19 April 2013

How Did the 2008 Stock Market Crash Affect Hospitals?

It is often assumed that hospitals absorb the impact from financial shocks from policy changes, such as Medicare or Medicaid reimbursement reductions, by raising prices on privately insured patients. If this is the case, then the incidence of such policy changes falls primarily on these patients and not on the program’s direct beneficiaries. However, David Dranove, Craig Garthwaite, and Christopher Ody find no evidence that the average hospital raises prices in response to losses in endowments -- such as those that occurred following the 2008 stock market collapse -- which, like reimbursement reductions, are a source of financial stress. They find that hospitals facing large endowment losses delay purchases of health information technology and stop offering some unprofitable services.

18 April 2013

A Dynamic Model of Subprime Mortgage Default

How much did declining home prices and loosened underwriting standards contribute to the increase in subprime defaults that was one trigger for the recent financial turmoil, and how effective might various policies be in mitigating future defaults? Patrick Bajari, Chenghuan Sean Chu, Denis Nekipelov, and Minjung Park show that principal write-downs significantly affect borrowers' default behavior and welfare. They estimate that for the pool of borrowers in their sample, a uniform 10 percent reduction in outstanding mortgage balance would reduce the overall default probability by 22 percent, and the borrowers' average willingness to pay for the principal write-down would be $16,643.

17 April 2013

The Welfare Impact of Indirect Taxation: Gas Taxes and Pollution

Instead of directly taxing automobile emissions, which would be difficult to do, policymakers may choose the indirect route of taxing gasoline, even though per-gallon emissions vary across vehicles. After analyzing data from the personal transportation market in California between 1998 and 2008, Chris Knittel and Ryan Sandler find that dirtier vehicles respond more to fuel prices, which is the hoped for result of higher gasoline taxes. They also show that a uniform tax on gasoline is not very good at eliminating the deadweight loss associated with vehicle emissions: in their sample, over 75 percent of that loss remains under the optimal choice of a uniform gasoline tax.

16 April 2013

Does Sorting Students Improve Scores?

Sorting similarly graded students into different classes at schools may affect achievement through two channels: a “tracking effect” from teachers who can direct their focus to a more narrow range of students, and a "peer effect" by which a particular student’s achievement is influenced by the quality of classroom peers. Although both of these effects should benefit high performing students, they would likely work in opposite directions for low achieving students. Using student-level data from the Dallas Independent School District that links students to their actual classes and reveals the distribution of students within a classroom, Courtney Collins and Li Gan find that sorting by previous performance significantly improves students’ math and reading scores for students across the score distribution. In other words, the net effect of sorting is beneficial for both high and low performing students.

15 April 2013

Financial Intermediaries Misrepresented Asset Quality

Tomasz Piskorski, Amit Seru, and James Witkin study a sample of mortgage securities originated between 2005 and 2007 and find that about one out of every ten mortgage loans sold by intermediaries in the $2 trillion non-agency market misrepresented its asset quality. The mortgage securities either misreported the occupancy status of the borrower or misreported second liens. These researchers also find that the propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. The ex post delinquencies on loans with misrepresentations are more than 60 percent higher than delinquencies on otherwise similar loans, yet these misrepresentations do not appear to be priced in the securities at their issuance.

12 April 2013

Acquisitions Relieve Target Firms’ Financial Constraints

After analyzing a sample of 5,187 European acquisitions occurring between 2001 and 2008, Isil Erel, YeeJin Jang, and Michael Weisbach confirm that acquisitions ease financial frictions in the target firms. The level of cash the target firms hold and the sensitivity of investment-to-cash-flow decline significantly following the acquisition, while investment increases significantly.

11 April 2013

"Fire-sale FDI" or Business as Usual?

Ron Alquist, Rahul Mukherjee, and Linda Tesar study approximately 32,000 foreign and domestic acquisitions that took place between 1990 and 2007 in sixteen emerging markets, a period that includes the Latin American and Asian financial crises of the mid- and late-1990s. When they compare corporate transactions that occurred during crisis periods with those that occurred during less volatile periods, they find that the increase in foreign acquisitions during crises is driven mainly by non-financial acquirers targeting firms in their own industry. Among these mergers and acquisitions, they find little evidence that foreign acquisitions are resold or “flipped” more frequently than domestic acquisitions, and flipping rates are not correlated with the industry’s dependence on external finance. The researchers thus conclude that what seems to be "fire-sale FDI" and asset flipping by foreign firms is instead “business as usual."

10 April 2013

The Irrational Use of Lawyers in Arbitration

Analyzing the outcomes of a number of disputes over wages that were settled by final-offer arbitration in New Jersey, as well as some court-annexed disputes in Pittsburgh and some child custody disputes in California, Orley Ashenfelter, David Bloom, and Gordon Dahl find that the parties face strong individual incentives to obtain legal representation, which makes them jointly worse off. In particular, the New Jersey data suggest that clients' biases toward legal representation could have been influenced by experts early on, but that over time positions become hardened and the use of lawyers becomes nearly universal, despite the fact that agreeing not to hire lawyers is cheaper and does not appear to alter arbitration outcomes.

9 April 2013

Real Estate Speculation and American History

Ed Glaeser points out that the 2000-2010 U.S. housing crisis was not unprecedented and that there have been many other episodes of home and land price run-ups, and declines, in U.S. history. However, the recent experience differed from other historical events, such as the frontier land boom of the 1790s and the skyscraper craze of the 1920s, because it occurred at a time of less uncertainty about fundamental economic and geographic trends. In any of these situations, high house and land prices could be justified if buyers projected strong future demand and stable or rising prices. For many historical episodes of price decline, it appears that buyers underestimated both the long-term elasticity of land supply and new construction and the effect of expanded supply on rents, and ultimately on prices.

8 April 2013

Estimating the Benefits from University-Level Diversity

Barbara Wolfe and Jason Fletcher use national data on the racial and ethnic characteristics of students who were attending college during the 2001-2 academic year to create an "index of diversity" for various colleges and universities. They then relate the students’ subsequent earnings – in the period from 2007-8 – to this index of diversity, and find a positive link between attending a college with greater diversity and higher earnings and family income.
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