“Are “Complimentary Policies” Substitutes? Evidence from R&D Subsidies in the UK”
Abstract: Governments subsidize R&D through a mix of interdependent mechanisms, but subsidy interactions are not well understood. This paper provides the first quasi-experimental evaluation of how R&D subsidy interactions impact firm behavior. I use funding rules and policy changes in the UK to show that direct grants and tax credits for R&D are complements for small firms but substitutes for larger firms. An increase in tax credit rates substantially enhances the effect of grants on R&D expenditures for small firms. For larger firms, it cuts the positive effect of grants in half. I explore the mechanisms behind these findings and provide suggestive evidence that complementarity is consistent with easing financial constraints for small firms. Substitution by larger firms is most consistent with the subsidization of infra-marginal R&D expenditures. I rule out some alternative explanations. Subsidy interactions also impact the types of innovation efforts that emerge: with increases in both subsidies, small firms steer efforts increasingly towards developing new goods (i.e., horizontal innovations) as opposed to improving existing goods (i.e., vertical innovations). Accounting for subsidy interactions could substantially improve the effectiveness of public spending on R&D. Full Paper
University of California, Santa Cruz
“Product Quality Disclosure with Uninformed Sellers”
(Joint with Erica Myers and Steve Puller)
Abstract: This study examines markets in which both buyers and sellers may not fully observe transacted product quality. Using a behavioral model, we illustrate how ignorance can influence sellers’ quality disclosure decisions. Empirically, we leverage a natural policy experiment that encourages homeowners to provide potential buyers with certified measurements of energy efficiency. Using similar nearby homes to form a counterfactual, we find that credible disclosure significantly increases price capitalization of and investments in energy efficiency. Despite very heterogeneous price benefits from disclosure, we show that properties’ relative energy efficiency only weakly predicts disclosure propensities. Connecting our empirical findings to the model, we demonstrate using a computational simulation that a substantial share of homeowners are apparently uninformed about the relative energy efficiency of their own properties. Our findings yield insights about the energy efficiency gap and hold implications for disclosure policies in real estate markets and in other settings.
University of California, Berkeley
“The Causes and Consequences of Racial Convergence in Pollution Exposure in the United States”
(Joint with Janet Currie and John Voorheis).
University California of Santa Barbara
Paying for Power: Prepaid Electricity and the Spending Patterns of the Poor
(Joint with Kathryn McDermott and Anja Sautmann)
Abstract: Revenue recovery is a challenges for electricity providers in developing countries. Poor customers often struggle to pay monthly bills, and providers face both cost and political economy barriers to enforcing payment. Prepayment is increasingly seen as a solution to this problem. However, little work has been done to date to understand how this affects poor consumers. The research is motivated by two empirical facts observed in the study setting in Cape Town (South Africa). First, electricity use falls by around 13 percent when households are switched from monthly billing to prepaid metering. Second, low income customers on prepaid metering purchase electricity in small quantities and at very high frequencies (every 3 days, on average), reminiscent of the purchasing patterns of poor consumers in other domains. These patterns may reflect liquidity and other constraints on poor households or deliberate choices, with very different welfare implications. We combine analysis of administrative data on electricity purchases with interventions that manipulate liquidity and transaction costs in order to understand the welfare implications of prepayment, as well as the drivers of the high frequency transactions observed in the expenditure patterns of poor households across many domains and settings We find little evidence for a demand for self- or other-control to explain these patterns. At the same time, we find evidence of meaningful transaction costs associated with purchases, which suggests a high liquidity cost of larger and less frequent expenditures. A model of credit constraints on cash combined with transaction costs on electricity helps reconcile the observational data with our experimental results.
Carnegie Mellon University Heinz College
“Short-Run and Long-Run Impacts of Environmental Regulations on Firm Productivity: Evidence from the U.S. Electricity Sector, 1938-1999”
Abstract: Although economic costs of environmental regulations are widely debated, there is limited empirical evidence on the magnitude of these economic costs and the extent to which these costs persist over time. This paper quantifies the short-run and long-run efficiency costs of air quality regulations on the U.S. electricity production sector. The analysis draws on newly digitized annual, plant-level data on the vast majority of U.S fossil fuel fired power plants from 1938-1999. This sample allows us to examine the U.S. electricity industry both before and after the implementation of the National Ambient Air Quality Standards (NAAQS) in 1972. To estimate the economic costs, we utilize a difference-in-differences framework where counties face different environmental regulations as they move in and out of attainment with NAAQS over time. We find that plants located in non-attainment counties experienced declines in TFP and production of 6.3\% and 7.0\%. The effects of nonattainment on TFP and generation are persistent over time. This suggests that existing plants did not adapt to environmental regulations such as NAAQS even in the long run.
University of Southern California
“The Effect of Air Pollution on Migration: Evidence from China”
Abstract: This paper looks at the effects of air pollution on migration in China using changes in the average strength of thermal inversions over five-year periods as a source of exogenous variation for medium-run air pollution levels. Our findings suggest that air pollution is responsible for large changes in inflows and outflows of migration in China. Specifically, we find that a 10 percent increase in air pollution, holding everything else constant, is capable of reducing population through net outmigration by about 2.8 percent in a given county. We find that these inflows are primarily driven by well-educated people at the beginning of their professional careers, leading to substantial changes in the sociodemographic composition of the population and labor force of Chinese counties. We also find strong gender asymmetries in the response of mid-age adults that suggests families are splitting across counties to protect vulnerable members of the household. Our results are robust to different specifications, including a spatial lag model that accounts for localized migration spillovers and spatially correlated pollution shocks.
Arizona State University
“Seawalls and Stilts: A Quantitative Macro Study of Climate Adaption”
Abstract: Investment in adaptation capital reduces the damage from extreme weather, mitigating the welfare cost of climate change. Federal aid for disaster relief reduces the net costs to localities that experience extreme weather, decreasing their incentives to invest in adaptation capital. We develop a heterogenous-agent macro model to quantify the relationship between adaptation capital, federal disaster policy, and climate change. We find that federal aid for disaster relief substantially reduces adaptation investment. However, the federal subsidy for adaptation more than offsets this moral hazard effect. We introduce climate change into the model as a permanent, increase in the severity of extreme weather. We find that adaptation reduces the welfare cost of this climate change by 15-20 percent. Full Paper
“Housing Discrimination and the Pollution Exposure Gap in the United States” w/ Peter Christensen (UIUC)
Abstract: The choice of residential location is a critical economic decision for households in the United States. Recent research has shown that neighborhood pollution exposures can have significant effects on health outcomes, disproportionately affecting minority households. In this study, we combine experimental evidence on discrimination in the rental market for housing with observational evidence from a panel detailing the movements of 1.5 million renter households to study the extent to which discrimination constrains the housing choices of minorities and contributes to inequity in health outcomes. We find that renters with African American and Hispanic/LatinX names receive the exact same response rates to inquiries made for housing within a tight radius of plants that emit toxic pollutants (high exposure locations), while receiving up to 35% and 36% lower response rates at lower exposure locations in the same markets. We find that African American and Hispanic/LatinX renters in these markets move into high exposure neighborhoods at higher rates and move out at lower rates than similar white households, resulting in higher exposures to toxics and particularly during periods of pregnancy. These differences result in a 19% higher likelihood of in utero exposures to toxic emissions for children born in Hispanic/LatinX households and 16.6% higher likelihoods for children born in African American households. Full Paper
Resources for the Future
“Quantities with Prices”
Abstract: Environmental policy with uncertainty is often posed as a choice of price versus quantity instruments. Quantity targets are typically preferred, but paradoxically employ architecture derived from the first-best global framework that applies imperfectly to the partial equilibrium policy setting. In practice, climate policies are incremental and multi-faceted, combining economic and regulatory approaches with limited geographic scope that do not balance global benefits and costs, but nonetheless are envisioned as a noncooperative sequence of actions enabling more efficient and comprehensive global policy. This paper recognizes and evaluates price responsive emissions allowance supply schedules emerging in existing trading programs. We use simulation modeling and laboratory experiments to explore a supply schedule in a regional market. A supply schedule usefully shares the risks and benefits with respect to emissions control costs between economic and environmental interests, preserving the role for technology and energy policies that are expected to lower costs over time. Full Paper
University of California, Berkeley
“Per Capita Income, Consumption Patterns, and CO2 Emissions”
Abstract: This paper investigates the role of income-driven differences in consumption patterns in explaining and projecting energy demand and CO2 emissions. We develop and estimate a general equilibrium model with non-homothetic preferences across a large set of countries and sectors, and trace embodied energy consumption through intermediate use and trade linkages. Consumption of energy goods is less than proportional to income in rich countries, and more income-elastic in low-income countries. While income effects are weaker for embodied energy, we find a significant negative relationship between income elasticity and CO2 intensity across all goods. These income-driven differences in consumption choices can partially explain the observed inverted-U relationship between income and emissions across countries, the so-called environmental Kuznet curve. Relative to standard models with homothetic preferences, simulations suggest that income growth leads to lower emissions in high-income countries and higher emissions in some low-income countries, with only modest reductions in world emissions on aggregate. Full Paper