nep-reg New Economics Papers
on Regulation
Issue of 2021‒08‒23
twenty-one papers chosen by
Christopher Decker
Oxford University

  1. Headwinds and Tailwinds: Implications of Inefficient Retail Energy Pricing for Energy Substitution By Severin Borenstein; James B. Bushnell
  2. Long-Term Resource Adequacy in Wholesale Electricity Markets with Significant Intermittent Renewables By Frank A. Wolak
  3. Regulating Conglomerates in China: Evidence from an Energy Conservation Program By Qiaoyi Chen; Zhao Chen; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Xu
  4. Corrective Regulation with Imperfect Instruments By Eduardo Dávila; Ansgar Walther
  5. The innovative mobility landscape: The case of mobility as a service By OECD
  6. Industrial Organization of Health Care Markets By Benjamin R. Handel; Kate Ho
  7. Regulated Revenues and Hospital Behavior: Evidence from a Medicare Overhaul By Tal Gross; Adam Sacarny; Maggie Shi; David Silver
  8. Unobserved Heterogeneity, State Dependence, and Health Plan Choices By Ariel Pakes; Jack R. Porter; Mark Shepard; Sophie Calder-Wang
  9. From Monopoly to Competition: Optimal Contests Prevail By Xiaotie Deng; Yotam Gafni; Ron Lavi; Tao Lin; Hongyi Ling
  10. Vertical integration as a source of hold-up: An experiment By Marie-Laure Allain; Claire Chambolle; Patrick Rey; Sabrina Teyssier
  11. Reputation and Market Structure in Experimental Platforms By Philip C. Solimine; R. Mark Isaac
  12. Nonlinear Pricing with Finite Information By Dirk Bergemann; Edmund Yeh; Jinkun Zhang
  13. Estimating Demand with Multi-Homing in Two-Sided Markets By Pauline Affeldt; Elena Argentesi; Lapo Filistrucchi
  14. Third-Degree Price Discrimination in the Age of Big Data By Charlson, G.
  15. The New Empirics of Industrial Policy By Lane, Nathaniel
  16. Information Markets and Nonmarkets By Dirk Bergemann; Marco Ottaviani
  17. The IO of Selection Markets By Liran Einav; Amy Finkelstein; Neale Mahoney
  18. Consumer Responses to Firms’ Voluntary Disclosure of Information: Evidence from Calorie Labeling by Starbucks By Rosemary Avery; John Cawley; Julia Eddelbuettel; Matthew D. Eisenberg; Charlie Mann; Alan D. Mathios
  19. Bankruptcy Costs and the Design of Preventive Restructuring Procedures By Epaulard Anne,; Zapha Chloé.
  20. No Free Launch: At-Risk Entry by Generic Drug Firms By Keith M. Drake; Robert He; Thomas McGuire; Alice K. Ndikumana
  21. The Right to Repair: Patent Law and 3D Printing in Australia By Rimmer, Matthew

  1. By: Severin Borenstein; James B. Bushnell
    Abstract: Electrification of transportation and buildings to reduce greenhouse gas (GHG) emissions requires massive switching from natural gas and refined petroleum products. All three end-use energy sources are mispriced due in part to the unpriced pollution they emit. Natural gas and electricity utilities also face the classic natural monopoly challenge of recovering fixed costs while maintaining efficient pricing. We study the magnitude of these distortions for electricity, natural gas, and gasoline purchased by residential customers across the continental US. We find that the net distortion in pricing electricity is much greater than for natural gas or gasoline. In most of the country, residential electricity prices are well above social marginal cost (private marginal cost plus unpriced externalities), while in some areas with large shares of coal-fired generation, prices are below SMC. Combining our estimates of marginal price and SMC for each of the fuels with a large survey of California households' energy use, we calculate the distribution of annual fuel costs for space heating, water heating, and electric vehicles under actual pricing versus setting price at SMC. We find that moving prices for all three fuels to equal their SMC would significantly increase the incentive for Californians to switch to electricity for these energy services.
    JEL: H23 L51 L71 L94 L95
    Date: 2021–08
  2. By: Frank A. Wolak
    Abstract: Growing amounts of intermittent renewable generation capacity substantially increases the complexity of determining whether sufficient energy will be available to meet hourly demands throughout the year. As the events of August 2020 in California and February 2021 in Texas demonstrate, supply shortfalls can have large economic and public health consequences. An empirical analysis of these two events demonstrates that similar supply shortfalls are likely to occur in the future without a paradigm shift in how long-term resource adequacy is determined for an electricity supply industry with significant intermittent renewables. An alternative approach to determining long-term resource adequacy that explicitly recognizes the characteristics of different generation technologies is outlined and its properties explored relative to current approaches.
    JEL: L22 L23 Q2 Q4
    Date: 2021–07
  3. By: Qiaoyi Chen; Zhao Chen; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Xu
    Abstract: We study a prominent energy regulation affecting large Chinese manufacturers that are part of broader conglomerates. Using detailed firm-level data and difference-in-differences research designs, we show that regulated firms cut output and shifted production to unregulated firms in the same conglomerate instead of improving their energy efficiency. Conglomerate spillovers account for 40% of the output loss of regulated firms and substantially reduce aggregate energy savings. Using a structural model, we show that alternative polices that use public information on business networks could lower the shadow cost of the regulation by more than 40% and increase aggregate energy savings by 10%.
    JEL: H23 L51 O44 Q48
    Date: 2021–07
  4. By: Eduardo Dávila (Cowles Foundation, Yale University); Ansgar Walther (Imperial College London)
    Abstract: This paper studies the optimal design of second-best corrective regulation, when some agents or activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that the optimal second-best policy is determined by a subset of policy elasticities: leakage elasticities, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities and with uniform regulation across agents/activities. We illustrate our results in applications to shadow banking, scale-invariant regulation, asset substitution, and fire sales.
    Keywords: Corrective regulation, Second-best policy, Pigouvian taxation, Policy elasticities, Leakage elasticities, Regulatory arbitrage, Financial regulation
    JEL: G18 G28 H21 D62
    Date: 2021–08
  5. By: OECD
    Abstract: This report reviews changes in today’s urban mobility landscape and the potential of Mobility as a Service (MaaS) to improve travel in cities. It assesses essential governance and regulatory challenges that stakeholders must address to create a healthy ecosystem for Mobility as a Service which aligns with societal objectives and delivers clear benefits to people.
    Date: 2021–07–06
  6. By: Benjamin R. Handel; Kate Ho
    Abstract: In this paper we outline the tools that have been developed to model and analyze competition and regulation in health care markets, and describe particular papers that apply them to policy-relevant questions. We focus particularly on the I.O. models and empirical methods and analyses that researchers have formulated to address policy-relevant questions, although we also provide an overview of the institutional facts and findings that inform them. We divide the chapter into two broad sections: (i) papers considering competition and price-setting among insurers and providers and (ii) papers focused specifically on insurance and market design. The former set of papers is largely concerned with models of oligopolistic competition; it is often focused on the US commercial insurance market where prices are market-determined rather than being set administratively. The latter focuses on insurance market design with an emphasis on issues raised by asymmetric information, leading to adverse selection and moral hazard. In addition, we discuss the literature on consumer choice frictions in this market and the significant implications of those frictions for I.O. questions.
    JEL: I11 L13 L2
    Date: 2021–08
  7. By: Tal Gross; Adam Sacarny; Maggie Shi; David Silver
    Abstract: We study a 2008 policy reform in which Medicare revised its hospital payment system to better reflect patients’ severity of illness. We construct a simulated instrument that predicts a hospital’s policy-induced change in reimbursement using pre-reform patients and post-reform rules. The reform led to large persistent changes in Medicare payment rates across hospitals. Hospitals that faced larger gains in Medicare reimbursement increased the volume of Medicare patients they treated. The estimates imply a volume elasticity of approximately unity. To accommodate greater volume, hospitals increased nurse employment, but also lowered length of stay, with ambiguous effects on quality.
    JEL: I18
    Date: 2021–07
  8. By: Ariel Pakes; Jack R. Porter; Mark Shepard; Sophie Calder-Wang
    Abstract: We provide a new method to analyze discrete choice models with state dependence and individual-by-product fixed effects and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). Moment inequalities are used to infer state dependence from consumers’ switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation illustrates that the policy implications of this difference can be substantive.
    JEL: C13 D12 I11 L60 M31
    Date: 2021–07
  9. By: Xiaotie Deng; Yotam Gafni; Ron Lavi; Tao Lin; Hongyi Ling
    Abstract: We study competition among contests in a general model that allows for an arbitrary and heterogeneous space of contest design, where the goal of the contest designers is to maximize the contestants' sum of efforts. Our main result shows that optimal contests in the monopolistic setting (i.e., those that maximize the sum of efforts in a model with a single contest) form an equilibrium in the model with competition among contests. Under a very natural assumption these contests are in fact dominant, and the equilibria that they form are unique. Moreover, equilibria with the optimal contests are Pareto-optimal even in cases where other equilibria emerge. In many natural cases, they also maximize the social welfare.
    Date: 2021–07
  10. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Claire Chambolle (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Patrick Rey (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Sabrina Teyssier (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)
    Abstract: In a vertical chain in which two rivals invest before contracting with one of two competing suppliers, vertical integration can create holdup problems for the rival. We develop an experiment to test this theoretical prediction in a setup in which suppliers can either precommit ex ante to being greedy or degrade ex post the input they provide to their customer. Our experimental results confirm that vertical integration creates holdup problems. However, vertical integration also generates more departures from theory, which can be explained by bounded rationality and social preferences.
    Keywords: Vertical integration,Hold-up,Experimental economics,Bounded rationality,Social preferences
    Date: 2021–06–08
  11. By: Philip C. Solimine (Department of Economics and Department of Scientific Computing, Florida State University); R. Mark Isaac (Department of Economics, Florida State University)
    Abstract: In this paper we conduct a market experiment with the opportunity for sellers to send a nonbinding advertisement of their product quality. We examine the effects of including a reputation aggregation system for sellers in these markets. In order to closely match the setting of real-life markets, we conduct a laboratory experiment designed to emulate an online marketplace. In some sessions, we prompt buyers to respond to their purchases with a canonical "five-star" rating, and display the average rating to buyers in each round. We find substantial efficiency gains from the addition of the ratings system, but not enough to obtain fully efficient market outcomes. These efficiency gains come primarily through a decrease in false advertising behavior by the sellers, as they compete to build reputations. We structurally examine the formation of reputations by the sellers (with and without ratings) and the effect of these reputations on the decisions of buyers and sellers in the market. Using a bipartite network of transaction data, we will quantify the effects of ratings in promoting trust and supporting diverse, connected, and high quality markets.
    Keywords: Product Quality, Seller Reputation, Ratings, Experimental Market Design, Plat- forms, Adverse Selection
    JEL: L1 L2 D4 D8
    Date: 2021–08
  12. By: Dirk Bergemann (Cowles Foundation, Yale University); Edmund Yeh (Department of Electrical and Computer Engineering, Northeastern University); Jinkun Zhang (Department of Electrical and Computer Engineering, Northeastern University)
    Abstract: We analyze nonlinear pricing with finite information. We consider a multi-product environment where each buyer has preferences over a d-dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. The limited menu reflects a finite communication capacity between the buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, for either the socially efficient or the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized," optimally. We introduce vector quantization and establish that the losses due to finite menus converge to zero at a rate of 1/n^2/^d. In the canonical model with one-dimensional products and preferences, this establishes that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1/n^2.
    Keywords: Mechanism Design, Nonlinear Pricing, Multi-Dimension, Multi-Product, Private Information, Limited Information, Quantization, Information Theory
    JEL: D82 D83 D86
    Date: 2021–08
  13. By: Pauline Affeldt; Elena Argentesi; Lapo Filistrucchi
    Abstract: We empirically investigate the relevance of multi-homing in two-sided markets. First, we build a micro-founded structural econometric model that encompasses demand for differentiated products and allows for multi-homing on both sides of the market. We then use an original dataset on the Italian daily newspaper market that includes information on double-homing by readers to estimate readers’ and advertisers’ demand. The results show that an econometric model that does not allow for multi-homing is likely to produce biased estimates of demand on both sides of the market. In particular, on the reader side, accounting for multi-homing helps to recognize complementarity between products; on the advertising side, it allows to measure to what extent advertising demand depends on the shares of exclusive and overlapping readers.
    Keywords: two-sided markets, platforms, multi-homing, media, advertising
    JEL: C51 D43 L13 L82 M37
    Date: 2021
  14. By: Charlson, G.
    Abstract: A platform holds information on the demographics of its users and wants maximise total surplus. The data generates a probability over which of two products a buyer prefers, with different data segmentations being more or less informative. The platform reveals segmentations of the data to two firms, one popular and one niche, preferring to reveal no information than completely revealing the consumer's type for certain. The platform can improve profits by revealing to both firms a segmentation where the niche firm is relatively popular, but still less popular than the other firm, potentially doing even better by revealing information asymmetrically. The platform has an incentive to provide more granular data in markets in which the niche firm is particularly unpopular or in which broad demographic categories are not particularly revelatory of type, suggesting that the profit associated with big data techniques differs depending on market characteristics.
    Keywords: Strategic interaction, network games, interventions, industrial organisation, platforms, hypergraphs
    JEL: D40 L10 L40
    Date: 2021–08–19
  15. By: Lane, Nathaniel (University of Oxford)
    Abstract: Nations have and will continue to shape their economies through industrial policy. Nevertheless, the empirical literature on these interventions is thin, dwarfed by the attention industrial policies receive from policymakers across the world. In this paper, I discuss the difficulties of empirically studying industrial policy and review how new econometric work is confronting these issues. Through careful research design and attention to institutional detail, I argue that emergent studies are rapidly expanding what we know—and updating what we thought we knew—about these policies. As well, I argue tools from policy evaluation allow us to study the impact of endogenous industrial interventions. This review is a proposal to take industrial policy, along with their complexities, more seriously as objects of inquiry. Doing so requires not only more serious evaluations of past policy but also a reevaluation of past empirical work and consensus.
    Date: 2020–01–03
  16. By: Dirk Bergemann (Cowles Foundation, Yale University); Marco Ottaviani (Department of Economics, Bocconi University)
    Abstract: As large amounts of data become available and can be communicated more easily and processed more e¤ectively, information has come to play a central role for economic activity and welfare in our age. This essay overviews contributions to the industrial organization of information markets and nonmarkets, while attempting to maintain a balance between foundational frameworks and more recent developments. We start by reviewing mechanism-design approaches to modeling the trade of information. We then cover ratings, predictions, and recommender systems. We turn to forecasting contests, prediction markets, and other institutions designed for collecting and aggregating information from decentralized participants. Finally, we discuss science as a prototypical information nonmarket with participants who interact in a non-anonymous way to produce and disseminate information. We aim to make the reader familiar with the central notions and insights in this burgeoning literature and also point to some open critical questions that future research will have to address.
    Keywords: Information, Data, Data Intermediaries, Information Markets, Information Non-markets, Science
    JEL: D82 D83 D84 G14 L86
    Date: 2021–08
  17. By: Liran Einav; Amy Finkelstein; Neale Mahoney
    Abstract: This is an invited chapter for the forthcoming Volume 4 of the Handbook of Industrial Organization. We focus on "selection markets," which cover markets in which consumers vary not only in how much they are willing to pay for a product but also in how costly they are to the seller. The chapter tries to organize the recent wave of IO-related papers on selection markets, which has largely focused on insurance and credit markets. We provide a common framework, terminology, and notation that can be used to understand many of these papers, and that we hope can be usefully applied going forward.
    JEL: G22 L00 L13
    Date: 2021–07
  18. By: Rosemary Avery; John Cawley; Julia Eddelbuettel; Matthew D. Eisenberg; Charlie Mann; Alan D. Mathios
    Abstract: This paper estimates the impact on consumer behavior of a firm’s voluntary disclosure of information. Specifically, we study the impact of Starbucks’ disclosure of calorie information on its menu boards in June 2013. Using data on over 250,000 consumers’ visits to specific restaurant chains, we estimate difference-in-difference models that compare the change in the probability that consumers recently visited Starbucks to the change in the probability that they recently visited a similar chain that did not voluntarily disclose: Dunkin Donuts. Estimates from difference-in-differences models indicate that we cannot reject the null hypothesis that Starbucks’ disclosure of calorie information had no impact on the probability that consumers patronized Starbucks in the past month. However, we find evidence of a transitory negative impact on the probability of visits the first year after disclosure, and evidence that disclosure reduced the probability of visits by men. These results are useful for understanding how consumers respond to the voluntary disclosure of information, a decision faced by many firms.
    JEL: D22 D8 I12 L2 L83
    Date: 2021–07
  19. By: Epaulard Anne,; Zapha Chloé.
    Abstract: A European directive requires Member States to give firms access to preventive restructuring procedures. This paper assesses the interest of a procedure distinct from that for insolvent firms. It is based on the French experience, where a preventive procedure has coexisted with the more common restructuring procedure since 2006. The spatial and temporal heterogeneity of the Commercial Courts' decisions allows the identification of the causal impact of the conversion from the preventive procedure to the common one on the firm's survival chances. Using an (almost) exhaustive sample of preventive bankruptcy fillings over 2010-2016, we show that conversion reduces the probability of firm survival by 50 p.p., which corresponds to indirect bankruptcy costs of around 20% of the firm assets. Our interpretation is that the low restructuring rate under the common bankruptcy procedure may alarm some of the firm's stakeholders, especially its customers. This in turn aggravates the firm's difficulties and reduces its chances of restructuring under the common procedure. We provide some empirical evidence to support this interpretation. A distinct preventive procedure helps prevent this spiral.
    Keywords: Corporate Bankruptcy; Costs of Bankruptcy; Law and Economics; Preventive Restructuring.
    JEL: G33 K22
    Date: 2021
  20. By: Keith M. Drake; Robert He; Thomas McGuire; Alice K. Ndikumana
    Abstract: After receiving FDA approval, a generic drug manufacturer can launch “at risk” before conclusion of any patent infringement litigation, but it risks paying damages if it loses. The generic can eliminate the risk by waiting to launch until the appeals process is complete but waiting has downsides too. We develop a model that implies that, after the generic has won a district court decision, at-risk entry is generally profitable and will occur quickly unless the cost of waiting for the appeal is very low. We examine generic drug applications that have received FDA approval with “first-filer” status (which precludes later filing generics from entering before the first filer). In our data, the generic and brand usually settled prior to the conclusion of litigation. For the remainder, drugs that received FDA approval prior to a favorable district court decision were always launched at risk. Generics without FDA approval before a favorable district court decision launched upon approval unless the approval was close in time to the appeal decision or it had forfeited the first filer exclusivity (indicating a low cost of waiting). We also consider implications of at-risk entry for social welfare, arguing that at-risk entry is analogous to a “buy out” of the patent with favorable welfare implications in both the short run (consumer prices) and long run (efficient incentives for R&D).
    JEL: D22 I11 I18 O32
    Date: 2021–08
  21. By: Rimmer, Matthew (Queensland University of Technology)
    Abstract: Considering recent litigation in the Australian courts, and an inquiry by the Productivity Commission, this paper calls for patent law reform in respect of the right to repair in Australia. It provides an evaluation of the decision of the Full Court of the Federal Court in Calidad Pty Ltd v Seiko Epson Corporation [2019] FCAFC 115 – as well as the High Court of Australia consideration of the matter in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41. It highlights the divergence between the layers of the Australian legal system on the topic of patent law – between the judicial approach of the Federal Court of Australia and the Full Court of the Federal Court of Australia, and the endorsement of the patent exhaustion doctrine by the majority of the High Court of Australia. In light of this litigation, this paper reviews the policy approach taken by the Productivity Commission in respect of patent law, the right to repair, consumer rights, and competition policy. After the considering the findings of the Productivity Commission, it is recommended that there is a need to provide for greater recognition of the right to repair under patent law. It also calls for the use of compulsory licensing, crown use, competition oversight, and consumer law protection to reinforce the right to repair under patent law. In the spirit of modernising Australia’s regime, this paper makes a number of recommendations for patent law reform – particularly in light of 3D printing, additive manufacturing, and digital fabrication. It calls upon the legal system to embody some of the ideals, which have been embedded in the Maker’s Bill of Rights, and the iFixit Repair Manifesto. The larger argument of the paper is that there needs to be a common approach to the right to repair across the various domains of intellectual property – rather than the current fragmentary treatment of the topic.
    Date: 2021–08–09

This nep-reg issue is ©2021 by Christopher Decker. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.