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on Industrial Competition |
| By: | Xiaoyang He; Ralph Siebert |
| Abstract: | We consider a dynamic oligopoly on the beer market and study the differential effects of switching costs on product prices, market shares, and profits. Our demand estimation results show large differences in brand loyalty, and switching costs across customer income segments and beer brands. Our supply estimation results show that the low-quality firm experiences a higher competitive pressure on price since low-quality consumers are more price sensitive and switch more easily to the high-quality firm’s product than vice versa. The high-quality firm is better shielded from price competition, as its consumers are less likely to switch to the low-quality product. |
| Keywords: | consumer heterogeneity, differentiated products, dynamic oligopoly, dynamic pricing, loyalty, state dependence, switching costs |
| JEL: | L13 L25 L66 M21 M31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9065&r= |
| By: | Janssen, Maarten; Roy, Santanu |
| Abstract: | Asymmetric information about product quality can create incentives for a privately informed manufacturer to sell to uninformed consumers through a retailer and to maintain secrecy of upstream pricing. Delegating retail price setting to an intermediary generates pooling equilibria that avoid signaling distortions associated with direct selling even under reasonable restrictions on beliefs; these beliefs can also prevent double marginalization by the retailer. Expected profit, consumer surplus and social welfare can all be higher with intermediated selling. However, if secrecy of upstream pricing cannot be maintained, selling through a retailer can only lower the expected profit of the manufacturer. |
| Keywords: | asymmetric information; delegation; intermediary; product quality; signaling |
| JEL: | D43 D82 L13 L15 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15537&r= |
| By: | Kory Kroft; Yao Luo; Magne Mogstad; Bradley Setzler |
| Abstract: | We quantify the importance of imperfect competition in the US construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise due to markdown of wages in the labor market, or markup of prices in the product market, or both. Our analyses combine the universe of US business and worker tax records with newly collected records from US procurement auctions. We use this data to identify and estimate a model where construction firms compete with one another for projects in the product market and for workers in the labor market. The firms may participate both in the private market and in government projects procured through auctions. We find evidence of considerable wage- and price-setting power. This imperfect competition creates sizable rents, three-fourths of which is captured by the firms. The incentives of firms to mark down wages and reduce employment due to wage-setting power are attenuated by their price-setting power in the product market. |
| Keywords: | imperfect competition; monopsony; market power; rents; rent sharing; auction; procurement |
| JEL: | J31 J42 D44 L11 |
| Date: | 2021–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-695&r= |
| By: | Mauring, Eeva |
| Abstract: | I study limited price discrimination based on search costs. "Shoppers" have a zero and "nonshoppers" a positive search cost. A consumer faces a nondiscriminatory "common" price with some probability, or a discriminatory price. In equilibrium, firms mix over the common and the shoppers' discriminatory prices, but set a singleton nonshoppers' discriminatory price. Less likely price discrimination mostly benefits consumers. An individual firm's profit can increase in the number of firms. These results have important implications for regulations that limit price discrimination via reduced tracking (e.g., EU's GDPR, California's CCPA) and for evaluating competition online based on the number of firms. |
| Keywords: | consumer tracking; cookies; GDPR; Imperfect Competition; Online markets; price discrimination; sequential search |
| JEL: | D43 D83 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15729&r= |
| By: | Calzolari, Giacomo; Denicolò, Vincenzo |
| Abstract: | Contracts that reference rivals' volumes (RRV contracts), such as exclusive dealing or market-share rebates, have been a long-standing concern in antitrust because of their possible exclusionary effects. We show, however, that it is more profitable to use these contracts to exploit rivals rather than to foreclose them. By optimally designing RRV contracts, a dominant firm may, indeed, obtain higher profits than if it were an unchallenged monopolist. In the most favorable cases, it can earn as much as if it could eliminate the competition and acquire the rivals' specific technological capabilities free of charge. |
| Keywords: | Exclusive dealing; Exploitation; foreclosure; Market-share discounts |
| JEL: | D42 D82 L42 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15520&r= |
| By: | Grigolon, Laura |
| Abstract: | Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel-efficient cars. |
| JEL: | D11 D12 L62 M3 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15630&r= |
| By: | Bar-Isaac, Heski; Caruana, Guillermo; Cuñat, Vicente |
| Abstract: | We present a model of product design. In our framework, there is an inherent trade-off associated with choosing between broad or niche designs. More-targeted designs are able to excite specific types of consumers, but at the cost of alienating others. We adapt the familiar Salop (1979) circle by allowing firms to locate on the interior. In contrast to previous research that exogenously assumed extreme designs, we provide conditions that ensure extreme or intermediate designs in monopoly, monopolistic competition, and duopoly. We use the framework to qualify earlier findings in the literature and support the robustness of others. |
| JEL: | D42 D43 M31 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15708&r= |
| By: | Sami Alpanda (University of Central Florida, Department of Economics); Sarah Zubairy (Texas A&M University, Department of Economics) |
| Abstract: | In this paper, we analyze the business cycle implications of firms having oligopsony power in labor markets, as well as oligopoly power in product markets, within the context of a New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. Relative to the standard setup with monopolistic competition in both goods and labor markets, the strategic interaction between intermediate goods firms in the current setup results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter. These effects are strengthened in a strongly non-linear fashion as the number of firms in each sector decline. Oligopsonistic labor markets also render wage shocks expansionary, unlike in the standard setup. Results indicate that a secular increase in industry concentration would not only reduce the labor share of income, but also weaken the pass-through from firms' marginal costs to prices and from productivity increases to real wages. |
| Keywords: | Market power, oligopoly, oligopsony, New Keynesian DSGE model, entry-exit. |
| JEL: | E25 E32 L13 |
| Date: | 2021–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20210429-001&r= |
| By: | Azar, José; Vives, Xavier |
| Abstract: | We develop a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labor, and in which a firm's decisions are affected by its ownership structure. We characterize the Cournot-Walras equilibrium of an economy where each firm maximizes a share-weighted average of shareholder utilities-rendering the equilibrium independent of price normalization. In a one-sector economy, if returns to scale are non-increasing then an increase in "effective" market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one are attained as the number of sectors in the economy increases. When firms have heterogeneous constant returns to scale technologies we find that an increase in common ownership leads to markets that are more concentrated. |
| Keywords: | Antitrust Policy; Common ownership; corporate governance; Labor Share; macro economy; market power; oligopsony; portfolio diversification |
| JEL: | D43 D51 E11 L21 L41 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15499&r= |
| By: | Jens-Uwe Franck; Martin Peitz |
| Abstract: | In this article we present and critically evaluate the newly introduced section 19a of the German Competition Act. The provision applies to operators of two-sided platforms and networks that the Bundeskartellamt classifies as being of ‘paramount significance for competition across markets’. Using examples of previous abuse cases, we discuss which firms may eventually be the addressees of the new instrument. We analyse the list of prohibitable practices and point to normative uncertainties as regards the assessment of platform activities. We discuss the merits of the abridged judicial review. Finally, we consider the prospect of continuing fragmentation in the legal treatment of digital platforms in the internal market and assess the interaction with the Digital Markets Act as proposed by the European Commission. |
| Keywords: | competition law, abuse of market power, digital platforms, gatekeeper, Big Tech |
| JEL: | K21 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_297&r= |
| By: | Fabra, Natalia |
| Abstract: | Addressing climate change requires full decarbonization of our economies. Whether this objective is achieved at least cost for society hinges on good policy design. In turn, this calls for a thorough understanding of firms' and consumers' incentives in the presence of asymmetric information, the determinants of strategic interaction, and the impact of market design and market structure on the intensity of competition. Industrial Economics thus has much to contribute towards a successful Energy Transition, while benefiting from the exciting research opportunities it brings. In this paper, I survey some of the recent developments in this area. My focus is on the power sector, and in particular, on the regulatory and market design challenges triggered by the expansion of intermittent renewables with almost zero marginal costs. I conclude with some questions that merit further research. |
| Keywords: | auctions; Carbon Emissions; Competition; Dynamic pricing; Energy; invecstment; market design; market power; Storage |
| JEL: | L22 L94 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15705&r= |
| By: | Anderson, Simon P; de Palma, André |
| Abstract: | We link fundamental technological and taste distributions to endogenous economic distributions of prices and firm size (output, profit) generated under monopolistic competition with heterogeneous productivities as per recent Trade and IO models. We new derive properties for monopoly pricing and equivalence properties on demand curvature, profit functions, and marginal revenue, which we use to ensure distributions of cost, price, output, and profit can be matched under monopolistic competition. Demand and one distribution determine the rest. We provide constructive proofs to recover demand and all distributions from just two (e.g., price and cost distributions uncover demand form), and derive consistency conditions that distribution pairs must satisfy. We then extend to include mark-up distributions. |
| Keywords: | Mark-up; monopolistic competition; Monopoly; pass-through and demand recovery; Price and profit dispersion; Primitive and economic distributions |
| JEL: | F12 L13 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15731&r= |
| By: | Ekta Srivastava (Indian Institute of Management Kozhikode) |
| Abstract: | This research uses sustainable competitive advantage theory to develop a conceptual framework for the choice of persuasive advertising appeals. By integrating previous findings from advertising and consumer behavior literature, it develops testable research propositions. This research, if empirically proven, would uphold that the rational (vs. emotional) appeal of advertising has a positive influence on the adoption of competing brands in low-involvement situations. Additionally, it identifies two major antecedents to the choice of persuasive advertising appeals: product-level brand equity and advertising goal congruency. The research framework, if empirically validated, would guide firms in choosing a right advertising appeal for their products, leading to firm performance.Length: 3 pages |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:iik:wpaper:455&r= |
| By: | Jan De Loecker; Jan Eeckhout; Simon Mongey |
| Abstract: | We propose a general equilibrium economy with oligopolistic output markets in which two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching time-series on markups, labor reallocation and costs between 1980 and 2016, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure over this period yielded positive welfare effects from reallocation and selection, but off-setting negative effects from deadweight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify replicate cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation, and sales reallocation toward larger, more productive firms. |
| JEL: | E0 L1 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28761&r= |
| By: | Barrenho, Eliana; Gautier, Eric; Miraldo, Marisa; Propper, Carol; Rose, Christiern |
| Abstract: | We examine the effect of a physician network on medical innovation using novel matched patient-physician-hospital panel data. The data include every relevant physician and all patients in the English NHS for 15 years and physicians' workplace histories for more than 20. The dynamic network arising from physician mobility between hospitals over time allows us to separate unobserved physician and hospital heterogeneity from the effect of the network. We build on standard peer-effects models by adding cumulative peer behaviour and allow for particularly influential physicians ('key players'), whose identities we estimate. We find positive effects of peer innovation take-up, number of peers, and proximity in the network to both pioneers of the innovation and key players. Counterfactual estimates suggest that early intervention targeting young, connected physicians with early take-up can significantly increase aggregate take-up." |
| Keywords: | Innovation; medical practice; networks; peer-effects |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15515&r= |
| By: | Calvano, Emilio; Calzolari, Giacomo; Denicolò, Vincenzo; Pastorello, Sergio |
| Abstract: | We show that if they are allowed enough time to complete the learning, Q-learning algorithms can learn to collude in an environment with imperfect monitoring adapted from Green and Porter (1984), without having been instructed to do so, and without communicating with one another. Collusion is sustained by punishments that take the form of "price wars" triggered by the observation of low prices. The punishments have a finite duration, being harsher initially and then gradually fading away. Such punishments are triggered both by deviations and by adverse demand shocks. |
| Keywords: | artificial intelligence; Collusion; Imperfect Monitoring; Q-Learning |
| JEL: | D43 D83 L13 L41 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15738&r= |
| By: | Nocke, Volker; Strausz, Roland |
| Abstract: | We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as a pooling of quality signals generated in different markets. Such pooling yields a beneficial informativeness effect for the actions of a global player present in all markets, but also harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing, applying to platform markets, franchising, licensing, umbrella branding, and firms with team production. |
| Keywords: | Collective branding; free riding; Imperfect Monitoring; repeated games; reputation |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15732&r= |
| By: | McGowan, Danny; Nguyen, Huyen |
| Abstract: | We provide novel evidence that regulatory-induced deposit market competition provoked banks to enter the securitisation market. Exploiting the state-specific removal of interstate bank branching restrictions across U.S states between 1994 and 2006 as an exogenous source of deposit competition, we document four key results. First, the interstate branching deregulation leads to an intensification of deposit market competition. Second, this rise in the cost of deposits increases the probability that a bank operates an 'originate-to-distribute' model by 6%. Third, the securitisation effect holds across bank asset classes but is most pronounced for mortgages. Finally, the results are strongest among small and single state banks owing to their reliance on deposit funding. The evidence is consistent with theories where increasing the cost of deposits creates incentives for banks to use securitisation as a cheaper loan funding model. The findings highlight a hitherto neglected supply-side explanation for the rapid expansion in securitisation before the financial crisis and speak to the debate about banking competition policy. |
| Keywords: | competition,deregulation,OTD,securitisation |
| JEL: | G21 G28 K11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:62021&r= |
| By: | Sinan Gokkaya; Xi Liu; René M. Stulz |
| Abstract: | We open the black box of the M&A decision process by constructing a comprehensive sample of US firms with specialized M&A staff. We investigate whether specialized M&A staff improves acquisition performance or facilitates managerial empire building instead. We find that firms with specialized M&A staff make better acquisitions when acquisition performance is measured by stock price reactions to announcements, long-run stock returns, operating performance, divestitures, and analyst earnings forecasts. This effect does not hold when the CEO is powerful, overconfident, or entrenched. Acquisitions by firms without specialized staff do not create value, on average. We provide evidence on mechanisms through which specialized M&A staff improves acquisition performance. For identification, we use the staggered recognition of inevitable disclosure doctrine as a source of exogenous variation in the employment of specialized M&A staff. |
| JEL: | G14 G24 G30 G34 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28778&r= |
| By: | Craig Garthwaite; Rebecca Sachs; Ariel Dora Stern |
| Abstract: | Pharmaceutical innovation policy involves managing a tradeoff between high prices for new products in the short-term and stronger incentives to develop products for the future. Prior research has documented a causal relationship between market size and pharmaceutical research and development (R&D) activities. The existing literature, however, provides no evidence of how this relationship varies across markets. We investigate whether recent expansions in state Medicaid programs caused an increase in R&D. We find no evidence of a response, potentially a result of Medicaid’s low reimbursement for pharmaceuticals, suggesting low(er) price markets may have different dynamics with respect to innovation policy. |
| JEL: | H0 I1 L43 L5 O3 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28755&r= |
| By: | Mustaqiem, Yogie Abrar; Bastaman, Aam; Bross, Noverdi |
| Abstract: | Marketing is one of the main activities by entrepreneurs to maintain the viability of their business to grow and earn a profit. In addition, marketing knowledge is also very useful so that companies can compete and survive in the competition. This study aims to examine the effect of Value Creation and Excellent Service on Competitive Advantage, where Brand Equity and Brand Loyalty are the mediating variables. This research uses a descriptive quantitative approach. The population in this study were Bukalapak e-commerce users who live in the Jakarta and surrounding areas, and used a sample of 220 respondents. The method of analysis in this study uses Partial Least Square (PLS). The results of this study indicate that Value Creation has an effect on Brand Equity, Value Creation has an effect on Brand Loyalty, Excellent Service has an effect on Brand Equity, Excellent Service has an effect on Brand Loyalty, Brand Equity has an effect on Competitive Advantage, Brand Loyalty effects on Competitive Advantage, Value Creation. has no effect on Competitive Advantage, Excellent Service affects Competitive Advantage, Value Creation affects Competitive Advantage mediated by Brand Equity, Value Creation has no effect on Competitive Advantage mediated by Brand Loyalty, Excellent Service has an effect on Competitive Advantage mediated by Brand Equity, Excellent Service has an effect on Competitive Advantage Mediated Brand Loyalty. |
| Date: | 2021–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:4wkvm&r= |
| By: | Boris, Hirsch; Jahn, Elke J.; Manning, Alan; Oberfichtner, Michael |
| Abstract: | Using administrative data for West Germany, this paper investigates whether part of the urban wage premium stems from greater competition in denser labor markets. We show that employers possess less wage-setting power in denser markets. We further document that an important part of the observed urban wage premia can be explained by greater competition in denser labor markets. |
| JEL: | R23 J42 J31 |
| Date: | 2020–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:106728&r= |
| By: | Frédéric Marty (Université Côte d'Azur, France; GREDEG CNRS) |
| Abstract: | Les enjeux de l'encadrement concurrentiel de l'économie numérique conduisent à proposer d'ajouter, au travers du Digital Market Acts, au critère de l'efficacité des critères reliés à la contestabilité des marchés et à la loyauté des relations inter-entreprises. Sur le seul volet de l'application des règles de concurrence, la réalisation d'une balance des effets tend à s'effacer au profit de considérations d'inspiration plus ordolibérale, telle la responsabilité particulière de l'opérateur dominant. Alors que l'approche plus économique devait supplanter cette conception des règles de concurrence qui avait inspiré le modèle européen, il apparaît que la politique de concurrence revêt une nouvelle coloration ordolibérale dans le contexte de l'économie numérique. Ce document de travail se propose de retracer la dynamique historique de la politique de concurrence européenne en analysant les liens entre ordolibéralisme et approche par les effets, en insistant sur leur proximité originelle dans le néolibéralisme des années 1930 et sur leur divergence à partir du développement de la Seconde Ecole de Chicago dans les années 1950. Il discute également l'hypothèse formulée par le courant Law and Political Economy selon laquelle ces deux approches s'intègrent dans un même ensemble. Les divergences quant à la place de l'efficacité par rapport aux enjeux de répartition, de souveraineté économique et de libertés économiques et politiques constituent de puissants éléments de différenciation. |
| Keywords: | économie et droit de la concurrence, économie numérique, ordolibéralisme, efficacité, loyauté |
| JEL: | K21 L41 L42 B21 B25 B52 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2021-22&r= |
| By: | Caroline Dauenhauer (HHL Leipzig Graduate School of Management); Jens K. Perret (International School of Management) |
| Abstract: | Low involvement goods per definition do not require the customer to invest a significant amount of will-power into the purchasing decision. Thus, buying decisions in this context are primarily driven by the intuitive mind and relevant decision heuristics. This study focuses on the anchor and the framing heuristic, their combined effect on the willingness-to-buy of low involvement goods and especially their interaction effect. It is established that of the two heuristics considered, the framing effect is the more relevant with an impact roughly 2.5 times the size of the anchor effect. An interaction effect between the two heuristics exists even though it is only weakly significant and only marginally impacts the willingness-to-buy, reporting an effect size of one fifth of the anchor effect. Although limited in its scope the weakly significant interaction effect shows that in certain retail environments price reduction have a more pronounced effect than in others. The study provides relevant insights from a theoretical academic perspective and offers advice to marketing practioners, in particular advertising experts. |
| Keywords: | Purchasing; Behavior; Price Anchor; Framing; Prospect Theory; Discounter |
| JEL: | C21 D91 M31 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:eiiwdp:disbei299&r= |
| By: | Wang, Ao (University of Warwick) |
| Abstract: | Applied researchers most often estimate the demand for dierentiated products assuming that at most one item can be purchased. Yet simultaneous multiple purchases are pervasive. Ignoring the interdependence among multiple purchases can lead to erroneous counterfactuals, in particular, because complementarities are ruled out. I consider the identification and estimation of a random coefficient discrete choice model of bundles, namely sets of products, when only product-level market shares are available. This last feature arises when only aggregate purchases of products, as opposed to individual purchases of bundles, are available, a very common phenomenon in practice. Following the classical approach with aggregate data, I consider a two-step method. First, using a novel inversion result in which demand can exhibit Hicksian complementarity, I recover the mean utilities of products from product-level market shares. Second, to infer the structural parameters from the mean utilities while dealing with price endogeneity, I use instrumental variables. I propose a practically useful GMM estimator whose implementation is straightforward, essentially as a standard BLP estimator. Finally, I estimate the demand for Ready-To-Eat (RTE) cereals and milk in the US. The demand estimates suggest that RTE cereals and milk are overall complementary and the synergy in consumption crucially depends on their characteristics. Ignoring such complementarities results in misleading counterfactuals. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1351&r= |
| By: | Lóránth, Gyöngyi; Morrison, Alan; Zeng, Jing |
| Abstract: | We show that a firm can use its organizational structure to commit to an investment strategy. The firmdelegates sequential search and project management tasks to a manager. Ex post, the firm turns away projects that generate high project management rent. However, because the expectation of such rent serves to defray the manager's search cost, investment might be optimal ex ante. A leveraged subsidiary mitigates this time-inconsistency problem by creating ex post risk-shifting incentives that counteract underinvestment. Subsidiaries are more valuable for projects with costly search, intermediate management costs, and returns that are uncorrelated with the existing business. |
| Keywords: | branch; multinational business; Organizational structure; subsidiary |
| JEL: | G32 G34 L22 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15602&r= |
| By: | Victoria R. Marone; Adrienne Sabety |
| Abstract: | We study the welfare effects of offering choice over financial coverage levels––"vertical choice''––in regulated health insurance markets. Though the efficient level of coverage, which trades off the value of risk protection and the social cost from moral hazard, likely varies across consumers, we emphasize that this variation alone is not sufficient to motivate choice. When premiums cannot reflect individual costs, consumers may not select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay for insurance have a higher efficient level of coverage. Using administrative data from a large public employer, we investigate this condition empirically and find that the welfare gains from vertical choice are either zero or economically small. |
| JEL: | D82 G22 I13 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28779&r= |