The Center for Global Economy and Business offers a small number of limited research grants to Stern faculty for projects related the interests of its research groups. In the Spring of 2012, the Center completed its second grant cycle. All full-time faculty were invited to apply for grants. In April, ten research grants were awarded to ten Stern faculty members.
The following Stern faculty received Spring 2012 Center research grants (sum in parentheses):
- Viral Acharya, Finance ($5,000)
- John Asker, Economics ($8,500)
- Allan Collard-Wexler, Economics ($6,000)
- Xavier Gabaix, Finance ($7,500)
- Alessandro Gavazza, Economics ($7,500)
- Robin Lee, Economics ($9,500)
- Renee Rottner, Management ($11,000)
- Robert Salomon, Management ($1,700)
- Stijn van Nieuwerburgh, Finance ($7,500)
- Laura Veldkamp, Economics ($7,500)
Resulting Papers and Materials
- Viral Acharya
We build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases in producers' hedging demand or speculators' capital constraints increase hedging costs via price pressure on futures, which affect producers' equilibrium hedging and supply decision inducing a link between a financial friction in the futures market and commodity spot prices. Consistent with the model, measures of producers' propensity to hedge forecasts futures returns and spot prices in oil and gas market data from 1979-2010. The component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect equilibrium supply and commodity prices.
- Allan Collard-Wexler
We measure the impact of a drastic new technology for producing steel - the minimill - on the aggregate productivity of U.S. steel producers, using unique plant-level data between 1963 and 2002. We find that the sharp increase in the industry's productivity is linked to this new technology through two distinct mechanisms. First, minimills displaced the older technology, called vertically integrated production, and this reallocation of output was responsible for a third of the increase in the industry's productivity. Second, increased competition, due to the expansion of minimills, drove a substantial reallocation process within the group of vertically integrated producers, driving a resurgence in their productivity and, consequently, the productivity of the industry as a whole.
- Xavier Gabaix
- A Sparsity-Based Model of Bounded Rationality, with Application to Basic Consumer and Equilibrium Theory
This paper defines and analyzes a “sparse max” operator, which generalizes the traditional max operator used everywhere in economics. The agent builds (as economists do) a simplified model of the world which is sparse, considering only the variables of first-order importance. His stylized model and his resulting choices both derive from constrained optimization. Still, the sparse max remains tractable to compute. Moreover, the induced outcomes reflect basic psychological forces governing limited attention.
With the sparse max, we can behaviorally enrich a variety of economic models. Here we study two pillars of economics: basic theory of consumer demand (choosing a consumption bundle subject to a budget constraint) and competitive equilibrium. We obtain a behavioral version of Marshallian and Hicksian demand, the Slutsky matrix, the Edgeworth box, Roy’s identity etc., and competitive equilibrium. The Slutsky matrix is no longer symmetric — non-salient prices are associated with anomalously small demand elasticities. In the Edgeworth box, the offer curve is “extra-dimensional:” it is a two-dimensional surface rather than a one-dimensional curve. As a result, different aggregate price levels correspond to materially distinct competitive equilibria, in a similar spirit to a Phillips curve. This framework provides a way to assess which parts of basic microeconomics are robust, and which are not, to the assumption of perfect maximization.
- Robin Lee
We examine the impact of increased health insurer competition on negotiated hospital prices. Insurer competition can lead to lower premiums and reduced industry surplus, thereby depressing hospital prices; however, hospitals may also leverage fiercer insurer competition when bargaining in order to negotiate higher prices. We rely on a theoretical bargaining model to derive a regression equation relating negotiated prices to the degree of insurer competition, and use the presence of Kaiser Permanente in a hospital's market as a measure of insurer competition. We estimate a model of consumer demand for hospitals and use it to derive many of the other independent variables specified in the regression equation. Leveraging a unique dataset on negotiated prices between hospitals and commercial insurers in California in 2004, we find that increased insurer competition reduces hospital prices on average, but has a positive and empirically meaningful effect on the prices of attractive and high utility generating hospitals. This heterogeneous effect across hospitals - which has not been emphasized in the recent literature on hospital-insurer bargaining - provides incentives for hospital investment and consolidation, and implies that hospital market power can lead to high input prices even in markets where many insurers are present.
- Robin Lee
We study the effect of changing the price differential for cesarean versus vaginal deliveries paid by commercial insurers to hospitals and physicians on cesarean rates. Using eight years of claims data containing negotiated prices, we exploit within-hospital-physician-group price variation arising from contract renegotiations over time. We find that increasing the physician price differential by $100 yields a 0.55 percentage point (1.9%) increase. Increasing the hospital price differential by $1000 for births delivered by hospital-exclusive physician groups yields a 1.1 percentage point (3.7%) increase. Our findings have implications for understanding hospital-physician principal-agent problems and the future of accountable care organizations.
- Robert Salomon
Research demonstrates that foreign firms imitate the practices of domestic firms (i.e., adopt an isomorphism strategy) in an attempt counteract the deleterious performance consequences associated with institutional distance. However, studies linking isomorphism as an endogenous strategy taken with its performance consequences in mind. Using a dataset of 80 foreign banks from 25 host countries operating in the United Staes, we find that foreign firms from institutionally distant home countries benefit more from selecting an isomorphism strategy than they would have had they not chosen such a strategy; however, the performance benefits associated with isomorphism erode as institutionally distant firms gain experience in the host country.
- Laura Veldkamp
For decades, macroeconomists have searched for shocks that are plausible drivers of business cycles. A recent advance in this quest has been to explore uncertainty shocks. Researchers use a variety of forecast and volatility data to justify heteroskedastic shocks in a model, which can then generate realistic cyclical fluctuations. But the relevant measure of uncertainty in most models is the conditional variance of a forecast. When agents form such forecasts with state, parameter and model uncertainty, neither fore- cast dispersion nor innovation volatilities measure uncertainty. We use observable data to select and estimate a forecasting model and then ask the model to inform us about what uncertainty shocks look like and why they arise.