Crestor, an important but controversial cholesterol-lowering drug, is contraindicated for use by senior and Asian patients. In this paper, we exploit this fact and a unique doctor-level prescription and advertising exposure data for statin drugs to examine the hypothesis of informative advertising. Our tests are based on the intuition that, if advertising is informative, it should lead to fewer contraindicated matches: Doctors should prescribe the drug less frequently to patients with characteristics for which the drug is contraindicated. We find strong evidence for the informative-advertising hypothesis: The match quality signaled by doctor-level advertising for contraindicated patients is significantly inferior to that signaled for the other patients. Our results are robust to the potential endogeneity in doctor-level advertising.
Semi-parametric Estimation of the Stochastic Utility Model of Choice: the Case with Dynamic Adverse Selection, 2016. (with Jeremy Fox and Haiyan Liu)
Multiunit Uniform-price Open Auctions vs. Posted Price: The Timing of Bids and Transaction Efficiency, 2016.
Prosper.com, a leading peer-to-peer online lending platform, switched its selling mechanism from multiunit uniform-price descending auctions to open fixed rates at the end of 2010. Our analysis of its listing and bid data shows that there is 1) a significant increase in its transaction efficiency associated with the policy switch; and 2) strong evidence of lenders herding and strategically delaying bidding in the auctions, and, to a significantly lesser extent, under fixed rates. Analysis of game-theoretic models of the two selling mechanisms shows that the interplay between lenders' herding and strategic timing of entry in the two dynamic selling mechanisms can explain the relatively higher transaction efficiency under open fixed rates, as well as other stylized patterns in bidding and funding outcomes.
Expectation-Based Reference-Dependent Preferences: Evidence from the Used Car Retail Market, 2016. Submitted. (with Haiyan Liu).
This paper empirically tests the expectation-based reference-dependent preference theory, by exploiting a large panel of used-car daily listings from a leading automobile classified website. The unique features of the paper's empirical strategy include: 1) it explicitly identifies consumers' reference points as their expectations; 2) it uses a unique panel dataset on the non-negotiable daily listing prices for cars advertised by a large national dealership to pin down the prices that car buyers expected and the actual prices; and 3) its tests for loss aversion consider the problem that price changes may affect cars' perceived quality or be correlated with the actual unobserved quality. The paper finds that---controlling for a car's actual price, its detailed attributes, the competitive environment and a rich set of fixed effects---an unanticipated price increase (drop) significantly lowers (increases) the car's daily sale probability; the estimated reference-price effects are weaker in the cases when consumers were less likely to recall the previous listing prices; and, although the magnitude of the average reference-price effect is significantly larger for price increases than for decreases, the asymmetry in the effects is statistically more significant for cars of older vintage or with higher mileage, suggesting that the asymmetry in the reference-price effects is driven partly by price decreases being bad news for cars' unobserved quality.
Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning. First version: 2012, new version: 2015.
Resubmitted, at the Management Science. (with Hong Luo and Jing Xia).
Pricing idiosyncratic products is often challenging because the seller, ex ante, lacks information about the demand for individual items. This paper develops a model of dynamic pricing for idiosyncratic products that features the optimal stopping structure and a seller that learns about item-specific demand through the selling process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the demand information that the dealer obtains through the initial assessment and subsequent learning in the selling process. With the dealer’s average net profit per car in the estimation sample being around $1150, the initial assessment is worth around $101, and the subsequent learning in the selling process helps improve the dealer’s profit by at least $269. These estimates suggest a potentially high return to taking the “information-based” approach to pricing idiosyncratic products.
Estimating Production Functions with Robustness Against Errors in the Proxy Variables, first version 2011, new version 2017. (with Yingyao Hu and Yuya Sasaki). Revise and Resubmit, at the Review of Economic Studies.
This paper proposes a new approach to the identification and estimation of production functions. It extends the literature on structural estimation of production functions, started by the seminal work of Olley and Pakes (1996), by relaxing the scalar-unobservable assumption about the proxy variables. The key additional assumption needed in the identification argument is the existence of two conditionally independent proxy variables (e.g. the investment and the material input). The assumption seems reasonable in some important cases. The proposed estimation method is straightforward to apply, and can be conveniently augmented to deal with measurement errors in the input variables.
Is Advertising Informative? Evidence from Contraindicated Drug Prescriptions, 2012. (with Matt Shum and Wei Tan).
Short-Run Needs and Long-Term Goals: A Dynamic Model of Thirst Management (with Ahmed Khwaja and K. Sudhir), Marketing Science, 2015.
Beverage consumption occurs many times a day in response to a variety of needs that change throughout the day. In making their choices, consumers self-regulate their consumption by managing short run needs (e.g., hydration and mood pickup) with long-term goals (e.g., health). Using unique intra-day beverage consumption, activity and psychological needs data, we develop and estimate a model of high frequency consumption choices that accounts for both intra-day changes in short run needs and individual level unobserved heterogeneity in the degree of self-regulation. A novel feature of the model is that it allows for dynamics of consumption and stockpiling at the level of product attributes. The model is used to evaluate introduction of new products in the beverage category and gain insight into the linkage between self-regulation and excess consumption. Broadly, the modeling framework of balancing short run needs with long-term goals has wide ranging applications in choices where long term effects are gradual (e.g., nutrition, exercise, smoking and preventive health care).
What Makes Insurance Companies Voluntarily Share Their Proprietary Customer Information. 2011.
This paper provides a novel game-theoretic explanation for why voluntary information-sharing arrangements in the insurance and banking industry can be self-enforcing---namely, why the information exchanges, organized as independent for-profit corporations, can count on insurance companies and banks to continue to report their private customer information to them.
Posted Price and Haggling in the Used Car Market. 2009. (new version coming soon.)
Though haggling has been the conventional way for auto retailers to sell cars, the last two decades have witnessed the systematic adoption of no-haggle prices by many large dealerships, including the largest used car dealership, Carmax. This paper develops a structural empirical model to estimate sellers' profits under posted price and haggling, and investigates how market conditions affect sellers' optimal pricing formats. The model incorporates a simple class of bargaining mechanisms into the standard BLP model. With the extension, the product-level demand system is estimated using data with only list prices, and the unobserved discounts obtainable in haggling are also recovered in the estimation. The counterfactual experiments based on the estimates yield a few interesting findings. First, dealers' adopted pricing formats seem superior to the alternative ones. Second, dealers enjoying larger market power through vertical differentiation and carrying a large number of models are more likely to have posted price as their optimal pricing format.
Work in Progress
Incentive Contracts and Dynamics in the Productivity of Service Employees, (with K. Sudhir)
A Model of Dynamic Cross-selling with Heterogeneous Products and Customers, (with K. Sudhir).
Peer Effects in a Dynamic Workforce, (with K. Sudhir).
Employee Turnover and Job Performance, (with Karam Kang and K. Sudhir)