E. Glen Weyl

Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition

We extend five principles of tax incidence under perfect competition to a general model of imperfect competition. The principles cover (1) the independence of physical and economic incidence, the (2) qualitative and (3) quantitative manner in which taxes are split between consumers and producers, (4) the determinants of tax pass-through, and (5) the integration of local incidence to determine the overall division of surplus. We show how these principles can be used to simplify and generalize the analysis of a range of economic questions such as the optimal procurement of new markets and the welfare effects of third-degree price discrimination.

The First-Order Approach to Merger Analysis

Using information local to the premerger equilibrium, we derive approximations of the expected changes in prices and welfare generated by a merger. We extend the pricing pressure approach of recent work to allow for non-Bertrand conduct, adjusting the diversion ratio and incorporating the change in anticipated accommodation. To convert pricing pressures into quantitative estimates of price changes, we multiply them by the merger pass-through matrix, which (under conditions we specify) is approximated by the premerger rate at which cost increases are passed through to prices. Weighting the price changes by quantities gives the change in consumer surplus.

An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to Twenty-First-Century Financial Markets

The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial gambling before deregulation in the 1990s.

Market Power Screens Willingness-to-Pay*

What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property selects high social surplus projects. Optimal innovation policy thus trades off the ex-ante screening benefit and the ex-post distortion. It solves a multidimensional screening problem in the private information held by the innovator: research cost, quality and market size of the innovation. The appropriate degree of market power is never full monopoly pricing and is determined by measurable market characteristics, the inequality and elasticity of innovation supply, making the analysis open to empirical calibration. The framework has applications beyond IP policy to the optimal pricing of platforms or the optimal procurement of public infrastructure.

Imperfect Competition in Selection Markets

Policies to correct market power and selection can be misguided when these forces coexist. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of market power and selection. We use graphical price-theoretic reasoning to characterize the interaction between these forces. Using a calibrated model of health insurance, we show that the risk adjustment commonly used to offset adverse selection can reduce coverage and social surplus. Conversely, in a calibrated model of subprime auto lending, realistic levels of competition can generate an oversupply of credit, implying that greater market power is desirable.

Walrasian Equilibrium in Large, Quasilinear Markets

In an economy with indivisible goods, a continuum of agents, and quasilinear utility, we show that equilibrium exists regardless of the nature of agents’ preferences over bundles. This contrasts with results for economies with a finite number of agents, which require restrictions on preferences (such as substitutability) to guarantee existence. When the distribution of preferences has full support, equilibrium prices are unique.

Taxation and the Allocation of Talent

The efficiency consequences of taxation through its effect on occupational choice can be the opposite of the traditional labor supply effects that economists have focused on. Murphy et al. (1991) argue that some occupations may have positive, others negative, externalities. If occupations with positive externalities tend to be more enjoyable, then progressive taxation can have the efficiency benefit of encouraging talented, well-educated workers to go into more enjoyable, socially productive professions. I explore this mechanism and how social signalling, conformity, natural variation in the externalities of various professions and costly (rival) prestige can all play roles in generating it. I am working on gathering empirical data to test the effects of taxation on occupation choice. The argument suggests a number of directions for further research. This paper is the theory section of an ongoing project with an empirical component, and even this part is extremely preliminary and incomplete. ∗This paper was written while I was visiting at the Becker Center on Chicago Price Theory at the University of Chicago and I am grateful to the Center for their support. Ed Glaeser, James Heckman, Alex Kaufman, Steve Levitt, Kevin Murphy, Josh Schwartzstein, Jesse Shapiro, Andrei Shleifer and Heidi Williams provided helpful comments. As always, I am grateful most of all to my advisers Roland Benabou, Hyun Shin and especially Jose Scheinkman for their support and advice on this and other projects. †Bendheim Center for Finance, Department of Economics, Princeton University, 26 Prospect Avenue, Princeton, NJ 08540: eweyl@princeton.edu.

Linear Demand Systems are Inconsistent with Discrete Choice

We show that with more than two options, a discrete choice model cannot generate linear demand. In doing so, we demonstrate a prediction of such discrete choice models that is falsifiable based on local second-order properties of demand.

Matching markets in the digital age

Digital markets make it easier to match companies and customers Recent advances in information technology are enabling new markets and revolutionizing many existing markets. For example, taxicabs used to find passengers through chance drive-bys or slow central dispatching (see the photo). Location tracking, computer navigation, and dynamic pricing now enable ride-sharing services such as Uber to offer low and consistent delay times of only a few minutes. In a recent study, Cramer and Krueger (1) show that ride-sharing has dramatically increased the usage of drivers and their cars, cutting costs for riders. The results highlight the opportunities provided by digital markets. Further efficiency gains may come from academia-industry collaborations, which could also help to ensure that the markets develop in ways that further the public interest.

Benefit-Cost Paradigms in Financial Regulation

This paper builds on contributions to the Sloan conference Benefit-Cost Analysis of Financial Regulation, held at the University of Chicago, to show how benefit-cost analysis (BCA) of financial regulations should be conducted. Our major themes are that (1) on theoretical grounds, BCA should be easier for financial regulation than for other areas of regulation where it is already used, such as health and safety regulation; (2) while many needed valuations for BCA of financial regulation do not yet exist, those valuations are theoretically measurable; (3) once regulators commit to using BCA, economists will have incentives to work on supplying those valuations; (4) BCA will improve financial regulation and make it less vulnerable to judicial challenge; and (5) the specific protocols or paradigms of BCA will differ across different areas of financial regulation.