Working Papers Series

Papers below are in pdf.

2008

WP 08-15
Customization in an Endogenous-Timing Game with Vertical Differentiation
Oksana Loginova & X.H. Wang

We study customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality and endogenous timing play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogenous timing sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, endogenous timing sometimes enables the lower quality firm to obtain an advantage that it would not have under simultaneous customization choices.

JEL Codes: D43, L13, C72
Keywords: customization, horizontal differentiation, vertical differentiation, endogenous timing

WP 08-14
Mass Customization with Vertically Differentiated Products
Oksana Loginova & X.H. Wang

We analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize.

JEL Codes: D43, L13, C72
Keywords: customization, horizontal differentiation, vertical differentiation

WP 08-13
How Do States Formulate Medicaid and SCHIP Policy? Economic and Political Determinants of State Eligibility Levels
Reagan Baughman & Jeffrey Milyo

We exploit the existence of substantial variation in state policies toward public health insurance for children between 1990 and 2002 to estimate the economic and political determinants of state eligibility levels. Controlling for state and year effects, eligibility levels are not significantly associated with either the percentage of uninsured children in the state or the eligibility policy of neighboring states; further, variation in eligibility levels within state is negatively associated with both the federal matching rate and state fiscal capacity. We also observe that state political preferences, measured by the Democrats’ share of seats in the lower chamber of the state legislature, are a relatively important a determinant of state eligibility levels. However, other political factors, such as party control of state government, voter turnout, legislative term limits and campaign finance regulations do not influence state eligibility levels.

JEL Codes: D78, H75, I78
Keywords: Medicaid, SCHIP, Political Economy, Race-to-the-Bottom

WP 08-12
Explaining Public Attitudes on State Legislative Professionalism
David M. Konisky, Jeffrey Milyo & Lilliard E. Richardson, Jr.

Scholars have long argued that state legislative professionalism, or the provision of staff, legislator salary, and session length, has behavioral incentives for legislators and implications for legislative capacity. Scant attention, however, has been devoted to public attitudes on the provision of these legislative resources. Using survey data on preferences for features associated with a citizen legislature versus a professional legislature, we examine the contours of public attitudes on professionalism and test models on the factors associated with these attitudes. Results suggest partisanship, trust, and approval of the local delegation matter, but the factors differ by the legislative professionalism of the respondent’s state and for low versus high knowledge citizens.

JEL Codes: D72, H79, H83
Keywords: Legislative Professionalism, Public Opinion, Political Economy

WP 08-11
Environmental Policy Attitudes: Issues, Geographical Scale, and Political Trust
David M. Konisky, Jeffrey Milyo & Lilliard E. Richardson, Jr.

Objectives. This article examines environmental policy attitudes, focusing on the differences in preferences across issue type (i.e., pollution, resource preservation) and geographical scale (i.e., local, national, global). In addition, we study whether an individual’s trust in government influences environmental policy attitudes.
Methods. Analyzing data from the 2007 Cooperative Congressional Election Study, we estimate a series of OLS regression models to examine the public’s environmental policy attitudes. Results. We find stronger public support for government action to address pollution issues than resources issues, and stronger support for local and national pollution abatement than dealing with global problems. We also find that Republicans and ideological conservatives are less likely to support further government effort to address the environment, and that more trusting individuals are more favorable to government action to address pollution and global issues.
Conclusion. Environmental policy attitudes vary by the nature of the issue; however, political ideology and partisan affiliation are consistent predictors of preferences across issues, even when controlling for an individual’s level of trust in government.

JEL Codes: Q5, H1, R5
Keywords: Environment, NIMBY, Public Opinion, Political Economy

forthcoming in Social Science Quarterly

WP 08-10
Crude Oil and Stock Markets: Stability, Instability, and Bubbles
J. Isaac Miller & Ronald A. Ratti

We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1-2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices, we find evidence for breaks after 1980:5, 1988:1, and 1999:9. We find a clear long-run relationship between these series for six OECD countries for 1971:1-1980.5 and 1988:2-1999.9, suggesting that stock market indices respond negatively to increases in the oil price in the long run. During 1980.6-1988.1, we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period. The expected negative long-run relationship appears to disintegrate after 1999.9. This finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years, which may suggest the presence of several stock market bubbles and/or oil price bubbles since the turn of the century.

JEL Codes: C13, C32, Q43
Keywords: crude oil, stock market prices, cointegrated VECM, structural stability, stock market bubble, oil price bubble

"Published in Energy Economics 31 (2009), pp. 559-568

WP 08-09
Supersize It: The Growth of Retail Chains and the Rise of the "Big Box" Retail Format
Emek Basker, Shawn Klimek, and Pham Hoang Van

We offer a theory for the complementarity between the size of a retail chain and the scope of its business to explain the growth of general-merchandise firms and the expansion of the "superstore" format. The complementarity results from an interaction of the retailer's economies of scale and consumer gains from "one-stop shopping." We find support for our model in micro data from the Census of Retail Trade for 1977-2002. Retail chains with more stores carry more distinct product lines and as retail chains grow they add both stores and product lines. On average, we find that a chain adds one product line, such as shoes, computers, or jewelry, to an existing store with every new store it opens. For the average large chain, adding a new product line throughout the chain is correlated with adding 400 new stores, competing in over 8,000 new markets and increasing its competitive pressure in more than 10,000 additional markets.

JEL Codes: L11, L25, L81
Keywords: Retail, Chain, Big Box, Superstore, Economies of Scale, General Merchandise, One Stop Shopping

WP 08-08
An Empirical Analysis of Teacher Spillover Effects in Secondary School
Cory Koedel

This paper examines whether educational production in secondary school involves joint production among teachers across subjects. In doing so, it also provides insights into the reliability of value-added modeling. Teacher value- added to reading test scores is estimated for four different teacher types: English, math, science and social studies. While the initial results indicate that reading output is jointly produced by math and English teachers, post-estimation falsification tests debunk the math-teacher “effects” - that is, there is in fact no evidence of joint production in secondary school. The results offer a mixed review of the value-added methodology, suggesting that it may be useful in some contexts but not others.

JEL Codes: I20, I22
Keywords: value-added, teacher quality, secondary school teachers, educational production

WP 08-07
Value-Added to What? How a Ceiling in the Testing Instrument Influences Value-Added Estimation
Cory Koedel and Julian Betts

Value-added measures of teacher quality may be sensitive to the quantitative properties of the testing instruments upon which they are based. This paper focuses on the sensitivity of value-added to a particularly relevant testing-instrument property – test-score-ceiling effects. Test-score ceilings are likely to be increasingly common in testing instruments across the country as education policy continues to emphasize proficiency-based reform. Encouragingly, we show that over a wide range of test-score- ceiling severity, teachers’ value-added estimates are only negligibly influenced by ceiling effects. However, as ceiling conditions approach those found in minimum-competency testing environments, value-added results are significantly altered.

JEL Codes: I20, I21 and J24
Keywords: Value Added, Test Score Ceiling, Ceiling Effects, Teacher Quality, Teacher Value Added

WP 08-06
Exposure Order Effects and Advertising Competition
Oksana Loginova

This paper applies the theories of exposure order effects, developed in the psychology literature, to an industrial organization model to explore their role in advertising competition. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive at the retailer and buy their most preferred brands. The order in which a consumer sees the advertising messages affects his brand preferences. Under the primacy effect the consumer prefers the brand he first saw advertised, under the recency -- the last encountered brand. The equilibrium of the advertising game is characterized separately under the primacy and the recency effects. In the first setting all consumers are initially unaware of the product existence. The equilibrium advertising intensities, remarkably, do not depend on the type of exposure order effect. In the other two settings some consumers have already formed their brand preferences. The primacy and the recency effects give rise to different equilibrium outcomes.

JEL Codes: C73, D11, D43, L13, M37
Keywords: Advertising Order Effects, Primacy, Recency

forthcoming in Journal of Economic Behavior and Organization

WP 08-05
Does Wal-Mart Sell Inferior Goods?
Emek Basker

I estimate the aggregate income elasticity of Wal-Mart's and Target's revenues using quarterly data for 1997-2006. I find that Wal-Mart's revenues increase during bad times, whereas Target's revenues decrease, consistent with Wal-Mart selling "inferior goods" in the technical sense of the term. An upper bound on the aggregate income elasticity of demand for Wal-Mart's wares is -0.5.

JEL Codes: L81, D12
Keywords: Retail, Wal-Mart, Target, Inferior Goods

forthcoming in Economic Inquiry

WP 08-04
Imports "R" Us: Retail Chains as Platforms for Developing-Country Imports
Emek Basker and Pham Hoang Van

Wal-Mart, Toys "R" Us, and other large retail chains are often identified with cheap imports. We use data from the Census of Retail Trade and the International Trade Commission over the period 1997-2002 to test whether big chains serve as platforms for imports from LDCs. Using difference-in-difference specifications we show that Chinese and other LDC imports have increased disproportionately in retail sectors with the sharpest consolidation into chains. To quantify the importance of chain growth to import growth we apply a numerical algorithm that generates marginal propensities to import by firm size. The largest retail firms' propensity to import from China is 17 percentage points higher than that of smaller retailers; the corresponding difference in import propensities from LDCs as a whole is 27 points. The disproportionate growth of large retailers between 1997 and 2002 explains 5% of the overall growth in consumer goods imports, 20% of the growth in consumer goods imports from China, and 22% of the growth in consumer goods imports from LDCs.

JEL Codes: F12, F14, L11, L81
Keywords: Imports, Retail Chains

WP 08-03
Testing the Bounds: Empirical Behavior of Target Zone Fundamentals
J. Isaac Miller

Standard target zone exchange rate models are based on nonlinear functions of an unobserved economic fundamental, which is assumed to be bounded, similarly to the target zone exchange rates themselves. A violation of this key assumption is a basic structural reason for model failure. Using a novel estimation and testing strategy, we show it is also a testable assumption. Our empirical results cast serious doubt on its validity in practice, providing a primitive reason for well-documented rejections of the basic model. Model failure from this violation is robust to otherwise ideal circumstances (e.g., perfect credibility).

JEL Codes: F3, C5
Keywords: target zone exchange rates, economic fundamental, unscented Kalman filter, rescaled range statistic

WP 08-02
Population Movements in the Presence of Agglomeration and Congestion Effects: Local Policy and the Social Optimum
David M. Mandy, Peter R. Mueser & Eric Parsons

We investigate the efficiency properties of population mobility when localities compete in an environment with local amenities and local externalities. Our model is dynamic, incorporating land and labor markets in a context where firms and workers form rational expectations. Concern focuses on whether and under what conditions the substantive conclusions from static models can be reinterpreted to apply in a dynamic context where moving is costly. In the spirit of Tiebout (1956), it can be shown in static models that taxes or subsidies developed by each local jurisdiction representing the interests of landowners can induce an efficient population allocation even in the presence of local externalities. We show that, in a dynamic model, efficiency of mobility requires that localities represent the interests of other local stakeholders, including residents and firms, as well as landowners. There may be multiple sets of equilibrium flows corresponding with alternative expectations. We consider institutional arrangements that may facilitate preferred paths.

JEL Codes: H21, J61
Keywords: geographic mobility, optimal population distribution

WP 08-01
Nonlinearity, Nonstationarity, and Thick Tails: How They Interact to Generate Persistency in Memory
J. Isaac Miller and Joon Y. Park

We consider nonlinear transformations of random walks driven by thick-tailed innovations that may have infinite means or variances. These three nonstandard characteristics: nonlinearity, nonstationarity, and thick tails interact to generate a spectrum of asymptotic autocorrelation patterns consistent with long-memory processes. Such autocorrelations may decay very slowly as the number of lags increases or may not decay at all and remain constant at all lags. Depending upon the type of transformation considered and how the model error is speci- fied, the autocorrelation functions are given by random constants, deterministic functions that decay slowly at hyperbolic rates, or mixtures of the two. Such patterns, along with other sample characteristics of the transformed time series, such as jumps in the sample path, excessive volatility, and leptokurtosis, suggest the possibility that these three ingredients are involved in the data generating processes of many actual economic and financial time series data. In addition to time series characteristics, we explore nonlinear regression asymptotics when the regressor is observable and an alternative regression technique when it is unobservable. To illustrate, we examine two empirical applications: wholesale electricity price spikes driven by capacity shortfalls and exchange rates governed by a target zone.

Revised version forthcoming in Journal of Econometrics

JEL Codes: C22, C16
Keywords: persistency in memory, nonlinear transformations, random walks, thick tails, stable distributions, wholesale electricity prices, target zone exchange rates