Early Evidence on Recreational Marijuana Legalization and Traffic Fatalities (with Ben Hansen and Caroline Weber)
Forthcoming, Economic Inquiry. Available online.
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.
Optimal Managed Competition Subsidies (with Amil Petrin, Robert Town, and Michael Chernew)
When markets fail to provide socially optimal outcomes, governments often intervene through `managed competition' where firms compete for per-consumer subsidies. Subsidies are generally set across geographies according to estimates of the cost of government provision, a method which may not be welfare-maximizing. 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 optimal schedule increases consumer surplus by 30% over the current policy and is well-approximated with a linear rule using market-level observables.
Download draft (February 2019)
Cash for Clunkers: A Lose-Lose-Lose Policy (with Wes Wilson and Nick Wood)
Industrial policies are often sold to the public through promises of second-order effects. For example, the 2009 Cash for Clunkers program, which provided subsidies to consumers who chose to scrap old automobiles and purchase new vehicles, was promoted under the idea that the exchanges would reduce vehicle emissions, combat rising inequality, and ``stimulate the economy.'' We evaluate the performance of the policy against these stated goals. As vehicles are durable goods and the policy differentiated between cars and light trucks, we introduce a dynamic, partial equilibrium portfolio model with vertical product differentiation and heterogeneous consumers. We calibrate the model to match data on new and used car purchases from 1998-2011 and find that the program generated roughly $0.11 in environmental savings per $1 in subsidies. Since subsidies largely went to middle-income marginal consumers, the program exacerbated purchasing power inequality. By pulling forward future truck purchases and incentivizing a switch to cars, the program resulted in a net loss to automakers.
New draft coming soon!
The Substitutability of Recreational Substances: Marijuana, Alcohol, and Tobacco (with Boyoung Seo)
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%.
Download the draft (January 2019)
Federalism, Partial Prohibition, and Cross Border Sales: Evidence from Recreational Marijuana (with Ben Hansen and Caroline Weber)
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 structure 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. Our results imply that Washington has earned between $64 million and $100 million in tax revenue from cross-border shoppers to date. These ﬁndings suggest that cross-border incentives may create a “race to legalize.”
Download the draft (November 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 the draft (June 2018)
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 the draft (February 2018)
The Taxation of Recreational Marijuana: Evidence from Washington State (with Ben Hansen and Caroline Weber)
The median United States voter supports the legalization of marijuana, at least in part due to a desire to increase state tax revenues. However, states with legal markets have implemented wildly different regulatory schemes with tax rates ranging from 3.75 to 37 percent, indicating that policy makers have a range of beliefs about industry responses to taxes and regulation. We examine a policy reform in Washington: a switch from a 25 percent gross receipts tax collected at every step in the supply chain to a sole 37 percent excise tax at retail. Using novel, comprehensive administrative data, we assess responses to the reform throughout the supply and consumption chain. We find the previous tax regime provided strong incentives for vertical integration. Tax invariance did not hold, with some types of firms benefiting much more than predicted. Consumers bear 44 percent of the additional retail tax burden. Finally, we find evidence that consumer demand for marijuana is price-inelastic in the short-run, but becomes price-elastic within a few weeks of a price increase.
Do Private Medicare Firms Face Lower Costs?
The US government’s Medicare Advantage (MA) program offers subsidies to private insurers who then compete to provide Medicare and supplemental benefits to seniors. Today, the subsidies paid to firms exceed Medicare’s costs, but almost all plans provide a number of benefits on top of those provided by traditional Medicare. To evaluate the welfare effect of the MA program, I estimate the cost to firms of providing Medicare-equivalent benefits and the consumer welfare gains from supplemental benefits. I introduce a model of supply and demand for MA that focuses on supply-side dynamics. In my model, firms choose prices and generosities for multiple plans and take into account the inter-temporal incentives generated by the existence of switching costs on the demand side. I estimate the model’s parameters using panel data on consumers and plans from 2008-2010 and find that, on average, private firms spend $5,293 to provide Medicare-equivalent benefits to a healthy individual, whereas Medicare spends $4,390 on similar individuals. The average plan spends $184 on supplemental benefits, generating $328 in consumer welfare. In counterfactual simulations, I explore the effect of a reduction in the subsidies offered to firms and policies that make it easier to switch providers. I find both policies increase total welfare, primarily by moving customers to traditional Medicare.
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.
New draft coming soon.
Work in Progress
The Effect of Recreational Marijuana Availability on Medicare Utilization
Understanding Washington's Marijuana Traceability Data (with Ben Hansen, Kendall Houghton, and Caroline Weber)
Auditing and Enforcement in the Recreational Marijuana Industry (with Ben Hansen and Caroline Weber)
Equilibrium Approximation with Heterogeneous Consumers and Continuous State Spaces