outcomes for the firm; a result that brings into question the basic framework on which economists currently base their understanding of corporate bankruptcy.
What Do Not-For-Profit Hospitals Maximize? Evidence from California’s Seisemic Retrofit Mandate (with Mireille Jacobson) [download]
Following the Northridge earthquake, California passed a controversial, unfunded mandate requiring all general acute care hospitals to retrofit or rebuild to comply with new seismic safety standards. We exploit the fact that part of the cost of compliance is exogenously predetermined by the underlying geological characteristics of a hospital’s location to study the role of ownership on hospital response and to empirically asses competing models of not-for-profit hospital behavior. We find that geological seismic risk is uncorrelated with a host of hospital characteristics, including ownership type, but hospitals with higher seismic risk, and thus compliance costs, are more likely to shut down or merge, irrespective of ownership type. As predicted, for-profit hospitals do not change their service mix in response to this shock. In contrast, not-for-profits increase their mix of profitable services - e.g. neonatal intensive care days and MRI minutes - while government hospitals respond by decreasing their provision of charity care. These results are most consistent with a theory of not-for-profit hospitals as prestige maximizers and allow us to reject two of the leading theories of not-for-profit hospital behavior - "for-profits in disguise" and "pure altruism." These results also suggest that government-owned hospitals have welfare as their maximand.
A Market for Disaster Preparedness: Using Cap-and-Trade to Regulate Provision of Essential Services (with Mireille Jacobson)
(Prepared for the NBER Regulation and Litigation Conference) [download]
While traditional command and control approaches dominate health and safety regulation, market-based solutions are used increasingly to address environmental policy problems. We study one particular health policy – California’s mandate that all general acute care hospitals retrofit or rebuild to remain operational following a major earthquake – that could benefit from a market-based regulatory approach. We trace out the impact of the mandate on the State's healthcare system, demonstrating some unintended consequences for the availability of hospitals and the provision of charity care. We provide a back-of-the-envelope cost-benefit analysis and propose a more cost-effective “cap-and-trade” type approach to ensuring hospital operations after a major seismic event.