Research Spotlight
Amanda Gaulke
It has been well documented across numerous countries that people with less income or less education have worse health. While previous research has documented that socio-economic disparities already exist in childhood, and less advantaged children tend to experience more adverse health events, less is known about variation in parental responses to the same adverse health event. In a working paper titled “Childhood Health Shocks and the Intergenerational Transmission of Inequality” with Tine M. Eriksen (VIVE, The Danish Center for Social Science Research), Jannet Svensson (Steno Diabetes Center Copenhagen), Niels Skipper (Aarhus University), and Peter R Thingholm (Aarhus University), Professor Gaulke focuses on how socio-economic status and adverse health events interact. Using administrative data from Denmark, the research team documents a clear socio-economic gradient in labor market penalties stemming from the same health shock, even in the context of universal access to health care. In other words, children who were more disadvantaged to begin with (have lower income parents or less educated mothers) experience even larger labor market penalties in adulthood than more advantaged children. This further exacerbates economic inequality. While many calls to address socio-economic disparities focus on access to health care (or expanding health insurance coverage), this paper provides evidence that universal access to care is not enough to eliminate socio-economic disparities.
This finding then leads to the question of why children who experience the same adverse childhood health event have such different outcomes depending on their parents’ characteristics, even in the context of universal access to healthcare. Professor Gaulke and her co-authors have just received funding to further study this question. Since the previous paper documents differences in health as a potential mechanism for the differences in labor market outcomes, the research team will focus on the role of advancements in medical technology in creating health disparities. While medical advancements should improve patient outcomes, if there is unequal take-up of those advancements, that could increase disparities. Understanding the reasons for socio-economic disparities in health is important for being able to reduce those disparities.
Philip G. Gayle
The area in economics in which I conduct research is known as Industrial Organization. Industrial organization is a sub-field of microeconomics that studies the functioning of imperfectly competitive markets. In particular, industrial organization is concerned with business behavior and strategy in imperfectly competitive markets, as well as the implications that such behavior and strategy have for economic welfare. A specific behavior of firms in imperfectly competitive markets that has received considerable attention from industrial organization economists is that of mergers between firms.
A merger is a transaction in which the assets of two or more firms are combined in a new firm. One of the central issues in industrial organization is how mergers affect firm conduct and market performance. Retrospective studies of mergers tend to focus on the price effects of the relevant merger. To wit, do we observe the merging firms increase or decrease the price of their products subsequent to merging? Assuming product quality is unchanged by the merger, consumer welfare is inversely related to the price change of the merged firm's products. However, due to reasons subsequently discussed below, a merged firm may produce products of different quality relative to pre-merger product quality, and changes in product quality directly affect consumer welfare.
Departing from the extant literature in industrial organization that largely focuses on the price effects of mergers, a recent research paper that I coauthored with Yongmin Chen (University of Colorado, Boulder), investigates how two recent airline mergers affect the quality of air travel products offered by the airlines that merged. The paper is entitled: “Mergers and Product Quality: Evidence from the Airline Industry.”
Why might mergers cause the quality of products offered by a merged firm to change relative to pre-merger product quality? The research paper posits two key effects through which a merger may influence product quality: (1) Coordination effect; and (2) Incentive effect.
The coordination effect is the situation in which a merger by two firms allows them to share technical information and coordinate production activities, which can positively affect the quality of their products. For example, an airline merger may allow the two airlines to coordinate their flight schedules to better serve consumer needs. On the other hand, the incentive effect occurs when a merger reduces the competitive pressure on the firms to improve product quality, which can negatively affect the quality of their products. For example, competing airlines in an origin-destination market may have each provided nonstop and intermediate stop(s) products prior to merging, but find it profitable to eliminate the more travel-convenient nonstop product post-merger. Therefore, using a simple theoretical model, we argue that whether a merger raises or lowers product quality depends crucially on the relative strengthens of the coordination and incentive effects.
The two airline mergers we study are: (1) Delta Airlines merger with Northwest Airlines, which occurred in 2008; and (2) United Airlines merger with Continental Airlines, which occurred in 2010.
The research focuses on a specific measure of air travel product quality, which we refer to as Routing Quality. Routing quality relates to the travel convenience of the product itinerary, and is measured by the percentage ratio of nonstop flight distance to the product's itinerary flight distance used to get passengers from the origin to destination. Therefore, the routing quality variable takes on only positive values, where the maximum value is 100 in the case that the product itinerary uses a single nonstop flight to get passengers from the origin to destination. The presumption is that, holding all other factors constant, passengers prefer an itinerary that uses the most direct routing to get to their destination, so a higher value of the routing quality measure is associated with a more passenger-desirable travel itinerary.
The empirical analysis focuses on a sample of US domestic air travel markets and yields two key findings.
First, we find that the mergers increased routing quality of the merging firms’ products in markets where the merging firms did not compete with each other prior to the merger. In these markets the negative incentive effect of the merger on product quality is absent since the merging firms did not compete with each other prior to their merger. Thus the positive effect of the mergers on product quality in these markets is driven by the coordination effect, i.e., the merging airlines coordinate their route networks to offer products with better routing quality for consumers in these markets.
Second, we find that the mergers decreased routing quality of the merging firms’ products in those markets in which the airlines directly competed prior to their merger. Since both the coordination and incentive effects of a merger on product quality are present in those markets, the evidence suggests that the negative incentive effect of the mergers is stronger than the positive coordination effect. In other words, in those markets the mergers serve to sufficiently reduce the competitive pressure on the airlines to maintain or improve product quality, thus resulting in products of lower quality post-merger.
Since changes in product quality directly affect consumer welfare, the evidence provided in this research suggests that the standard practice in merger reviews that consider mainly the price effects may lead to substantial under- or over-estimate of a merger’s consumer benefit or harm. It would thus be desirable to explicitly incorporate product quality considerations into merger reviews. The insights from this paper may stimulate further research on merger-specific quality considerations and thereby inform public policy on the merits of proposed mergers.
Philip Gayle presented this paper at The 12th Annual International Industrial Organization Conference, April 11-13, 2014, held at the Northwestern University Law Searle Center on Law, Regulation and Economic Growth. The paper is also currently under review at a peer-reviewed economics journal.
Peri da Silva
One of the most visible faces of international economic integration has been the formation of Preferential Trade Agreements (PTAs). They show up in popular media with known acronyms such as EU (European Union), USMCA (former North American Free Trade Agreement, NAFTA), and KORUS (South Korea – US Free Trade Area, among others), among others. Their importance can be stated in sheer numbers: in the early 1980s, there were about a dozen PTAs, while 360 of them as of October 2023. Despite deeper economic ties across nations, international trade relations have become more contentious due to trade imbalances, among other reasons. In a famous tweet from March of 2018, former US President Trump claimed that “When a country [USA] is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade any more – we win big. It’s easy!”
In a recent paper, Professor da Silva and coauthors investigated whether the degree of bilateral trade imbalances and income inequality are important drivers of PTA formation. They explore this question using a political economy of trade model where voters directly influence the choice of trade policy regime (PTA or status quo) and the choice of PTA type. The latter is important since 88 percent of PTAs take the form of Free Trade Areas (FTAs) where member countries can apply different tariffs on non-member countries. In contrast, agreements like the EU that require a common external tariff represent 5 percent of the total number. They assess the model's predictions using data from 187 countries from 1960 to 2015. Their results confirm that the greater the bilateral trade imbalances, the lower the probability that a country pair forms a PTA. Likewise, they find that the greater the national levels of income inequality, the less likely a PTA is formed. Furthermore, the more significant the sectoral productive difference between the two countries, the more likely an FTA will emerge in equilibrium if the decision to form a PTA has been taken. This paper was published in The Economic Journal, the premier Journal of the British Royal Economic Society.
Hugh Cassidy
The topic of immigrant is a significant concern for policymakers, the public, and economists, and understanding how immigrants perform in the labor market is an important part of this discussion. Professor Hugh Cassidy's research focuses primarily on immigration issues.
An important aspect of immigration is how legal status impacts labor market outcomes. In a 2019 paper, Professors Cassidy and George Borjas find that undocumented immigrants have significantly lower wages than those with legal status, mainly due to individual characteristics such as educational attainment and English proficiency. However, a meaningful gap persists even when accounting for these differences, suggesting that lack of legal status likely harms the earnings of undocumented immigrants.
In another recent paper, Professors Cassidy and Borjas note that immigrants experienced greater job loss in the early months of the COVID pandemic compared to non-immigrants. One key factor is that immigrants often work in occupations less conducive to remote work, increasing their vulnerability to job loss during the pandemic. However, immigrant employment rebounded more rapidly than non-immigrant employment in the months following the onset of COVID.
In a recent working paper, Professor Cassidy uses historical US Census data to track the impact of a change in the immigrant population on pre-existing immigrants, i.e., those who arrived at least a decade prior. He compares the effect of new immigrants on pre-existing immigrants versus non-immigrants, revealing significant differences in outcomes such as geographic mobility and occupation change. Professor Cassidy also finds that the origin of immigrants is crucial; pre-existing immigrants are affected differently by an influx of immigrants from the same birthplace compared to an influx from different birthplaces.
In a recently published paper with Professor Amanda Gaulke, also from the economics department at Kansas State University, Professor Cassidy documents an increase in the penalty for mismatched degrees and jobs among college graduates. While there has been a documented penalty for working in a job unrelated to one's field of study for decades, this penalty increased by over 50% between 1993 and 2019. Professors Cassidy and Gaulke investigate potential explanations, finding that the composition of degrees explains much of the increasing penalty for women, while a shift in occupation returns explains a large portion of the increase in the penalty for men.
Yang-Ming Chang
Recent research projects by Yang-Ming Chang, professor of economics, include an examination of differences between the U.S. antitrust case and the E.U. antitrust case against Microsoft. In 2000, the U.S. Department of Justice called for Microsoft’s breakup for reasons that included the following: it monopolized the market for the operating systems; the integration of its browser, Internet Explorer(IE), into the Windows operating system was anti-competitive; its free distribution of IE was predatory; it engaged in anti-competitive contracts with personal computer manufactures and internet service providers; it impeded product innovation; and its competitive actions harmed consumers. But the U.S. government’s antitrust litigation against Microsoft was eventually overturned. In the E.U. Microsoft case, the European Community argued that Microsoft had abused market dominance in its operating systems by tying the sales of Windows Media Player or IE to Windows. Unlike the U.S. case, the E.U. was successful in ruling against Microsoft and the company was required to offer a clean version of Windows (without any browser or application software). Yang-Ming and his coauthor, Hung-Yi Chen, a Ph.D. in economics from Kansas State and currently a full professor at Soochow University, develop an economic model to capture the idiosyncratic characteristics of the operating system monopoly (i.e., Windows dominance) and of the oligopolistic market for browsers (IE, Netscape’s Navigator, or Opera). They examine the case of tying behavior in which Microsoft integrates IE into Windows to generate a bundled system good for sales, as compared to the no-tying case when Microsoft is required by the government to break into smaller entities. Their findings indicate that Microsoft’s tying enhances price competition in the browser market and the integration of IE with Windows as a system good is socially desirable. This is directly related to the fact that Windows is an essential component and the fact that it is run on more than ninety percents of all personal computers. Based on their model, they show that a Microsoft breakup stifles competition, hurts consumers, and is socially undesirable. The results of their study further indicate that the E.U. international antitrust intervention against Microsoft as a foreign exporter benefits the E.U. software producers at the expense of their computer users. The paper also addresses issues on international antitrust and protection of domestic industries in the E.U. case. Yang-Ming presented this paper on March 17, 2012, at the 10th Annual International Industrial Organization Conference, which was held at George Mason University in Arlington, Virginia.
Lance Bachmeier
It is widely believed that higher oil prices lead to inflation. Based on the experience of the 1970's and 1980's, most introductory macroeconomics textbooks teach students that a higher price of oil increases the cost of producing goods, which is then passed on to consumers in the form of higher prices. Research by Lance Bachmeier, associate professor of economics, and Inkyung Cha, visiting assistant professor of economics, has shown that is not the case. They examined the behavior of more than 100 "core" consumption goods, such as clothing, toys, and household appliances, and found that most prices either do not change or even fall when the price of oil rises. They find that the main reason oil shocks are no longer inflationary is that firms have adopted energy-efficient production technology. Firms use about half the energy to produce the same goods today as in 1970. Their paper was published in the September 2011 issue of the Journal of Money, Credit and Banking.