Research

Working Papers

1. Strategic Responses to Used Goods Markets: Airbus and Boeing, (Online appendix) 2016 (Revise & Resubmit at AEJ: Micro)

In this paper, I present a dynamic oligopoly model of Airbus, Boeing, and used aircraft markets and employ a unique dataset to examine the interaction between innovation, production, and the used goods markets. My findings show that firms increase new product developments in response to used goods markets. Moreover, R&D subsidies lead to a delay in in- novation while production subsidies have a minor effect on in- novation. However, the R&D subsidies are less cost-effective than the production subsidies. Finally, a change in market structure from a duopoly to a monopoly decreases innovation in the presence of used goods markets.

2. Does Competition Increase Quality? Evidence from the U.S. Airline Industry, 2017 with Ricard Gil (Submitted)

In this paper we study the impact of competition on the provision of quality in the US airline industry. Using changes in competition triggered by LCC entry and airline mergers, we find that an increase in competition increases the provision of quality of major incumbent and non-merging airlines by increasing the number of flights and seats available in a route as well as improving their on-time performance with less frequent cancellations and flight delays. Contrary to previous findings in the literature, our evidence suggests that an increase in competition unambiguously increases consumer surplus since prices go down and quality goes up.

3. Relational Contracting in the Airline Industry, 2018 with Ricard Gil and Giorgio Zanarone (Revise & Resubmit at Management Science)

In the airline industry, ex-post adaptation of flight schedules is necessary in the presenceof bad weather conditions. When major carriers contract with independent regionals,conflicts over these adaptation decisions typically arise. Moreover, the celerity of needed adjustments requires that adaptation be informal, and hence enforced relationally. In thispaper, we theoretically analyze, and empirically test for, the importance of relationaladaptation in the airline industry. Our model shows that for relational contracts to be selfenforcing,the long-term value of the relationship between a major and a regional airlinemust be at least as large as the regional’s cost of adapting flight schedules across jointroutes. Thus, when facing a shock that forces it to terminate some routes, the major is morelikely to preserve routes outsourced to regional airlines that have higher adaptation costs,as the value of the major’s relationship with those regionals is larger. We analyze theevolution of U.S. airline networks around the 2008 financial crisis, and we find thatconsistent with our theoretical predictions, regional routes belonging to networks withworse average weather, and hence higher adaptation costs, were more likely to surviveafter the shock.

4. Competition and Price Dispersion: Product Differentiation Matters, 2016 with Leilei Shen (Revise & Resubmit at European Economic Review)

We analyze the effect of competition and market structure on price dispersion in the airline industry between 1993 and 2013. First, we document that the effect of competition on price dispersion has changed over time. Gerardi and Shaprio (2009) found that competition reduces price dispersion for a sample form 1993- 2006 while we find that this relationship does not longer hold in more recent data. We argue an omitted variable are likely responsible for the negative effect of competition on price dispersion documented by Gerardi and Shaprio (2009) to disappear. Airlines likely gained significant market power in this time period. In particular, fares at the 90th percentile show no significantly different impact of competition than fares at the 10th percentile. Second, our finding suggests that competition increases price dispersion of one-way trip while reduces price dispersion of round-trip. Third, we extend the existing literature by showing that the direction of travel matters for both price dispersion and average prices.

5. One for All or All for One: What Does the Category Captain Do?, 2018 with Leilei Shen and Suman Basuroy and Sri Beldona (Submitted)

Category management is challenging for retailers that sell thousands of products across hundreds of categories and often lack the resources and capabilities to manage all of them intensively. Picking one supplier to be the category captain (CC) to manage the category – including rival’s brands – through pricing and merchandising is a recent retail management initiative that aims at improving a retailer’s overall performance in a product category. Despite tremendous retailer and manufacturer interest in CC and its adoption in the industry, much uncertainty exists about the consequences of CC. This paper empirically examines the role of CC by utilizing a unique data set on ready-to-eat cereals category, characterized by high concentration and market power, before and after the transition into category captain management. We find that after the transition, CC acted to improve its own market shares and those of private labels. A private label is designating a product under the name of the retailer rather than the name of the manufacturer and often offers higher profit margins for the retailer. In addition, CC improved its market shares by focusing on its core competency brands at the expense of some of its smaller brands while CC improved private labels’ market shares through an uniform increase across all private label brands. Using estimates from a structural model, we find consumer welfare is increased by 8.8% after the transition into category captain management.

6. When do Firms Offer Higher Product Quality? Evidence from the Allocation of Inflight Amenities, 2016 with Qihong Liu and Nicholas Rupp (Submitted)

This study examines when firms offer higher product quality. We measure product quality by examining four different in-flight amenities provided by airlines: Wi-Fi, seat size, entertainment, and seat power. Using daily flight level data for over 800 routes and spanning nine weeks in the third quarter of 2015, we observe that carriers were actively retrofitting aircraft to expand their in-flight amenity offerings. We find significantly higher product quality (Wi-Fi, entertainment, and power) on more competitive routes. While considerable research has been done on airline pricing, less well known is how airlines pursue other revenue streams from ancillary services. Recent work by Brueckner et al. (2015) explores the role of baggage fees in airline pricing. We examine additional revenue streams provided by Wi-Fi and entertainment in-flight amenities. We find that carriers are lowering the posted base ticket prices on routes with Wi-Fi and entertainment and then charging passengers for using these amenities. The IV price estimates reveal that the magnitude of the posted fare reduction is larger than the additional revenue generated from the in-flight amenity.

7. Backward Compatibility in Two-Sided Markets, 2015 with Richard Gretz and Suman Basuroy (Submitted)

Often new hardware is backward compatible with software designed for previous gener- ations of hardware. For example, PlayStation 2 can play games designed for PlayStation. Our study contributes to the growing literature on dynamic discrete choice- demand esti- mation for consumer durables by incorporating backward compatibility into a framework with heterogeneous forward looking consumer who can multi-home (purchase more than one piece of hardware). We apply it using data from the home video game industry on seven consoles and their games spanning two product generations from 1995 – 2005. We use our estimates to obtain the marginal value of console backward compatibility on hardware share. Our results suggest backward compatibility offers hardware firms a significant advantage over non-backward compatible competitors. However, backward compatibility increases the canni- balization of the associated previous generation hardware – an important factor for managers considering profitability throughout the hardware lifespan. Also, we assess the effect of back- ward compatibility on hardware adoption for different consumer inventories. Interestingly, we find backward compatibility has the greatest effect on non-adopters of the previous generation hardware.

8. Help or Hindrance? U.S. Aid on Growth , 2017 with Leilei Shen (Revise & Resubmit at Applied Economics Letters)

We distinguish between U.S. aid and non-U.S. aid and study the effects on growth in recipient countries. Our analysis exploits time variation in aid due to changes in the supply of U.S. aid and cross-sectional variation in a country's tendency to receive any U.S. aid. We find that U.S. aid has a positive effect on growth. In particular, U.S. economic aid has a positive effect on growth while U.S. military and food aid have no effect on growth. There is also no evidence of U.S. aid crowding out aid from other countries.

9. The Effect of Carry-on Luggage Fee on Competing Carriers' Price and Service Quality, 2018 with Lei He and Qihong Liu (Submitted)

In 2010 Spirit airlines announced that it would start charging passengers for carry-on bag- gage. Using a generalized diff-in-diff estimation, we examine the impact of Spirit’s policy change on its rivals’ prices. Our results show that Spirit’s rivals reduce their prices by about 5% after Spirit’s baggage fee policy. Looking further on the price distribution, we find that the policy impact is larger for prices at the 50-percentile, relative to prices at the 80-percentile and 20- percentile. Next, we take into account the outsourcing status of Spirit’s rivals, i.e., whether they operate their own flights or outsource to regional airlines. Our results show that in response to Spirit’s carry-on baggage fee policy, relative to carriers which do not outsource, carriers who outsource reduce their ticket prices significantly more. Due to the common nature of the out- sourcing contracts between major and regional carriers, our results suggest that major carriers, facing Spirit’s policy change, shift much of the burden of price reduction to the regional carriers they contract with.

10. Does Multi-Market Contact Spur Price Discrimination?, 2018 with Donggeun Kim

We study the effect of tacit collusion on price discrimination in the U.S. airline industry. Using panel data from 1993 to 2017, we find that tacit collusion driven by multi-market contact has a positive effect on price as discussed in the existing literature but a negative effect on price dispersion. This result comes from a bigger increase in the 10th percentile but a smaller increase in the 90th percentile of price distribution. Firms collude to raise prices charged to the lower bound more than the upper bound. This outcome is consistent with both mutual forbearance hypothesis and brand loyalty theory. We also find heterogeneous effects of collusion on the ticket price conditional on the number of market unsold tickets, and show that the airlines have a motivation to tacitly collude with high level of multi-market contact but might not actively get involved in collusion with poor market conditions.

11. Returns to Job Satisfaction in the Presence of Horizontal Mismatch, 2016 with Qi Ge and Eunjung Jordan and Leilei Shen (Submitted)

In this paper we study the relationship between job satisfaction and wages using data from the 2013 Scientists and Engineers Statistical Data System (SESTAT). Job satisfaction is positively correlated with wages, however, this effect diminishes as job satisfaction increases, suggesting more satisfied workers are not earning more. This non-monotonic effect is particularly strong in the 20-39 age group. We find that one standard deviation increase in job satisfaction from the 25th percentile is associated with a 12.3% increase in wages, while one standard deviation increase in job satisfaction from the 75th percentile is associated with a 7.3% change in wages. These patterns are consistent with a search and matching model that imposes a negative search cost for higher wages, but less reward in higher wages from a concave utility function in wages.

12. I am Jane. Do I Pay More in the Housing Market?, 2018 with Sean Oconnor and Brent Norwood and Leilei Shen (Submitted)

Do women pay more than men for similar housing? We utilize repeat-sales housing transactions drawn from ZTRAX to examine if gender gaps exist in house purchase prices and loan to price ratios. Our analysis utilizes repeat-sales and include house and neighborhood-by-time fixed effects to control for unobserved differences in the quality of houses and their associated neighborhoods. We find that female homebuyers pay a 2% premium on average. In addition, female homebuyers’ loan to price ratio is 3 percentage points lower than that of male buyers. We also show that female buyers pay less when the seller is female than when the seller is male. However, the gender price differentials and loan-to-price differentials are disappearing in more recent years. Our estimates have implications for the levels and persistence of gender differences in homeownership and wealth accumulation.

13. Do Female Professors Survive the 19th-Centry Tenure System? Evidence from the Economics Ph.D. Class of 2008, 2016 with Susan Chen and Qihong Liu

(Media Coverage: INSIDE HIGHER ED)

This study examines early career outcomes (i.e., tenure and promotion) of the Economics Ph.D. class of 2008. We find that relative to males in the same cohort, female economists are less likely (by 9.6%) to have received tenure and promotion during the first eight years since graduation. The gender gap becomes more pronounced, or 12%, among individuals of foreign origins working in the U.S. In addition, we find a similar gender bias regarding whether an individual remains in academia since the initial job placement in 2008. In particular, female faculty, particularly international women working in the U.S., are more likely to quit than their male counterparts in their post-doctoral careers. Compared to the existing literature, our sample includes a wide range of 57 U.S. economics programs, rather than a handful of top programs. Furthermore, we examine a new and growing dimension of the labor market for economics Ph.D.'s, i.e., women and internationals.

Work in Progress

1. “Subcontracting and Tacit Collusion in the Airline Industry” with Joe Mazur

2. “Relational Adaptation within and between Firms: Evidence from the US Airline Industry” with Ricard Gil and Giorgio Zanarone

3. “Spillover Impact of Airline Bankruptcy: Evidence from the Housing Market in Smaller Communities” with Qi Ge and Sean Oconnor

4. “Discrete Game Model of Heterogeneous Competition Effects” with Byoung Park

5. “Air Defense R&D: Technological Spillovers to the Civil Aircraft Industry”

6. “Airline Fuel Costs: Hedging and Pass-Through” with Long Shi and Qihong Liu

7. "The Effect of Environmental Regulation in Aviation Industry: A Dynamic Demand Estimation" with Federico Ciliberto

Publications

Does Job Satisfaction Increase Sales and Customer Satisfaction? Evidence from Retail Banking in South Korea, with Ricard Gil and Inhyouk Koo, The B.E. Journal of Economic Analysis & Policy, Vol.17, Issue 3 (Jul 2017)

In this paper we investigate the relationship between job satisfaction and worker productivity. We theoretically demonstrate that even when job tasks are not interdependent across workers, job satisfaction of an individual and coworkers may decrease or increase worker productivity. Our data contains personnel records from a survey in a retail banking in South Korea. We show that higher job satisfaction is positively associated with higher productivity levels, while the standard deviation of job satisfaction at the branch level is negatively associated with productivity. When correcting for potential endogeneity between productivity and job satisfaction, we find that while higher job satisfaction may increase short term productivity through sales to existing customers, excessive sales to existing customers may hurt customer satisfaction and willingness to recommend in the long run.

The Impact of IT-Industry Development on the Korean Economy, with Youngsub Chun, Economic Journal, (in Korean), (2005)

Recent Drafts available upon request