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Igal Hendel
Research
Does the Secondary Life
Insurance Market Threaten Dynamic Insurance? Joint with Glenn daily and
Alessandro Lizzeri.
The
Relative Performance of Real Estate Marketing Platforms: MLS versus
FSBOMadison.com joint with Aviv Nevo and Francois Ortalo-Magné
Storable
Good Monopolist, joint with Paolo Dudine and Alessandro Lizzeri (American
Economic Review, December 06)
We study dynamic
monopoly pricing of storable goods in an environment where demand
changes over time. The literature on durables has focused on incentives
to delay purchases. Our analysis focuses on a different intertemporal
demand incentive. The key force on the consumer side is advance
purchases or stockpiling. In the case of storable goods the stockpiling
motive has been documented in recent empirical literature. Advance
purchases can also arise in the case of durables, although the
literature has not focused on this case.
We show that if the
monopolist cannot commit, then prices are higher in all periods, and
social welfare is lower, than in the case in which the monopolist can
commit. This is in contrast with the analysis in the literature on the
Coase conjecture.
Measuring the Implications
of Sales and Consumer Inventory Behavior, joint with Aviv Nevo (Econometrica,
November 06)
Temporary price
reductions (sales) are common for many goods and naturally result in
large increase in the quantity sold. In previous work we found that the
data support the hypothesis that these increases are, at least partly,
due to dynamic consumer behavior: at low prices consumers stockpile for
future consumption. In this paper we quantify the magnitude of the
effect and derive the quantitative economic implications. We construct
and structurally estimate a dynamic model of consumer choice using two
years of scanner data on the purchasing behavior of a panel of
households. The results suggest that static demand estimates, which
neglect dynamics, may overestimate own price elasticities by up to
50-80 percent.
Sales and Consumer Inventory, joint with Aviv
Nevo (Rand Journal of Economics, Fall 06)
Temporary price
reductions (sales) are common for many goods and naturally result in
large increase in the quantity sold. We explore whether the data
support the hypothesis that these increases are, at least partly, due
to dynamic consumer behavior: at low prices consumers stockpile for
future consumption. This effect, if present, renders standard static
demand estimates misleading, which has broad economic implications. We
construct a dynamic model of consumer choice, use it to derive testable
predictions and test these predictions using two years of scanner data
on the purchasing behavior of a panel of households. The results
support the existence of household stockpiling behavior and suggest
that static demand estimates, which neglect dynamics, may overestimate
price sensitiveness by up to a factor of 2 to 6.
Efficient
Sorting in a Dynamic Adverse Selection Model, joint with Alessandro
Lizzeri and Marciano Siniscalchi (Review of Economic Studies, April
05)
We study the
possibility of achieving efficiency in a dynamic adverse selection
market for durable goods. The idea is to use the number of times a car
has been traded ("vintage") as a signal of its quality.
Higher-valuation consumers experiment with younger vintages. We first
exhibit an impossibility result: no choice of (re)sale prices can
induce consumers to follow this experimentation policy. We then show
that leasing contracts can be constructed so as to achieve efficiency
if consumers are patient.
The Role of
Commitment in Dynamic Contracts: Evidence from Life Insurance, joint
with Alessandro Lizzeri Quarterly Journal of Economics, 2003)
Lack of commitment
to long term insurance contracts is believed to leave consumers subject
to reclassification risk. We present a model of long term insurance in
an environment with evolving information to study this question. We
test the implications of the model about optimal dynamic contracts
using a very rich data set on life insurance contracts. The data
contains the whole future profile of premiums. We find in accordance
with the model, that (1) all types of contracts involve some
front-loading, (2) front-loading is associated with better risk pools,
reflected by the expected cost of insurance.
The Role of
Leasing under Asymmetric Information, joint with Alessandro Lizzeri, (Journal
of Political Economy, February 2002).
Leasing has become
very popular in the car market and there is evidence that buyers and
lessees behave differently. Leasing contracts specify a rental rate and
an option price at which the used good can be bought at the termination
of the lease. This option price cannot be controlled when the car is
sold. We show that in a world with symmetric information this
additional control variable is useless; equilibrium allocations and
profits to lessors are unaffected by the option prices. In contrast,
under adverse selection, leasing contracts affect equilibrium
allocations in a way that matches observed behavior in the car market.
We show that a
social planner can use leasing contracts to improve welfare but they
are imperfect tools. We show that there is a mechanism that achieves
the first best.
We show that a
producer with market power can benefit from leasing contracts for two
reasons: better pricing of the option of keeping the used good and
market segmentation. Moreover, despite the fact that lessors could
structure contracts to prevent adverse selection (by raising the option
price so high that no lessee keeps the used good) we show that this is
not in their interest; a keeping option will always be included in some
contracts.
Asymmetric
Information in Health Insurance Markets, joint with James Cardon (Rand
Journal of Economics, Autumn 2001).
Adverse selection
is perceived as a major source of market failure in insurance markets.
There is very little empirical evidence on the extent of the problem.
We structurally estimate a model of health insurance and health care
choices using data on single individuals from the NMES. We test for
unobservables linking health insurance status and health care
consumption. We find no evidence of informational asymemtries. We
validate our estimates by comparing some of them, like the moral hazard
estimates, to the Rand Health Insurance Experiment findngs. They are in
the range.
Adverse
Selection in Durable Goods Markets, joint with Alessandro Lizzeri (American
Economic Review, December 1999)
An undesirable
feature of Akerlof style models of adverse selection is that ownership of
used cars is independent of preferences and is therefore ad hoc. We
present a dynamic model that incorporates the market for new goods.
Consumers self-select into buying new or used goods making ownership of
used goods endogenous. We show that, in contrast with Akerlof and in
agreement with reality, the used market never shuts down and that the
volume of trade can be quite substantial even in cases with severe
informational asymmetries. By incorporating the market for new goods,
the model lends itself to a study of the effects of adverse selection
on manufacturers' incentives. We find that manufacturers may gain from
adverse selection. We also give an example in which the market
allocation under adverse selection is socially optimal. An extension of
the model to a world with many brands that differ in reliability leads
to testable predictions of the effects of adverse selection. We show
that unreliable car brands have steeper price declines and lower
volumes of trade.
Estimating
Multiple-Discrete Choice Models (Review of Economic Studies,
April 99)
This paper presents
a multiple-discrete choice model for the analysis of demand of
differentiated products. Users maximize profits by choosing the number
of units of each brand they purchase. Multiple-unit as well as
multiple-brand purchases are allowed. These two features distinguish
this model from classical discrete choice models which consider only a
single choice among mutually exclusive alternatives. The model is
estimated using micro level data on personal computer purchases. The
estimated demand structure is used to assess the welfare gains from
computerization and technological innovation in peripherals industries.
The estimated return on investment in computers is 90%. Moreover, a 10%
increase in the performance-to-price ratio of microprocessors leads to
a 4% gain in the estimated end user surplus.
Interfering with
Secondary Markets, joint with Alessandro Lizzeri (Rand Journal of
Economics, Spring 99)
We develop a model
to address in a unified manner four ways in which a monopolist can
interfere with secondary markets. In the model consumers have
heterogeneous valuations for quality and used markets play an
allocative role. Our results are the following: (1) In contrast to
Swan's famous independence result, a monopolist does not provide
socially optimal durability. (2) Allowing the monopolist to rent does
not restore socially optimal durability and increases the monopolist's
market power in the used market. However, forcing the monopolist to
sell the goods may be a bad policy because it would lead to either
lower output or lower durability. (3) The manufacturer benefits from a
well functioning used market despite the fact that used goods provide
competition for new goods. (4) The monopolist prefers to restrict
consumers' abilities to maintain the good.
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