My research is centered in Applied Microeconomics, with policy-relevant applications in Industrial Organization and Law & Economics. I am chiefly interested in the capital investment decisions of firms that behave strategically, especially how their incentives are affected by legal and policy changes and market frictions. My interests also extend to the analysis of mergers and acquisitions, complementing my professional experience as a corporate financial analyst specializing in industrial M&A. Below I describe several active research projects.
Can Stricter Bankruptcy Laws Discipline Capital Investment? Evidence from the U.S. Airline Industry
Download PDF (New version coming soon! This draft: 10/21/2015)
Models of capital investment in industrial organization typically treat bankruptcy as an involuntary and final outcome, yet firms that file under Chapter 11 of the U.S. Bankruptcy Code typically do so voluntarily and with the expectation that they will eventually emerge. Moreover, Chapter 11 permits cancellation or renegotiation of long-term contracts for labor and capital, effectively providing otherwise constrained firms an opportunity to downsize, and suggesting a non-financial role for bankruptcy law in investment behavior. This paper is the first to analyze the link between bankruptcy and investment in a dynamic oligopoly setting. To capture the strategic implications of both decisions, I develop a dynamic game in continuous time that incorporates choices over investment and bankruptcy. I show that strengthening creditors’ bargaining power in bankruptcy proceedings can discipline capital investment behavior outside of bankruptcy, curbing investment in periods of high demand and spurring the sale of capital when demand is low. I test the implications of the model using data on the bankruptcy-prone U.S. commercial passenger airline industry, finding evidence that a recent reform that strengthened creditors’ bargaining power in Chapter 11 may have contributed to the widely acknowledged “capacity discipline” observed in the market since 2006. I then simulate several alternative bankruptcy policies to better understand how the treatment of contracts in bankruptcy affects long-term investment and industry dynamics.
Airline Mergers and the Potential Entry Defense
(with Sophia Ying Li, James Roberts, and Andrew Sweeting)
Download PDF (This draft: 03/01/2016)
Horizontal mergers may be approved if antitrust authorities believe that new entry would limit any anticompetitive effects. This `potential entry defense’ has led to mergers being approved in concentrated markets in several industries, including airlines. However, entry will be both less likely and less able to constrain market power if the pre-merger entry process already selected the best firms into the market, for example those firms with better product qualities or lower marginal or fixed costs. We estimate a rich empirical entry model allowing for these types of selection using data from airline routes connecting the top 80 airports in the U.S. Our results indicate that selection is important and helps to explain the fact that airline mergers have tended to increase prices without inducing a significant number of new entering firms, even though most of these markets have several potential entrants and, in most cities, entry barriers are relatively low. We also use our model to conduct counterfactual merger analysis. We are in the process of updating the paper to reflect more recent mergers and data.
Price Distribution Effects of Airline Mergers
(with James Roberts and Andrew Sweeting)
When evaluating a proposed merger, a primary concern for antitrust authorities is the potential for anti-competitive price outcomes, typically manifested in higher overall prices for consumers. In markets for differentiated products, however, the overall level of prices may not be the only concern. Quantity levels, product variety, and the degree of price discrimination could all change significantly as the result of a merger. Using data on the airline industry, we examine the impact of mergers on price dispersion, finding that prices rise more at the top of the fare distribution than at the bottom when the merger is between two legacy carriers, while the opposite effect is observed for the recent merger between Southwest and AirTran. We propose and test possible explanations for this pattern.
Sensitivity Analysis in Merger Simulation
Simulation based on economic models has become an increasingly important tool for antitrust authorities in predicting the price effects of a proposed merger. However, assessing the accuracy of this method has received relatively little attention. Although several studies have compared simulated to actual outcomes, few have examined the sensitivity of their predictions to underlying assumptions. In this paper, I offer a straightforward approach to analyzing the sensitivity of merger predictions to assumptions about the change in marginal costs for overlapping products. I then demonstrate my approach using price and quantity data for a merger between two large airlines, Delta and Northwest. I find that the simulated price impact of the merger is relatively robust, largely because the range of implied marginal costs for overlapping routes is not particularly wide. The simulations tend to overestimate the price impact of the merger overall, predicting average price changes in the range of 5.1% to 6.1%, versus an actual change of 4.9%.
R&D vs. Physical Capital Investment under Collateral Constraints
(with Daniel Xu)
Tangible capital (buildings, equipment, etc.) serves more readily as a source of collateral than intangible capital (R&D output, brand equity, etc.). When credit markets are tight, a firm’s need to borrow funds may therefore influence its R&D investment decision. We examine the trade-off between tangible and intangible capital investment in the face of economy-level liquidity shocks using data on the electric motor industry in the Republic of Korea.