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Category Archives: 2012

The Impact of Spectrum Quality on Wireless Telecom Competition

By Stephen Zhu

This paper explores the metrics used by FCC and others for evaluating competition between wireless telecom carriers. It focuses on the impact of wireless spectrum quality on the results of FCC spectrum auctions and the estimated market shares of wireless carriers. In this case, it is revealed that quality is affected by the physical attributes of and the policies that are imposed at auction. Further, accounting for quality can lead to changes in the perception of concentration in local markets. The findings here give insights that can be used to better evaluate the competitive landscape of telecom in the future.

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Advisor: Michelle Connolly

Policy in Competitive Insurance Markets: Incentivizing Risk Sharing and Cost Efficiency

By Ross Green

In the setting of a population with heterogeneous risk of illness, informational asymmetries in a competitive health insurance market can cause the gains from risk sharing to fall short of social optimality in equilibrium. Traditional policies meant to address the under-provision of insurance, like mandating open enrollment or community-rated premiums, can be prohibitively costly or impossible to implement. I consider three policy regimes in the context of a competitive insurance industry in which firms maximize profits by exerting effort to monitor the provision of health care. When multiple risk types are present in the population, I find that a subsidy rule based on the marginal costs of insuring high risks can induce a Pareto-improvement to risk sharing gains, at a cost to the efficiency of health care provision. The novelty of the subsidy rule lies in the way it incentives pooling equilibria.

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Advisor: Curtis Taylor | JEL Codes: I0, I13, I18 | Tagged: Health Care Efficiency, Insurance Contracts, Private Information

Federal Outlays: The Effect of the President and Electoral Politics

By Michael Ge

The effect of congressional electoral politics on pork barrel spending is a well -studied phenomenon.
Likewise, presidential politics are receiving increased scrutiny. This paper aims to expand the
literature relating presidential electoral politics and the geographic distribution of federal funds on a
county level. It asks whether there is increased spending in the electorally-important counties in the
electorally-important states during and after a presidential elections. Results show that there are in
fact links between electoral importance and federal funding levels. However, results do not show a
trend in those results over different elections.

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Advisor: Marjorie McElroy | JEL Codes: A12, D72, E62, H50, H61 | Tagged: Distributive Politics, Pork Barrel, Presidential Elections, US Federal Budget

After the Storm Impacts of natural disasters in the United States at the state and county level

By Danjie Fang

Empirical research on the impact of natural disasters on economic growth has provided contradictory results and few studies have focused on the United States. In this thesis, I bridge the gap by examining the merits of existing claims on the relationship between natural disasters and growth at the states and county level in the U.S. I find that climatological and geophysical disasters have a small and negative impact on growth rates at the state level, but that this impact disappears over time. At the county level, I find that tornados have a slight but negative impact on per capita GDP levels and growth rates over a five year period across three states that experience this natural phenomenon. Controlling for FEMA aid, I find that there may be upward omitted variable bias in regressions that do not include the amount of aid as a variable. I find evidence that FEMA aid has a small but positive impact on growth and per capita GDP levels at both the county and state level.

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Advisor: Christopher Timmins, Michelle Connolly | JEL Codes: O11, O40, Q58 | Tagged: Aid, County, FEMA, Natural Disasters, State, United States

Economic Racism: A Look at Rental Prices in 1930

By Basel Fakhoury

The Great Migration caused massive demographic changes in Northeastern and Midwestern cities as African Americans moved from the South to the North. These changes led to economic discrimination and segregation within northern cities. This paper compares African American and white rental prices in four major cities: Chicago, Detroit, New York City, and Philadelphia in an effort to see how this discrimination and segregation affected rental prices. The results consistently show that in the most precise geographic area, prices rise as the concentration of blacks in those neighborhoods rise, which I believe is a result of overcrowding.

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Advisor: Patrick Bayer | JEL Codes:  J1, J11, J15, R31 | Tagged: Economic Discrimination, Housing Markets, Segregation, The Great Migration

Integrating Medicare and Medicaid Healthcare Delivery and Reimbursement Policies for Dual Eligible Beneficiaries: A Cost-Efficiency Analysis of Managed Care

By Kan Zhang

The extreme underpricing of Chinese Initial Public Offerings in the early days of the Chinese equity markets was reduced by several reforms instituted by the Chinese government from around 2000 to 2002. These reforms reduced 1-day returns on IPOs from 295% to 72%. The reforms reduced IPO underpricing by decreasing the inequality between IPO supply and demand. These reforms, while announced between 2000 and 2002, likely took until around 2004 to take full effect. In addition to inequality between supply and demand, other factors such as information asymmetry and government/quality signaling contributed to underpricing both before and after the reforms.

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Advisor: Frank Sloan | JEL Codes: D61, I0, I11, I12, I18 | Tagged: Dual Eligibles, Managed Care, Medicare

The Predictability of the Chilean Yield Spread as an Economic Indicator

By Cong Ding

A country’s yield spread, defined as the difference between its long term and short term interest rates, has historically been used in developed countries as a proxy for projecting the economy’s future gross domestic product. Because interest rates are so liquid, data on rates are accessible and up to date. This means that the yield spread can be derived very quickly, and can therefore serve as an useful indicator for future economic growth. This paper empirically examines if interest rate data collected from the Chilean Central Bank construct yield spread indicators that can be used to predict GDP levels in subsequent periods. In addition, I assess whether the predictability is equally strong across different monetary policy regimes within the time period. I expected to find that the yield spread is positively correlated with GDP, but due to the volatile nature of an emerging market, I do not expect for the predictability to be consistent across the entire time period examined. I find that the Chilean yield spread does have predictive power on GDP, but that predictability is not clearly distinct across different monetary policy regime.

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Advisor: Michelle Connolly

Are Asset Allocation Funds Good at Market Timing?

By Yunze Chen

“Don’t forget that your incredible success in consistently making each move at the right time in the
market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results.” (John Bogle, quoted in The Finance Buff, 2011).

John C. Bogle, the founder of the Vanguard Group, has long insisted on the superiority of index funds over actively managed mutual funds and the foolishness of attempts to time the market. He published two articles in the Journal of Portfolio Management showing that in eight out of nine style categories, managed mutual funds had lower risk-adjusted returns than the corresponding indexes did. While this demonstrates the failure of stock picking by mutual funds to serve investors well, it says nothing about their ability to time the market by changing styles. Managers of asset allocation funds often use a flexible combination of stocks, bonds, and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends. To test his view of market timing, we evaluated the returns of 82 major asset allocation funds by comparing them with the returns of corresponding baskets of Vanguard’s index funds over a 13-year time span. We find that on average the index funds have higher risk-adjusted returns. We conclude that “simplicity is the ultimate sophistication” applies to mutual fund investments.

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Advisor: Edward Tower | JEL Codes: G10, G11, G20 | Tagged: Expense Ratio, Mutual fund families, Performance

Simultaneous Occurrence of Price Jumps and Changes in Diffusive Price Volatility

By Shunting Wei

This paper uses high frequency financial data to study the changes in diffusive stock price volatility when price jumps are likely to have occurred. In particular, we study this effect on two levels. Firstly, we compare diffusive volatility on jump and non-jump days. Secondly, we study the change in diffusive volatility in local windows before and after 5-minute intervals on which price jumps are likely to have occurred. We find evidence that market price jumps occur simultaneously with a change in diffusive volatility with negative dependence in the direction of the jump and the volatility change. However, a similar relationship is not detectable in individual stock price data.

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Advisor: George Tauchen | JEL Codes: C22, G1, G19 | Tagged: Diffusive Volatility, Jump Tests, Realized Volatility, Stock Price Jumps

Empirical Evidence of Airline Merger Waves Based on A Selective Entry Model

By Peichun Wang

Ever since the Deregulation Act in 1978 in the U.S. airline industry, there have been series of major airline mergers and acquisitions, notably three major waves in the 1980’s, 1990’s, and late 2000’s. These mergers, especially the more recent multi-billion mergers (e.g. Delta- Northwest, United-Continental) have shown a trend of substantial market consolidation that inevitably worries consumers as well as the U.S. Department of Justice (DoJ). Most academic literature to date have tried to study mergers in a static setting where these mergers are assumed to be exogenous. However, the clear pattern of merger waves in the airline industry, as well as many other industries, suggests strong correlation between mergers. A few studies that attempted at a dynamic merger model remain theoretical due to computational barriers. In this paper, I found empirical evidence of merger waves by investigating the change of airline carriers’ incentive to merge after another merger between two other carriers. These results are based on a structural model of the U.S. airline industry, in which I estimate demand with a standard (for dierentiated product markets) discrete-choice nested logit model, but allow for selection on entrants’ costs and qualities, i.e. rms with lower costs and higher qualities would have been selected into the market before the merger, suggesting that post-merger entry is less likely than what non-selective entry models have predicted.

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Advisor: James Roberts | JEL Codes: L13, L25, L93 | Tagged: Airline, Merger Wave, Selective Entry


Undergraduate Program Assistant
Jennifer Becker

Director of the Honors Program
Michelle P. Connolly