Working Papers

Pass-Through and Substitution of Discrete Choice Demand

We study the determinants of cost pass-through in differentiated product markets. Random utility models of demand, such as mixed logit, are attractive for the limited restrictions placed on customer substitution patterns. We show that the shape of the distributions of the underlying customer preferences similarly determines cost pass-through. However, common functional form assumptions for these distributions lead to biased estimates of both pass-through and substitution. We offer a flexible, parsimonious unit-demand specification capable of accommodating both log-concave demands (incomplete pass-through) and log-convex demands (over-shifted pass-through) up to that of CES demand. Using data from ready-to-eat cereal, our specification matches consumption patterns across different income levels, and the estimates reject the common practice of modeling preferences as linear or log-linear in customer demographics. Such misspecification has substantive implications: welfare gains to uniform pricing are three to nine times greater than under the more restrictive specifications. Previously circulated as Elasticity and Curvature of Discrete Choice Demand Models - CEPR DP 18310

Amazon HQ2: A Tale of Shocks to Housing Price Expectations

The measurement of the contribution of expectations to house prices is unresolved in the macro-housing literature. We leverage a novel quasi-natural experiment using Amazon's unan- ticipated split location decision for its second headquarters to identify the impact of this expectations shock on local house prices, seller expectations and market liquidity. We find that listed and transacted prices increased on average 7.9% and 7.5%, respectively in the six months following the announcement. Furthermore, price gains were common across all market segments and the announcement had no effect on rents. We develop a tractable general equilibrium macro-housing model featuring mortgages and endogenous housing supply able to replicate the response of the price-rent ratio to an expectations shock. The model quantifies the differences between credit and expectations shocks and generates testable predictions for identifying the nature of a housing price shock. Our empirical and theoretical results provide a benchmark test for structural models that attempt to incorporate shocks to price expectations. CEPR DP 18314

Trade Protection, Industrial Policy, and the Shaping of Local Preferences

Industrial policy might enhance welfare if trade does not happen among competitive economies and/or if there are potential dynamic economies of scale or consumer learning to be accounted for. We conduct a retrospective analysis of the Spanish automobile industrial policy that overcomes many of the common empirical challenges: inconsistent enforcement of long-lived policies affecting not only domestic production but also welfare. The policy had four pillars: the state-sponsored creation of SEAT, the domestic manufacturer; a restrictive maximum share of foreign capital ownership; a stringent domestic minimum component requirement for foreign manufacturers to locate in Spain; and a de facto prohibition of imports until Spain joined the European Union in 1986. Spanish automobile production grew from non-existing in the 1950s to become the fifth largest in the world in the mid 1990s. We use historical province-level automobile registration data to highlight inefficiencies that are otherwise ignored when focusing on output growth alone. If given a chance, many Spaniards preferred cheaper, higher quality imports. Furthermore, entry of foreign manufacturers triggers a sudden but long-lasting increase in domestic sales of these brands, which is always more intense in the local market where the new assembly plant is located. Thirty years after import restrictions were abandoned, the strong preference for brands with a domestic production facility survives, resulting in a serious regional segmentation of the Spanish automobile market that softens competition despite being fully integrated in Europe. We show that intranational home bias accounts for the equivalent of a 5.5% import tariff, compared to a nominal import tariff into the European Union of 10.3%. Seventy years after its creation, SEAT is still the largest beneficiary of local biased preferences.

(Available upon request)