Network Structure and Efficiency Gains from Mergers: Evidence from the U.S. Freight Railroads [Sep. 2021]
Abstract: This paper studies the role of networks in the effect of mergers by examining mergers that took place from 1985 to 2005 in the U.S. freight railroad industry. Markets are interdependent in a network, hence the network structure or topology affects how much firms benefit from economy of scope. I estimate an optimal transport network model that incorporates firms’ decisions about pricing, routing, and allocation in multiple origin–destination markets, allowing these markets to be interdependent at the cost minimization stage. Simulation of historical mergers shows that on average shipment cost decreased by 15.49%. Of the total cost reduction, 26% is due to misallocation of resources before merger, while 74% is due to network changes and re-optimization of routing. The full model reveals the complete cost and markup changes in all local markets following each railroad merger. To guide policy implementation, I provide prescriptive statistics regarding centrality measures of a merged network: averaging over all mergers, an increase in degree centrality of 1 results in a 0.6-percentage-point extra reduction in cost and a 0.2-percentage-point extra increase in markup after merger.
A Structural Empirical Model of R&D, Firm Heterogeneity, and Industry Evolution, joint with Daniel Yi Xu [Feb. 2022] (Accepted at JIndE)
Abstract: This paper develops and estimates a dynamic industry equilibrium model of R&D, R&D spill-overs, and productivity evolution of manufacturing plants in the Korean electric motor industry from 1991 to 1996. Plant-level decisions for R&D, physical capital investment, entry, and exit are integrated in an equilibrium model with imperfectly competitive product market. We use a Simulated Method of Moments estimator to estimate the cost of R&D, the magnitude of the R&D spill-over, adjustment costs of physical investment, and the distribution of plant scrap values. The recent approximation method of Weintraub, Benkard and Van Roy (2007) is applied. Counterfactual experiments of two policies are implemented. Increasing the elasticity of substitution between products increases plant innovation incentives and the plant turnover. In contrast, a lower entry cost does not change industry productivity. Although the market selection effect is strengthened by higher firm turnover, the plant’s incentives to invest in R&D are reduced.
Collateral Damage: The Impact of Shale Gas on Mortgage Lending, joint with James Roberts, Christopher Timmins, and Ashley Vissing [Sep. 2021]
Abstract: We analyze mortgage lenders’ behavior with respect to shale gas risk during the period of the U.S. shale gas boom, which coincided with fluctuations in the U.S. housing market and increased scrutiny in the lending industry. Shale gas operations can place affected houses into technical default such that Fannie Mae and Freddie Mac are unable to maintain them in their portfolios. We find that lenders change from being willing to pay $814 on average to avoid one unit of shale risk before the financial distress in 2008, to $3,137, or 1.6% of profit earned on an average mortgage, afterwards. Our approach provides an alternative to the traditional property value hedonic measurement of the disamenities associated with shale gas development by looking at the decisions of mortgage professionals.
Mortality Decline, Retirement Age, and Aggregate Savings (with Sau-Him Paul Lau), Apr 2016, Macroeconomic Dynamics 20, no. 3: 715-736.
Optimizing the Scale of Markets for Water Quality Trading (with Martin W. Doyle, Lauren A. Patterson, Kurt E. Schnier, and Andrew J. Yates), Sep 2014, Water Resources Research 50.9: 7231-7244
Economic Incentives to Target Species and Fish Size: Prices and Fine-Scale Product Attributes in Norwegian Fisheries (with Frank Asche and Martin D. Smith), Dec 2014, ICES Journal of Marine Science 72, no. 3: 733-740.