Essays On Applied Microeconomics: Airline Networks And Job Search

228 Pages·2017·2.25 MB·English

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Publicly Accessible Penn Dissertations
2017
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Kristijan Gjorgjevik
University of Pennsylvania, [email protected]
Follow this and additional works at: https://repository.upenn.edu/edissertations
Part of the Labor Economics Commons
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Gjorgjevik, Kristijan, "Essays On Applied Microeconomics: Airline Networks And Job Search" (2017).
Publicly Accessible Penn Dissertations. 2307.
https://repository.upenn.edu/edissertations/2307
This paper is posted at ScholarlyCommons. https://repository.upenn.edu/edissertations/2307
For more information, please contact [email protected].
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This dissertation consists of three chapters that develop and implement economic models to analyze
modern problems in Industrial Organization and Labor Supply. In the first chapter, I extend the standard
BLP model (Berry et al. [1995]) to account for capacity constraints in a network and evaluate the welfare
effects of the 2013 merger between American Airlines and US Airways. I show that including capacity as
a constraint in the profit maximization problem that airlines face generates better out-of-sample
predictions and leads to different policy implications. In particular, I find that the merger increased
consumer surplus by 1.5-1.7%, while the benchmark model could predict it to have decreased by as much
as 4.5%. In other words, ignoring capacity constraints could lead regulators to erroneously believe that
this merger harmed consumers. I find that, on average, the merger increased the variable profit margins of
airlines by 0.3-0.4%, and American Airlines' by 2.5%. I develop and implement an approach for ex-post
merger evaluation that could be useful in antitrust legislation.
In the second chapter, I extend the theory of efficiency wages (Shapiro and Stiglitz [1984]) to incorporate
employer-sponsored health insurance. I develop sufficient conditions under which the Affordable Care Act
increases efficiency wages. In particular, if the Affordable Care Act succeeds, at least in part, in inducing
employers to provide health insurance and individuals to self-insure, then wages will rise after its
implementation. I suggest that the Affordable Care Act may provide efficiency wage subsidies towards
the welfare-maximizing wage level, and numerically show the existence of regions where this is the case.
In the third chapter, I extend Mirrlees' theory of optimal taxation (Mirrlees [1971]) to include endogenous
job search. I use a public-use microdata file on the Canadian labor force to calculate the optimal, revenue-
neutral federal tax rates. The results are highly sensitive to the level of inequality aversion chosen for the
social welfare function. The optimal tax rate schedule is hump-shaped in income.
DDeeggrreeee TTyyppee
Dissertation
DDeeggrreeee NNaammee
Doctor of Philosophy (PhD)
GGrraadduuaattee GGrroouupp
Economics
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Katja Seim
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Airline Industry, Efficiency Wages, Industrial Organization, Labor Supply, Mergers, Mirrlees Taxation
SSuubbjjeecctt CCaatteeggoorriieess
Economics | Labor Economics
This dissertation is available at ScholarlyCommons: https://repository.upenn.edu/edissertations/2307
ESSAYS ON APPLIED MICROECONOMICS: AIRLINE NETWORKS AND
JOB SEARCH
Kristijan Gjorgjevik
A DISSERTATION
in
Economics
Presented to the Faculties of the University of Pennsylvania
in
Partial Fulfillment of the Requirements for the
Degree of Doctor of Philosophy
2017
Supervisor of Dissertation
Katja Seim
Associate Professor of Business Eco-
nomics and Public Policy
Graduate Group Chairperson
Jesus Fernandez-Villaverde, Professor of Economics
Dissertation Committee
Petra Todd, Alfred L. Cass Term Professor of Economics
Kenneth Burdett, James Joo-Jin Kim Professor of Economics
ESSAYS ON APPLIED MICROECONOMICS: AIRLINE NETWORKS AND JOB
SEARCH
(cid:13)c Copyright
2017
Kristijan Gjorgjevik
This work is licensed under the
Creative Commons
Attribution-NonCommercial-ShareAlike 4.0
International License
To view a copy of this license, visit
http://creativecommons.org/licenses/by-nc-sa/4.0/
To my parents. Thank you for everything.
iii
ABSTRACT
ESSAYS ON APPLIED MICROECONOMICS: AIRLINE NETWORKS AND JOB
SEARCH
Kristijan Gjorgjevik
Katja Seim
This dissertation consists of three chapters that develop and implement economic
models to analyze modern problems in Industrial Organization and Labor Supply. In
the first chapter, I extend the standard BLP model (Berry et al. [1995]) to account for
capacity constraints in a network and evaluate the welfare effects of the 2013 merger be-
tween American Airlines and US Airways. I show that including capacity as a constraint
in the profit maximization problem that airlines face generates better out-of-sample pre-
dictions and leads to different policy implications. In particular, I find that the merger
increased consumer surplus by 1.5-1.7%, while the benchmark model could predict it to
have decreased by as much as 4.5%. In other words, ignoring capacity constraints could
lead regulators to erroneously believe that this merger harmed consumers. I find that,
on average, the merger increased the variable profit margins of airlines by 0.3-0.4%, and
American Airlines’ by 2.5%. I develop and implement an approach for ex-post merger
evaluation that could be useful in antitrust legislation.
In the second chapter, I extend the theory of efficiency wages (Shapiro and Stiglitz
[1984])toincorporateemployer-sponsoredhealthinsurance. Idevelopsufficientconditions
under which the Affordable Care Act increases efficiency wages. In particular, if the
iv
Affordable Care Act succeeds, at least in part, in inducing employers to provide health
insurance and individuals to self-insure, then wages will rise after its implementation. I
suggest that the Affordable Care Act may provide efficiency wage subsidies towards the
welfare-maximizing wage level, and numerically show the existence of regions where this
is the case.
In the third chapter, I extend Mirrlees’ theory of optimal taxation (Mirrlees [1971])
to include endogenous job search. I use a public-use microdata file on the Canadian labor
force to calculate the optimal, revenue-neutral federal tax rates. The results are highly
sensitive to the level of inequality aversion chosen for the social welfare function. The
optimal tax rate schedule is hump-shaped in income.
v
Contents
List of Tables ix
List of Figures xii
1 AnEmpiricalAnalysisoftheAirlineIndustrywithCapacityConstraints 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2.1 Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2.2 Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.3.1 DB1B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.3.2 T-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.3.3 Evidence for Load Factors . . . . . . . . . . . . . . . . . . . . . . . 21
1.3.4 Sample Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.3.5 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.3.6 Airfare Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.3.7 Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.3.8 Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
vi
1.3.9 Empirical Capacity Constraints . . . . . . . . . . . . . . . . . . . . 39
1.4 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.4.1 Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.4.2 Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1.4.3 Prediction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
1.4.4 Model Fit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
1.4.5 Counterfactual: But-For AA-US Merger . . . . . . . . . . . . . . . 63
1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
2 Efficiency Wages with Health Insurance 94
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
2.2 Benchmark Model (Pre-ACA) . . . . . . . . . . . . . . . . . . . . . . . . . 99
2.2.1 Worker’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
2.2.2 Health Insurance Purchase Decision . . . . . . . . . . . . . . . . . 104
2.2.3 Employer’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . 106
2.2.4 Solving for No-Shirk-Conditions . . . . . . . . . . . . . . . . . . . 108
2.2.5 Solving for Equilibrium Wage . . . . . . . . . . . . . . . . . . . . . 114
2.3 Affordable Care Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
2.3.1 Worker’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
2.3.2 Employer’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . 120
2.3.3 Insurance Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . 121
2.3.4 Solving for No-Shirk-Conditions . . . . . . . . . . . . . . . . . . . 125
2.4 Benchmark/ACA Comparison . . . . . . . . . . . . . . . . . . . . . . . . . 129
vii
2.4.1 Case 1: Firm offers HI after ACA. . . . . . . . . . . . . . . . . . . 129
2.4.2 Case 2: Firm does not offer HI . . . . . . . . . . . . . . . . . . . . 133
2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
3 Mirrlees Taxation with Endogenous Search Effort 144
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
3.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
3.2.1 Worker’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
3.2.2 Government’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . 149
3.3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
3.4 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
3.4.1 Limited Information MLE . . . . . . . . . . . . . . . . . . . . . . . 152
3.4.2 Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
3.4.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Bibliography 161
Appendices 165
A Appendix to Chapter 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
B Appendix to Chapter 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
C Appendix to Chapter 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
viii