The Cost of Delay: Evidence from the Ethereum Transaction Fee Market
by Yinhong “William” Zhao
Abstract
Delaying a financial transaction can be costly, but the cost of delay is difficult to estimate in traditional
finance. I exploit the unique data offering and market design of the Ethereum blockchain to estimate the
cost of delaying financial transactions in decentralized finance (DeFi). I construct a dynamic auction
model for the Ethereum transaction fee market that relates users’ optimal transaction fee bids to their delay
cost functions and network conditions, and I structurally estimate the delay cost functions for different
users and transaction types. The average cost of delaying a transaction by one minute is 8.78 US dollars,
but the distribution of delay costs is highly skewed to the right. Delay costs are higher for complex
transactions and users who trade more frequently. I estimate that welfare loss due to network delay on
Ethereum was 14.03 million US dollars per day in July 2021, and I apply the delay cost estimates to
evaluate the welfare losses under alternative transaction fee mechanisms.
Campbell Harvey, Faculty Advisor
Michelle Connolly, Faculty Advisor
JEL Codes: D44; G10; L17;
Generic Entry and The Effect on Prices in the Prescription Drug Market
By Sahana Giridharan
Abstract
Drug firms have utilized a variety of strategies that contribute to rising drug prices in the
U.S. for the last few years. Strategic entry timing and number of indications a drug is approved
might be two factors that contribute to this rise in prices. While there have been some studies
uncovering a positive relationship between generic entry and branded prices, there has been little
research done on the effects of generic entry on generic prices thus far. This work can impact
policy aimed at decreasing generic drug prices and increasing competition in the generic drug
market.
Oncology and inflammatory bowel disease (IBD) are two disease areas that have a high
price burden to patients in the U.S. today, hence using Medicare Part B Average Sales Price
(ASP) data, I analyze the effect of entry timing on the price of 24 drugs in these two indication
areas. Using the Drugs@FDA Database, I collect data on the FDA approval date of a drug, and
on the indications a drug is approved for. Utilizing OLS, my results suggest that later entry times
lead to lower drug prices, with a 1 year increase in entry time resulting in a 6.99% increase in
prices. Results also suggest that an increase of 1 in the number of indications a drug is approved
for leads to a 49.79% decrease in drug price. This could suggest that having existing generic
competitors in the pharmaceutical market decreases generic prices, and that number of
indications is a strong indicator of drug price.
If the current work is confirmed by future studies similar to this studying entry time and
price in the generic pharmaceutical market, it is possible that future drug policy should focus on
promoting competition within the pharmaceutical market to lower generic prices.
Professor Frank Sloan, Faculty Advisor
Professor Grace Kim, Faculty Advisor
Professor Kent Kimbrough, Faculty Advisor
JEL Classification: L11; I11; C3
Taxing Marijuana and the Road to Reparations: Comparing the Colorado and Illinois Cannabis Markets
By Tommaso Carlo Filippo Babucci
Although still prohibited at the federal level, cannabis can now be found on the shelves of recreational dispensaries across thirty-three U.S states. This thesis examines the development of this legal market from both historical and empirical perspectives. Using a new data set, it estimates the determinants of cannabis sales and tax revenues in the Colorado market and analyzes the incidence of a single tax increase. The results, which suggest that legal cannabis behaves like a luxury good, are used to analyze the potential for cannabis-funded reparations programs in Illinois, which recently approved recreational sales of cannabis.
Advisors: Professor Connel Fullenkamp | JEL Codes: H2, R50, L15
The Upstream and Downstream Effects of Government Industrial Policy in the Rare Earth Elements Industry
By Charles Daniel
The Chinese government has found considerable success in stimulating economic modernization through its industrial policy. The development of the rare earths industry, in both upstream and downstream markets, exemplifies this success. Rare earths are a group of metals whose natural properties make them critical for many pieces of modern technology. Upstream, Chinese raw rare earth producers extracted minimal output in 1985; by 2001 they accounted for more than 90 percent of global production. China stimulated this growth beginning in 1990 with implicit and explicit subsidies for rare earth producers, which enabled them to enter the market and produce at lower marginal costs than other world firms. These lower costs enabled Chinese producers to assume a market-leading position, and this paper explains the resulting developments in the upstream rare earth market through the Stackelberg model, which describes sequential quantity competition. In 2006, China introduced an additional policy of export quotas on rare earths, intended to benefit downstream Chinese firms. These firms depend on rare earths as inputs for the final goods (such as batteries and personal electronics) they produce. After the quota announcement, Chinese downstream firms benefitted from continued unrestricted access to rare earths, while non-Chinese downstream firms faced higher costs on the world market for rare earth inputs. This paper uses the Bertrand model, in which firms compete on prices, to examine the subsequent effects on these downstream markets. While Chinese rare earth producers were harmed by the export quotas, the combination of the subsidy and the export quotas enabled China to complete its economic goals: to first gain leverage in the rare earths industry, and to second transition its economy toward higher-value products and services.
Advisors: Professor Alexander Pfaff, Professor Michelle Connolly | JEL Codes: L5, L52, L13
Competition and Innovation: Evidence from Third-Party Reprocessing in the Medical Device Industry
By Varun Prasad
Healthcare is projected to soon become the industry with the largest amount of spending on research and development in the world. While competition has the potential to catalyze the development of new healthcare technologies and drive down costs, increases in competition have also been thought to hinder innovation as a result of thinner profit margins and reduced incentives. I estimate whether and to what extent competition in the medical device industry promotes innovation. Using Food and Drug Administration data on medical device applications from 1976 to 2019, I examine how original equipment manufacturers respond to the entry of third-party reprocessed devices. I find that, when controlling for year and medical specialty, the introduction of a reprocessed device leads to an almost five-fold increase in new device applications by original manufacturers after both one and two years. These results suggest that an increase in competition within the medical device market has spurred innovation and the development of new technologies.
Advisors: Professor James Roberts, Professor David Ridley | JEL Codes: L1, D22, L65
Pricing and Pack Size Brand, Quantity, and Cost Considerations in Pricing Multipacks of Toothpaste
By Stephanie Wiehe
The US market for toothpaste, like many other goods, is shifting towards selling
in bulk. Multipacks of toothpaste require quantity discounts to incentivize consumers, making buying in bulk a great deal for the savings-minded toothpaste-shopper. It is more difficult to understand, however, producers’ willingness to sell multipacks of toothpaste, when margins are necessarily slimmer than single tubes due to quantity discounts. This paper explores the consumer’s decision in purchasing toothpaste as an interaction between savings on price and inventory considerations, like shopping and carrying costs. My model combines aspects of prior works on second degree price discrimination and quantity discounts with alterations to fit the intricacies of the market for toothpaste. The model’s predictions support the possibility of pack size as a tool for second degree price discrimination as shopping and carrying costs constitute two markets with different price elasticities of demand for single and multipacks of toothpaste. This work adds to the existing literature on storable goods and non-linear pricing and brings a new economics-based approach to a question faced by toothpaste producers.
Advisors: Professor Allan Collard-Wexler, | JEL Codes: L11; L42; D4
Deterring Ineffcient Gambling in Risk-Taking Agents
By Ryan Westphal
This paper proposes a model describing the incentive issues faced by prin-
cipals and agents when the agent has limited liability and is capable of un-
dertaking unidentifiable, inefficient risky behavior. We propose a contract
structure by which the principal deters risk by deferring payment to the
agent until she reaches an absorbing steady-state in which promised equity
alone deters inefficient behavior. The paper discusses the effect of exogenous
parameters on the tradeoffs facing the principal as well as the implications
they have on the efficient choice of contract. We also outline extensions to
the model in which the principal has access to a costly monitoring technology
to identify inefficient risk taking. The theoretical results have implications
for real-world employment contracts and practices in financial firms such as
investment banks and private equity funds.
Advisor: Curtis Taylor | JEL Codes: D82, D86, G32, L14 | Tagged: Contract Theory, Moral Hazard., Optimal Contracts, Risk Management
Competition from Incumbent Firms During Mergers: Estimating the Effect of Low-Cost Carriers on Post-Merger Prices
By Jonathan Gao
In an evaluation of a merger, the type of existing competitors in the market should play a role in constraining market power following the merger. In the airline industry, heterogeneity between low-cost carriers (LCCs) and legacy carriers suggest that the types of airline competitors could affect the price effects of a merger. This paper investigates the pro-competitive effects that existing, non-merging airline carriers have on prices when an airline merger occurs. Using data in the years around the 2008 merger between Delta and Northwest Airlines, the results show that average price levels of Delta and Northwest dropped after the merger, with larger price decreases on routes with LCC competitors. There is evidence that incumbent LCC competitors have a larger influence than legacy competitors in restricting post-merger prices and market power, confirming that the type of competitors matters in assessing the level of competition in a market. This paper also shows that much of the cost efficiencies from the merger were concentrated on routes with a hub of Delta or Northwest.
Advisor: James Roberts | JEL Codes: L0, L11, L13 | Tagged: Airline Competition, Airline Merger, Market Structure
Understanding SME Finance: Determinants of Relationship Lending
By Sean Suk Hyun
Much of the existing literature in small and medium-sized enterprise (SME) finance surveys the impact of borrower and lender characteristics on firms’ credit availability, and it has already been established that there is a link between strong firm-bank relationship and higher level of credit availability. In this paper, I focus on what determines the strength of relationship, measured by length and exclusivity. In particular, I was able to build an original metric to gauge the strength of relationship using the inverse value of the number of financial institution that a firm deals with. Using a set of regressions, I confirm the existing theories that size of the firm and type of ownership matters. Small firms and sole proprietorships tend to have longer and more exclusive relationships, which implies their reliance on relationship lending. Firm owner characteristics are shown to be somewhat important, in that it serves as proxies for a given firm’s creditworthiness.
Advisor: Grace Kim, Michelle Connolly | JEL Codes: G02, G21, G30, L14 | Tagged: Asymmetrical information, Credit Rationing, Relationship Lending, SME Finance
Video Game Sales: Does Diversity Pay?
By Helena Wu
The video game industry has grown into a mature market in the past decade, surpassing the size of the U.S. film industry in 2009. As a result of the rise in popularity of video gaming amongst many demographic groups of the American population, the underrepresentation of female and ethnic minorities in video games has become an increasingly relevant topic of discussion. This paper empirically examines the effects of including female and ethnic minority lead characters on the equilibrium sales volume of video games. Through the use of a reduced-‐form regression, the equilibrium quantity is regressed on a list of exogenous variables pertinent to the interest of this study. The findings suggest that the inclusion of female and minority lead characters affects sales of different genres of games in distinct manners, suggesting that the video game market has a heterogeneous consumer base with a diverse range of preferences. In addition to empirical work, one of the main contributions of this paper is creating a new and unique dataset (N=712) on game attributes, especially with regard to character gender and ethnicity. This paper’s findings have implications on the game design decisions for video game producers.
Advisor: Kent Kimbrough, Loi Leachman | JEL Codes: D00, L1, L82 | Tagged: Entertainment, Ethnicity, Gender, Sales, Video Game
