Essays in applied microeconomics

Andrew Neil Greenland, Purdue University

Abstract

This thesis is comprised of three independent chapters. The first two chapters quantify the direct and competitive effects of automotive recalls on firm value. The third chapter discusses the impact of increasing import competition on schooling decisions. In the first chapter, I demonstrate that unobserved quality may be signaled by a reputational asset common to many firms — country of origin. Analyzing stock market reactions to all published automotive recalls in the U.S. from 1966-2011, I find evidence that consumers learn about product quality both through historic experience with firms and country of origin. I estimate that firms whose products are recalled initially experience abnormal returns of -0.6%, and that these abnormal returns diminish with each subsequent recall. Further, I find significant intra-country spillovers of -0.15% during recall announcements. These results have implications for firms' willingness to invest in quality and they lend insight into the perceived country-specific quality observed in the automotive industry. In the second chapter, joint work with Anson Soderbery, we explore the direct effects of product recalls on market outcomes. We estimate and follow the channels through which wealth losses are generated. Using highly disaggregate automobile data matched with the universe of US recalls, we demonstrate that firm demand and profits are significantly impacted by recalls. Recalls causing death lead to, on average, a 12% decrease in market share for the offending model, with significant dispersion across vehicle types. Tracing these fatalities through the market highlights how these direct losses transfer to competing models. Fatalities account for $100B in lost profits over the period 1994-2011. Importantly, there are winners and losers from fatalities. The US Big 3 are hurt the most, accounting for $200B in lost profits, while the Japanese Big 3 absorb these losses and actually gain $50B. The final essay, written jointly with John Lopresti, exploits regional variation in exposure to Chinese import competition to identify the effect of trade-induced changes in labor market conditions on U.S. high school dropout rates. Employing the methodology of Autor et al. (2013), who examine the effect of increased Chinese import competition on U.S. employment and wages, we argue that increasing import competition increases the relative returns to education and leads to a reduction in dropout rates. For the region with the median dropout rate in 2000, a movement from the 25th to the 75th percentile of change in import exposure per worker corresponds to a reduction in the 2007 dropout rate by 0.456 percentage points, which corresponds to a reduction in the number of dropouts by over 68,000 annually. Using available estimates of the present value of the lifetime net public benefit of each additional high school graduate and extrapolating such an annual reduction in dropouts to the entire country implies a net public benefit between $4.4 billion and $14.4 billion. Results are robust to controls for changes in school quality, demographic composition, and initial labor market conditions.

Degree

Ph.D.

Advisors

Soderbery, Purdue University.

Subject Area

Economic theory

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