Publications

Capturing and harvesting in Medicare Advantage plan design

2024, Health Affairs Scholar, qxae077

Consumers in health insurance markets have inertia stemming from the desire to maintain relationships with providers and other frictions involved in switching plans. In other markets that feature inertia, suppliers respond with pricing strategies that vary by market share: lowering markups to capture consumers when market shares are low, and raising markups to harvest profits once market share has been established. I tested for this behavior in the Medicare Advantage market by examining how MA plan sponsors changed the financial terms of their plans in response to changes in market share from 2007-2021 using a first-difference model with fixed effects. I found evidence that plans increase premiums, copays, and out-of-pocket limits when market shares increase. The results imply that for every 1% increase in market share, plan sponsors subsequently increase out-of-pocket costs by 1% in the following year.

Changes in Rail Rates for U.S. Commodity Grain Shipments Over Time (with Wesley W. Wilson)

2023, Research in Transportation Economics, Volume 102, 101359

The deregulation of the U.S. railroad industry has largely been considered a success, as costs and rates have fallen due to changes in the mix of traffic and industry consolidation. However, rates did not fall as quickly as costs, and since 2000 rates have been rising while many measures of cost have remained relatively stable. We investigate these changes in rail rates using a sample of agricultural shipments from 2000–2016. We provide evidence that even after controlling for changes in cost drivers such as fuel, the relationships between prices and determinants have changed over time, suggesting that railroad pricing rules have driven increases in rates faced by shippers.

Reducing Medicare Advantage Benchmarks Will Decrease Plan Generosity, But Those Effects Will Likely Be Modest (with Michael Chernew, Robert Town, and Amil Petrin)

2023, Health Affairs, Volume 42: 4

Concerns that Medicare Advantage plans are overpaid have motivated calls to reduce Medicare Advantage benchmarks – the dollar amount set by CMS against which MA plans bid to set premiums and fund extra benefits. However, cutting benchmarks may lead to higher MA enrollee premiums and decreased plan generosity. We assess the relationship between Medicare Advantage benchmarks, plan generosity and benefits. We estimate that a $1000 per year decrease in benchmarks would lead to small increases in annual premiums of about $60 and annual deductibles of about $27. Copays would also increase modestly and the propensity to offer benefits would generally decline by less than 5 percentage points, with the greatest impact on the availability of dental, hearing and vision benefits.  These results suggest that, while cuts to Medicare Advantage benchmarks will adversely affect plan generosity, those effects will be modest.

Watching the Grass Grow: Does Recreational Cannabis Legalization Affect Retail and Agricultural Wages? (with Sichao Jiang)

2022, Journal of Cannabis Research, Volume 4: 42

Over the past several years, cannabis has become legal for recreational use in several U.S. states and jurisdictions around the world. The opening of these markets has led to the establishment of hundreds of cannabis production and retail firms with accompanying demand for labor, leading to concerns about spillover effects on wages from incumbents. We study the markets for agricultural and retail labor in Washington and Colorado, early legalizers with now-established cannabis markets. Using a synthetic control technique to account for the possibility of border-state spillover effects and machine learning techniques for data imputation and variable selection, we find no evidence that cannabis legalization is associated with increases in per-employee wages, neither within industries most similar to cannabis production or retail, nor in more broad industry categories. We conclude that cannabis legalization is unlikely to negatively impact incumbent firms through the labor market channel.

Vertical Integration and Production Inefficiency in the Presence of a Gross Receipts Tax (with Benjamin Hansen and Caroline Weber)

2022, Journal of Public Economics, Volume 212: 104693

We quantify the effects of a gross receipts tax (GRT) on vertical integration for the first time. We use data from the Washington state recreational cannabis industry, which has numerous advantages including a clean natural experiment: a 25% GRT imposed on cannabis firms was subsequently replaced by an excise tax at retail. We find the short-run elasticity of vertical integration with respect to the intermediate good net-of-tax rate is -0.15 and the long-run elasticity is about twice as large. We find these incentives lead to large output losses -- production increases by 23 percent when the GRT is eliminated.

Up in Smoke? The Market for Cannabis (with Ben Hansen and Caroline Weber)

In Handbook of Labor, Human Resources and Population Economics

Legal access to recreational cannabis continues to expand across the globe. With each new market comes new legal structures and regulations. In this chapter we first review the regulations and market structures of the newly legalized recreational markets in the United States, Canada and Uruguay. We then discuss the emerging literature on the industrial organization of the cannabis industry, which provides new evidence on market competition and the price elasticity of demand. We proceed to review the expanding research on cannabis taxation and the black market. This research has meaningful public policy conclusions for how tax rates and structures affect revenue generation and the black market, key arguments for legalization. We finish by reviewing the public health literature on legalization, and its findings on how legalization has affected cannabis use, dangerous driving, and the use and abuse of other drugs.

The Effect of Cannabis Legalization on Substance Demand and Tax Revenues (with Boyoung Seo)

2021, National Tax Journal, Volume 74, Number 1

Marijuana advocates argue legalization will increase tax revenues. If legal substances are substitutes, marijuana revenues may crowd out other taxes. We study tax revenues around Washington’s legalization of marijuana using detailed administrative and scanner data. We estimate a flexible demand system for marijuana, alcohol, and tobacco and control for prices. We find legalizing marijuana leads to a 5% decrease in alcohol demand and a 12% decrease in tobacco demand. Liquor and cigarettes are most affected. 40% of state marijuana tax revenue is offset by reductions elsewhere. A 1% increase in Washington’s marijuana tax, currently the highest nationwide, increases revenue 0.2%.

Federalism, Partial Prohibition, and Cross Border Sales: Evidence from Recreational Marijuana (with Ben Hansen and Caroline Weber)

2020, Journal of Public Economics, Volume 187: 104159

Marijuana is partially prohibited: though banned federally, it is available to 1 in 4 U.S. adults under state statutes. We measure the size of the interstate trade generated by state-level differences in legal status with a natural experiment: Oregon allowed stores to sell marijuana for recreational use on October 1, 2015, next to Washington where stores had been selling recreational marijuana since July 2014. Using administrative data covering the universe of Washington's sales and a differences-in-discontinuities approach, we find retailers along the Oregon border experienced a 36% decline in sales immediately after Oregon's market opened. We investigate the home location of recent online reviewers of marijuana retailers and find similar cross-border patterns. By the end of Washington's 2018 fiscal year, our results imply that Washington had earned between $44 million and $75 million in tax revenue from cross-border shoppers. These cross-border incentives may create a “race to legalize.”

Sharing the Sacrifice, Minimizing the Pain: Optimal Wage Reductions

2020, Economics Letters, doi: 10.1016/j.econlet.2020.109503

Faced with temporary revenue shocks, employers may choose to implement wage reductions -- this has been a common response for U.S. universities during the COVID-19 pandemic. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances the need to ``minimize the pain'' and ``share the sacrifice.'' I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the results using wage data from a large U.S. university.

Download draft (August 2020)

Taxing the Potency of Sin Goods: Evidence from Recreational Cannabis and Liquor Markets (with Ben Hansen, Boyoung Seo, and Caroline Weber)

2020, National Tax Journal, Volume 73:2

Cannabis is legal to purchase for over 28 percent of United States citizens. A central argument used in public campaigns for cannabis legalization has focused on the tax revenue that legal cannabis markets could generate. Recently, some policy makers and politicians have debated switching from traditional ad valorem taxes to taxes on potency, aiming to reduce the potential externalities associated with highly potent products. In this paper, we construct a theoretical model to predict the implications of a potency-based tax in an environment with market power. We then estimate the demand for cannabis potency based on administrative records of sales and potency from Washington state. We finish by conducting counterfactual analyses comparing revenue and potency outcomes from potency-based taxes vs. the traditional price-based taxes.

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Environmentalism, Stimulus, and Inequality Reduction Through Industrial Policy: Did Cash for Clunkers Achieve the Trifecta? (with Wes Wilson and Nick Wood)

2020, Economic Inquiry, Volume 58:3

The 2009 American Cash for Clunkers program, which subsidized consumers who scrapped old vehicles and purchased new vehicles, was promoted by appealing to multiple constituencies. We evaluate the policy and alternatives according to its stated goals: economic stimulus, emissions reductions, and reducing inequality. We calibrate a dynamic partial equilibrium portfolio model to match consumer expenditure data from 1998-2011 focusing on heterogeneity across cars and trucks. We find the program generated $0.17 in environmental benefits, $0.48 in consumer surplus, and $0.79 in additional spending per subsidy dollar. Since subsidies largely went to middle-income infra-marginal consumers, the program exacerbated income inequality.

Early Evidence on Recreational Marijuana Legalization and Traffic Fatalities (with Ben Hansen and Caroline Weber)

2018, Economic Inquiry, Volume 58:2

Over the last few years, marijuana has become legally available for recreational use to roughly a quarter of Americans. Policy makers have long expressed concerns about the substantial external costs of alcohol, and similar costs could come with the liberalization of marijuana policy. Indeed, the fraction of fatal accidents in which at least one driver tested positive for tetrahydrocannabinol has increased nationwide by an average of 10% from 2013 to 2016. For Colorado and Washington, both of which legalized marijuana in 2014, these increases were 92% and 28%, respectively. However, identifying a causal effect is difficult due to the presence of significant confounding factors. We test for a causal effect of marijuana legalization on traffic fatalities in Colorado and Washington with a synthetic control approach using records on fatal traffic accidents from 2000 to 2016. We find the synthetic control groups saw similar changes in marijuana‐related, alcohol‐related, and overall traffic fatality rates despite not legalizing recreational marijuana.

Governance Structure and Exit: Evidence from California Hospitals (with Wesley Wilson)

2018, Review of Industrial Organization 53:31. Available online.

Most inpatient and emergency health care services in the U.S. are delivered by non-profit organizations. To understand the impact of policies that are designed to affect competitive outcomes in hospital markets, it’s important to understand whether the “non-profit” structure changes the behavior and competitive conduct of firms. Given the complexity of the product space within which hospitals operate, we focus on more easily interpreted decisions within the hospital market: entry and exit. Using comprehensive administrative data for the universe of California hospitals from 1980 to 2013, we document the observed entry and exit behavior. We estimate flexible exit policy functions and demonstrate a difference in behavior between for-profit and non-profit firms that exists after accounting for several observable characteristics of hospitals. We find differences in observed behavior: this is a finding that strongly suggests that there are differences in the underlying objective function of the various firms.

Working Papers

The Impacts of Mortgage Servicer Licensing Requirements (with Edder Martinez-Lazo)

Under Review

The 2007-2008 U.S. financial crisis illustrated the way in which mortgage servicers, through their role in influencing deliquencies, foreclosures, and in administering mortgage modification programs, can influence housing market outcomes at a broad scale. We study a wave of state-level mortgage servicer licensing laws passed in the wake of the crisis. We study mortgage market outcomes using a difference-in-differences approach and pooled mortgage-backed security outcomes using an exposure design. We find evidence that the reforms decreased in late-stage delinquencies and foreclosures. Compliance costs may have been passed through to increased interest rates. Other borrower and loan characteristics were unchanged.

The Short-run Effects of Opening Mobile In-App Payment Systems: Evidence from South Korea (with Boyoon Chang)

Under Review

Mobile app platforms are highly concentrated -- Apple and Google each distribute over 75% of the total number of apps installed on the relevant devices. These platforms generally require developers to use a built-in system for processing payments with a commission rate of 30\% for both the initial purchase of an app and any subsequent in-app purchases. In September 2021, South Korea became the first country to ban this lock-in; purchases made in the country may be conducted through any billing system developers wish. We analyze the impact of this policy change (and Apple's subsequent adaptation) on demand for apps and revenue using difference-in-differences techniques and data on apps offered through Apple's App Store from a leading app analytics firm from January 2018 to December 2023. We find no evidence that the policy change generated substantive changes in South Korea's app marketplace.

The Optimal Geographic Distribution of Managed Competition Subsidies (with Amil Petrin, Robert Town, and Michael Chernew)

Revise and Resubmit

When markets fail to provide socially optimal outcomes, governments often intervene through ‘managed competition’ where firms compete for per-consumer subsidies. We introduce a framework for determining the optimal subsidy schedule that features heterogeneity in consumer preferences and inertia, and firms with heterogeneous costs that can set prices and product characteristics in response to changes in the subsidy. We apply it to the Medicare Advantage program, which offers Medicare recipients private insurance that replaces Traditional Medicare. We calculate counterfactual equilibria as a function of the subsidies by estimating policy functions for product characteristics from the data and solving for Nash equilibria in prices. The consumer-welfare-maximizing budget-neutral schedule increases aggregate annual consumer welfare by $4.6 billion over the current policy and is well-approximated with a linear rule using market-level observables.

Download draft (January 2023)
Monte Carlo code (September 2022)

In Search of Peace and Quiet: The Heterogeneous Impacts of Short-Term Rentals on Housing Prices (with Brett Garcia and John Morehouse)

The supply of housing for short-term rental (STR) has grown dramatically with the emergence of platforms such as Airbnb. This trend has led to contradictory concerns about increasing housing prices and negative externalities. We provide evidence that in some areas, STRs can decrease housing prices. Using a parsimonious model of housing occupancy with externalities, we show the marginal effect of STRs on housing prices depends on the net impact of STRs on local amenities. Using zip-code-level data from Los Angeles County, California, we show heterogeneity in the marginal effects of Airbnb listings on housing prices across localities. We then examine the consequences of a 2015 law restricting STRs within the City of Santa Monica in the coastal region of Los Angeles County. In that City, we estimate a negative relationship between the prevalence of STRs and housing prices. Using a differences-in-differences approach, we show that the 2015 law increased housing prices -- which can be rationalized by our theory. Finally, we provide evidence for a potential mechanism: ``party-related’’ nuisance calls to the Santa Monica Police Department decreased after the policy was enacted.

Are Firms’ Cost Predictions Accurate? Evidence from Medicare Advantage (with Sichao Jiang)

Many firms employ forecasters to predict future market conditions. We investigate the accuracy of these predictions in the context of Medicare Advantage, where insurers receive subsidies from the government and compete to provide health insurance to seniors. As part of the ``bidding'' process, firms must submit forecasts of their costs. Insurers have incentives to report accurately, as these predictions are used to determine both the level of the subsidy and (implicitly) the degree to which that subsidy can be spent on various plan features. We collect data on predictions and realized expenses per member per month at the plan-service-category level from 2008-2015, and document three stylized facts. First, on average firms overestimate future costs. Second, this overestimation decreases with the experience of the firm. Firms in more competitive markets (as measured by the number of other firms present) form more accurate estimates. We show that firms with higher costs than expected generally offer plans that feature greater patient cost sharing (i.e. higher deductibles and copays).

A Study of Tax Invariance (with Benjamin Hansen, Kendall Houghton, and Caroline Weber)

We provide an empirical test of tax invariance (TIV). When a 25 percent tax remitted by cannabis manufacturers was eliminated in Washington state and the retail excise tax was simultaneously increased from 25 to 37 percent---a shift intended to be revenue-neutral---TIV did not hold. Manufacturers kept two-thirds of their tax savings instead of passing all their savings through to retail firms as predicted by TIV. Retailers passed one-third of their tax increase on to consumers instead of keeping prices constant or even declining as predicted by TIV.

Estimating Costs When Consumers Have Inertia: Are Private Medicare Firms More Efficient?

When consumers have inertia, firms have an intertemporal pricing incentive to capture and then harvest market share. This implies that marginal cost estimators derived from static profit-maximization first-order conditions may be biased depending on the distribution of shares in the data. I examine this empirically with the Medicare Advantage program, through which seniors may obtain health insurance through private firms rather than the traditional public system. I present evidence that firms behave dynamically, and estimate a dynamic multiproduct oligopoly model which incorporates inertia and adverse selection. I find MA firms face costs which may exceed the government’s, contrary to static estimates.

Download draft (June 2019)

Modeling the Costs and Benefits of Civil Court Case Resolution (with Amil Petrin)

Civil courts provide a setting in which society’s citizens can right a believed wrong. Resolving the case determines whether a wrong was committed and, if so, the damages caused. Determining which acts are bad can also benefit
society by deterring future acts of the same nature. We estimate the costs of case resolution directly from court accounting data. We estimate the benefit to society by assuming that the court’s view of the damages—the judgment—is correlated with society’s view of the benefit of righting the wrong. Additional benefits come when the resolution of the case deters future bad acts—the size of the judgment reflects the size of the bad acts deterred. We apply our approach to all civil cases handled by the Fourth Judicial Court of Minnesota from 2008 to 2012. Average judgments are magnitudes larger than costs: the average Contract case judgment in our data is $440,685 and the average cost to the court is $1,183. Over the sample period, the total court costs for the cases we consider were $23.1 million and the total judgments were $1.5 billion.

Download draft (February 2018)

Retail Price Holidays: Theory and Evidence (with Ben Hansen, Kendall Houghton, and Caroline Weber)

Many retail industries feature price promotion holidays: periods close to calendar anchors when most firms simultaneously offer discounts, such as back-to-school sales in August or Black Friday sales after Thanksgiving. Models of sales by individual firms rely on supply side mechanisms, such as cost or inventory shocks, to explain discounting behavior. We analyze a price promotion holiday in the recreational marijuana industry and document facts that conflict with these traditional models. Despite an arguably exogenous increase in demand due to the proximity to a cultural event and constant marginal costs and inventories, firms choose to lower prices substantially. To explain these observations, we present a stylized model of price competition in which firms compete for customers with heterogeneous price sensitivities. An exogenous demand shock increases demand from both consumers types, and crucially increases the ratio of price-sensitive to price-insensitive consumers leading to a different optimal pricing strategy for the firm.

Download draft (June 2018)

Does Premerger Notification Matter? Evidence from Cable Television (with Kailin Clarke)

U.S. antitrust policy requires firms to disclose sizable acquisition plans to the Department of Justice before completing any transactions so effects on competition can be proactively evaluated. It has been difficult to test the effects of this policy given the difficulty of defining potential and actual acquisitions across industries. We construct a novel dataset of acquisitions in the cable television industry to study the acquisition behavior of several large firms. We test the effect of the disclosure threshold and the nature of local competition on the probability that a small firm is acquired. We find the program has a small but significant impact on large firms' propensities to purchase horizontal (overbuilt) competitors but no significant effect on other types of acquisitions. Our results are robust to several variations of the test.

Work in Progress

  • The Short-Run Effects of Opening Mobile App Payment Systems: Evidence from South Korea (with Chang, B.)

  • Measuring the Effectiveness of Mortgage Servicing Standards (with Martinez-Lazo, E.)

  • Approximate Markov-Perfect Equilibria When State Spaces are Continuous

  • Imperfectly Competitive Firms, Imperfectly Competitive Politics