Abstract: Many of the world’s major aquifers are rapidly depleting from agricultural irrigation, generating dynamic common-pool externalities by raising future extraction costs. While Pigouvian taxation can restore the first-best outcome, such policies are often infeasible due to political and technological constraints. By contrast, extensive-margin policies that regulate well entry are second-best but administratively simple. We study this trade-off by developing and estimating a dynamic model of farmers’ joint well-drilling and water-use decisions using a novel dataset of aquifer levels, agricultural water use, and crop production in the Kansas High Plains Aquifer from 1959–2022. We find that entry fees can create substantial welfare gains but that their effectiveness erodes rapidly over time. In 1960, entry fees would have captured three-quarters of the gains of Pigouvian taxation, by 1980 only one-quarter, and today virtually none. This rapid decline reflects negligible marginal extraction costs relative to fixed well drilling costs, ensuring depletion becomes largely locked in once wells are sunk. Together, these findings highlight the importance of irreversible investments in constraining second-best environmental regulations.
Optimal Urban Transportation Policy: Evidence from Chicago
with Milena Almagro, Felipe Barbieri, Juan Camilo Castillo, and Tobias Salz
Revise and Resubmit, Econometrica, August 2024
Abstract: We characterize and quantify optimal urban transportation policies in the presence of congestion and environmental externalities. We formulate a framework in which a municipal government chooses among transportation equilibria through its choice of public transit policies---prices and frequencies---as well as road pricing. The government faces a budget constraint that introduces monopoly-like distortions and the potential need to cross-subsidize modes. We apply this framework to Chicago, for which we construct a new dataset that comprehensively captures transportation choices. We find that road pricing alone leads to large welfare gains by reducing externalities, but at the expense of travelers, whose surplus falls even if road pricing revenues are fully rebated. The optimal public transit price is near zero, with reduced bus and increased train frequencies. Combining transit policies with road pricing slackens the budget constraint, allowing for higher transit frequencies and lower prices, thereby increasing consumer surplus after rebates.
Abstract: Platforms often use price recommendation algorithms to suggest prices to firms based on the platform's private information about demand conditions. I develop a theoretical model and algorithmic experiments to study the impact of platform price recommendations under three types of firm conduct: collusion, competition, and when firms use pricing algorithms. When firms are either collusive or competitive I show theoretically that the platform's optimal price recommendation system is generically fully informative, and that this outcome is consumer-pessimal. When firms use pricing algorithms I find in algorithmic experiments that the introduction of a price recommendation system reduces average consumer surplus by 31%.
Out with the Old, In with the New: The Importance of Secondary Markets for Electric Vehicle Subsidy Design
with Aaron Berman and Dam Linh Nguyen
Draft coming soon!
Abstract: We evaluate the relative cost effectiveness and distributional impacts of primary- and secondary-market subsidies for electric vehicle adoption. We develop a simple theoretical framework that highlights the ambiguous cost-effectiveness of the two subsidy designs. Relative to subsidies for purchases of used electric vehicles, subsidies for new purchases always induce greater adoption. However, they also lead to more inframarginal government spending due to consumer selection into resale. We study this trade-off empirically by proposing a dynamic model of the vehicle market, which captures sorting of consumers into resale through endogenous vehicle replacement decisions. To analyze the equilibrium consequences of the two subsidy designs, we calibrate the model using granular data on car registrations and transactions in Texas from 2015 to 2022. Counterfactual results indicate that, in our setting, secondary-market subsidies: (1) are more cost-effective than primary-market subsidies due to large decreases in inframarginal spending; and (2) achieve more progressive distributional impacts.