Research

Working Paper

• Dynamic Evaluation of Preference Program in Public Procurement Market (Job Market Paper)

This paper implements a dynamic entry and bidding model to evaluate the long-term benefits of small business (SB) preference programs in repeated auctions. I find descriptive evidence that experience in submitting bids and winning contracts lowers entry and project completion costs of federal highway procurement auctions in California. This motivates a dynamic entry and bidding model with three state variables: entry experience, work experience, and backlog. The estimation results indicate a diminishing learning effect on entry costs. This implies a virtuous cycle of enhanced competition and procurement saving can be achieved through learning dynamics when auctions favor less-experienced firms. To quantify the long-term benefit, I conduct counterfactual analysis subsidizing the entry of less-experienced firms. Subsidy costs are larger than the instantaneous savings from increased competition. However, as learning from subsidized entry continues in following periods, cumulative procurement savings are larger than the subsidy expenditure.

• Ohio Rock Salt Procurement Auctions, Bid Preferences, and Competition (Revision Requested at RAND Journal of Economics)

with Matthew Weinberg

We study the design of procurement auctions for rock salt, county level bidding data, and antitrust complaints in Ohio from 2002-2021. We compare bidding behavior before and after the removal of a policy that favored local firms and was alleged to have facilitated collusion. Specifically, the policy only awarded contracts to the two firms with exclusive access to salt mined in Ohio if both entered an auction. A difference in differences estimates that this policy raised winning bids by 14%. We provide evidence that the policy facilitated collusion and thus increased procurement costs beyond what would be expected under competition. While the policy was in place, firms that barely won contracts were 38 percentage points more likely to be an incumbent than firms that nearly won contracts. This discontinuity disappeared after the policy was removed, suggesting that local firms were able to collude by dividing county markets. We quantify the impact on procurement costs by comparing observed bids under the policy with simulated bids under competition conditional on auction heterogeneity. Favoring local firms raised procurement costs above competitive levels conditional on market structure by 8.5%. Costs under competitive bidding would have been at least 6% lower after accounting for competition from firms without access to local inputs.  

Publication

• Return Predictability using an Endogenous Regime Switching Model, Journal of Economic Theory and Econometrics 33.1 (2022): 1-27. 

with Minsoo Jeong and Changsik Kim

This paper examines whether stock excess return predictability is dependent upon the stock market volatility. The paper introduces a two-state regime switching model with endogenous feedback effect for the stock return predictability test. To model regime switching, this paper adopted a new approach proposed by Chang et al. (2017), allowing an endogenous feedback effect channel through which the underlying time series affect the next period volatility regime. This paper shows that modeling such a channel is important in the return predictability context to incorporate the leverage effect. Monte Carlo simulation results demonstrated that additional power gain and bias improvement could be achieved in the endogenous regime switching (ERS) model, compared to the conventional Markov switching model. The empirical test results using the ERS model indicate that none of the tested predictors have significant predictive power when stock returns are highly volatile. However, the dividend-price ratio and macro variables such as T-bill rate and term spread had significant predictability, at least in the low volatility regime.