"Location Restrictions and Resident Externalities: Evidence from the Washington State Recreational Cannabis Industry" (Job Market Paper)
The welfare impact of land-use regulations, such as location restrictions for businesses, generally involves a trade-off between market growth and the harm on affected parties and is ultimately an empirical question. I study how location restrictions near sensitive-use areas affect recreational cannabis retailers' decisions in Washington State and their effects on residents, consumers, and taxation. Using property sales data, I first show reduced-form evidence that cannabis retailers act as a disamenity when close to homes and to their assigned schools. Then, I develop a structural model of consumer demand and firm entry and location and estimate it on a comprehensive dataset of retail sales and inventory transfers. The model incorporates the various market regulations as constraints on the firms’ strategic decisions. I use the estimated model to conduct counterfactual land-use policies. Relaxing buffers around sensitive-use areas, like schools, from 1000 ft down to 100 ft benefits consumers and harms residents but, on net, results in welfare and tax revenue improvements.
“A Discrete Choice Model of Housing Demand and Supply for (Dis)Amenities”
Amenity provision and regulation is a perennial policy debate topic among most localities' highly heterogeneous residents, and measuring the marginal or the average willingness to pay for an amenity may conceal important information about residents' valuations when an amenity has localized and diverse impacts. To this end, I develop a discrete-choice, static model of housing demand and supply, and estimate it with property sales and mortgage applicants data from King County, Washington. Allowing for heterogeneous preferences and residents' endogenous responses, I incorporate the role of cannabis retailers as a potential (dis)amenity to households. I then compute the welfare impact of various alternative location configurations for retailers that arise from the counterfactual land use policies studied in Larsen (2020a).
“Change and Continuity: The Role of Learning versus Inertia in Vertical Relationship Formations in a New Market”
Using a rich dataset of inventory transfers for the Washington State recreational cannabis industry, I assemble a novel dataset of vertical relationships between producers and retailers starting from the market’s inception. I study the factors that make or break vertical relationships. In the early stages of the market, I find substantial structural state dependence within vertical relationships, suggesting firms are reluctant to sever their existing business links due to poorly performing products and serves as a cautionary tale against making assumptions about firms when not in equilibrium. As the market reaches an equilibrium, product performance becomes the leading factor for producer-retailer matching. A theoretical model of firm learning with link formation frictions is provided to rationalize these findings.
“Obtaining Diversion Ratios from Churn Data”, with David Sibley
In merger analysis, the diversion ratio has become a key analytical tool. In practice, it is often difficult to estimate. As an approximation, ratios constructed from churn data are often used as approximations to true diversion ratios. In this paper, we propose a definition of churn based on a differentiated Bertrand demand system and then derive the relationship between churn ratios and diversion ratios. We find that churn ratios are poor approximations to the true underlying diversion ratios. A proof and simulations are provided.