How mergers affect innovation…maybe?

Justus Haucap and Joel Stiebale with the Düsseldorf Institute for Competition Economics (DICE) at the University of Düsseldorf have a recent paper analyzing the effects of mergers on innovation in the European pharmaceutical industry. The develop a model that suggests mergers reduce innovation not only in the merged firms, but among industry competitors as well. Their data bear this out, as explained in the abstract:

This papers analyses how horizontal mergers affect innovation activities of the merged entity and its non-merging competitors. We develop an oligopoly model with heterogeneous firms to derive empirically testable implications. Our model predicts that a merger is more likely to be profitable in an innovation intensive industry. For a high degree of firm heterogeneity, a merger reduces innovation of both the merged entity and non-merging competitors in an industry with high R&D intensity. Using data on horizontal mergers among pharmaceutical firms in Europe, we find that our empirical results are consistent with many predictions of the theoretical model. Our main result is that after a merger, patenting and R&D of the merged entity and its non-merging rivals declines substantially. The effects are concentrated in markets with high innovation intensity and a high degree of rm heterogeneity. The results are robust towards alternative specifications, using an instrumental variable strategy, and applying a propensity score matching estimator.

While I haven’t yet read the paper in detail, a cursory examination suggests they have ignored another possibility: mergers in high-intensity R&D industries could be a leading indicator of decreased innovation productivity (i.e., lower returns to investment in R&D). Consider that as research advances, the “low hanging fruit” are collected first before the more difficult (and lower return) investments are pursued. As companies in a high-intensity R&D industry exploit all of the low hanging fruit, particularly internally, one might expect mergers as a way of expanding the available set of lower-cost/higher-return R&D investment opportunities. Since firms are competing in the same science space, a slow-down in one firm is likely to be spuriously correlated with slowdowns throughout the industry.

“Affect” is a word of causation. To suggest that mergers cause a reduction in innovation is a strong statement–especially when paired with a merger policy implication. This may be something that bears more scrutiny since, as the authors note, the entire subject is one on which relatively little light has thus far been shed.

Flipping a Coin for Happiness

Steven Levitt of Freakonomics fame (and professor of economics at University of Chicago) has a new paper out on a not-so-new research project. In “Heads or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness” (gated at NBER, a summary article is available here), Levitt finds that individuals who made important life decisions based on a coin flip were more likely to be happy two or six months afterward.  Based on these findings, Levitt suggests that individuals may be too cautious in making major decisions. The abstract reads:

Little is known about whether people make good choices when facing important decisions. This paper reports on a large-scale randomized field experiment in which research subjects having difficulty making a decision flipped a coin to help determine their choice. For important decisions (e.g. quitting a job or ending a relationship), those who make a change (regardless of the outcome of the coin toss) report being substantially happier two months and six months later. This correlation, however, need not reflect a causal impact. To assess causality, I use the outcome of a coin toss. Individuals who are told by the coin toss to make a change are much more likely to make a change and are happier six months later than those who were told by the coin to maintain the status quo. The results of this paper suggest that people may be excessively cautious when facing life-changing choices.

So if in doubt, maybe you should reach in your pocket for a coin. Or you could do it like this guy:

NSF Funding for Economics Research: Good or Bad?

The latest Journal of Economic Perspectives includes a pair of papers debating the social value of ecNSFonomics research funding from the National Science Foundation, featuring Robert Moffitt from Johns Hopkins and Tyler Cowen and Alex Tabarrock from George Mason. The abstracts of their respective viewpoints follow:

Robert Moffitt: “In Defense of the NSF Economics Program
The NSF Economics program funds basic research in economics across all its disparate fields. Its budget has experienced a long period of stagnation and decline, with its real value in 2013 below that in 1980 and having declined by 50 percent as a percent of the total NSF budget. The number of grants made by the program has also declined over time, and its current budget is very small compared to that of many other funders of economic research. Over the years, NSF-supported research has supported many of the major intellectual developments in the discipline that have made important contributions to the study of public policy. The public goods argument for government support of basic economic research is strong. Neither private firms, foundations, nor private donors are likely to engage in the comprehensive support of all forms of economic research if NSF were not to exist. Select universities with large endowments are more likely to have the ability to support general economic research in the absence of NSF, but most universities do not have endowments sufficiently large to do so. Support for large-scale general purpose dataset collection is particularly unlikely to receive support from any nongovernment agency. On a priori grounds, it is likely that most NSF-funded research represents a net increase in research effort rather than displacing already-occurring effort by academic economists. Unfortunately, the empirical literature on the net aggregate impact of NSF economics funding is virtually nonexistent.

Tyler Cowen & Alex Tabarrock: “A Skeptical View of the National Science Foundation’s Role in Economic Research
We can imagine a plausible case for government support of science based on traditional economic reasons of externalities and public goods. Yet when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy. In this essay, we take a more skeptical attitude toward the efforts of the NSF to subsidize economic research. We offer two main sets of arguments. First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. Given these critiques, we suggest some possible ways in which the pattern of NSF funding, and the arguments for such funding, might be improved.

11th Annual Conference on Empirical Legal Studies

11th Annual Conference on Empirical Legal Studies (CELS)
Duke Law School, Durham, North Carolina
Friday, November 18 and Saturday, November 19, 2016

Duke Law School is pleased to host the 11th Annual Conference on Empirical Legal Studies (CELS) on November 18-19, 2016. CELS is a highly regarded interdisciplinary gathering that draws scholars from across the country and internationally and is sponsored by the Society for Empirical Legal Studies. The conference brings together hundreds of scholars from law, economics, political science, psychology, policy analysis, and other fields who are interested in the empirical analysis of law and legal institutions. Papers are selected through a peer review process and discussion at the conference includes assigned commentators and audience questions.

Paper submissions are due by July 31, 2016.

For more information about the conference click here (https://law.duke.edu/cels2016/).

7th International Conference on Public-Private Partnerships

Registration is open for the seventh international conference on “Contracts, Procurement, and Public-Private Arrangements” on 14-15 June at Université Paris – Panthéon-Sorbonne.

This conference focuses on the recent developments in contract theories. Papers are invited on all topics of contract theories including: Relational contracting, transaction costs, renegotiations, incentives, award mechanisms, incomplete contracting, contract design, benchmarking, privatization, corruption, institutions.

See here for more information

The Old College ROI

Today I ran across a graphic from The Economist in March 2015 that shows the return on investment (ROI) to different college majors by level of selectivity of the college the student attended. The charts show that while college pays, it does not pay the same for everyone. More specifically, it does not pay the same for every major. Engineering and math majors have high ROIs, followed by business and economics majors. Humanities and arts majors have lower ROIs on average.

If you’re underwhelmed by the realization, you should be. After all, it’s really common sense and something I’ve written about before here. But it’s a fact that seems incomprehensible to so many (for starters, count the number of votes Bernie Sanders has received). This is imCollege ROIportant because college education is subsidized not by degree, but by the expense of the school the student chooses. An arts major at Stanford is paying the same tuition as the engineering major–and likely borrowing just as much money–but their returns on investment for those educations are vastly different. Put another way, the value of those degrees are very different, even if the price of the degrees is the same.

Interestingly, though, the ROI by degree does not change much based on the selectivity of the school (typically a measure of quality). Looking at each of the degree types, there is very little obvious correlation between selectivity and ROI (taking into account financial aid; i.e., based on net-cost not listed tuition). While students from more selective schools may earn higher starting salaries, the higher cost of their education means they are getting no better return on their financial investment than students of similar majors at much less selective schools.

This suggests that the market for college graduates is actually working pretty darn well when you take into account students’ degrees (i.e., the value of the human capital they develop in college).

It also suggests we should reconsider federal policy for student loans. If we insist on continuing to subsidize higher education (and all the ills that creates), at least we could do it more intelligently by tying loan amounts to degree programs rather than tuition levels.

Death, Taxes, and Opportunity Costs

They say two things are unavoidable in life: death and taxes. I’d like to propose adding opportunity costs to that list.

In his State of the Union address in January, President Obama announced his support for a “moonshot” researchsotu initiative to cure cancer. “For the loved ones we’ve all lost, for the family we can still save, let’s make America the country that cures cancer once and for all,” the President announced to a hearty round of applause. And deservedly so. I suspect there are few, if any, people whose lives have not been touched by cancer, either suffering it directly or with loved ones.

Since then, I’ve had several friends on Facebook post their support of the President’s proposal and their personal desire to eradicate cancer. Some even arguing we should spend “whatever it takes” to rid ourselves of this horrible disease. But while I empathize with their heart-felt conviction, I can’t help but ask, “at what cost?” And I don’t mean (just) the dollars and cents. Okay, the billions of dollars. I mean the opportunity cost of focusing so many resources on the goal of “curing” cancer.

As an economist, one (should) necessarily asks the question: what is the marginal benefit versus the marginal cost of eliminating cancer. Sounds cold and heartless? Bear with me a minute.

According to the US Dept of Health & Human Services, Continue reading Death, Taxes, and Opportunity Costs