Regulation and Responsible Innovation (with Jorge Lemus and Nicolás Figueroa), R&R at The Journal of Law, Economics and Organization.
Who should investigate potential product harms: firms through ``Responsible Innovation'' (RI) or regulators? Firms could investigate potential harms early on, using resources otherwise allocated to innovation. Regulators, by contrast, typically assess products only after they reach the market. We characterize the efficient solution and show that RI is not always efficient, that is, regulators sometimes need to bear the full burden of investigating the harm. We then examine whether the efficient solution is implementable in a dynamic game where a profit-maximizing firm chooses how much to invest in RI, and a regulator, only concerned about consumers, can levy fines, use the precautionary principle, and investigate the harm of products that are in the market. Our main insights are twofold. First, implementing efficiency requires fewer constraints on the regulator when the harm is very small or large, but more constraints when the harm is moderate. Second, efficient ex-post regulation deters firms from engaging in responsible innovation, so to encourage it, regulatory decisions must be distorted. Effective regulatory regimes must balance incentives for responsible innovation with necessary oversight.
This paper investigates the impact of an intervention in Chile's fraudulent sick leave market, where 176 physicians were sanctioned for excessive sick leave certificate issuance. Physician decisions are influenced by patient needs and their own incentives, often leading to suboptimal healthcare practices. The study aims to determine if audits and sanctions can alter physician behavior, whether non-sanctioned doctors experience spillover effects, and how these changes affect patient behavior. Using data from approximately 22 million sick leaves issued between January 2018 and October 2022, the study employs a difference-in-differences (DiD) approach alongside a regression discontinuity in time (RDiT) model. Results indicate a significant decline in sick leave issuance among sanctioned doctors, with a 40.49% decrease observed in the DiD model compared to matched physicians, while the RDiT model shows reductions between 50.12% and 34.46%. Additionally, evidence suggests spillover effects, as non-sanctioned doctors’ sick leave issuance decreased by 14.19% to 9.33% post-intervention. On the demand side, high-receiving patients exposed to sanctioned doctors experienced an 18.94% reduction in sick leaves, translating to estimated savings of approximately $12.6 million for the public insurer. However, the findings indicate that these patients may substitute sick leaves imperfectly, revealing potential unintended consequences of the intervention. The paper concludes by suggesting further research into the channels of information transmission and the broader impacts on firm productivity.
"Lending in Contests" (with Jorge Lemus).
We examine how strategic lending affects equilibrium outcomes in contests between resource-constrained participants. We develop a three-player model with two firms competing for a prize and a profit-maximizing lender. Our results show that lending provision critically depends on the resource asymmetry between contestants. When resources are relatively balanced, the lender maximizes profits by lending to both contestants. As the asymmetry increases, the lender often benefits from lending exclusively to the more constrained contestant. Different lending mechanisms---uniform interest rates, price discrimination, and lump-sum financing---yield distinct competitive dynamics. These findings have important implications for market design in capital-intensive competitions.
We study a market in which the buyer has no information about product quality, while the seller has private probabilistic information about it. Buyers observe price and can procure an inspection, which provides valuable information about the good for sale. With costless inspections, there is no separating equilibrium. We then show that when information acquisition is costly, there is a separating equilibrium that satisfies the intuitive criterion, in which high prices signal high quality and furthermore, the dynamic separating equilibrium showing higher separating prices than the static one. Finally we discuss the implications of time-on-the-market on separating equilibria. Specifically, when there is only one asset on sale over both periods (therefore both price and time-on-the-market can signal quality) there is no separating equilibrium even if single-crossing is satisfied. The key to this result is that the second-period buyer cannot observe why the asset did not sell in the first period. Notably, the failure to sell can be attributed to overpricing or an unfavorable inspection outcome. Therefore the copycat behavior is more attractive to the poor-quality seller because he benefits more from an increase in buyer beliefs than his high-quality counterpart. Allowing only the first-period buyer to acquire information on quality, we show the existence of a separating equilibrium in which high prices and time-on-the-market signal high quality.