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Essays on the Allocation of Scarce Resources
among Competing Ends
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Cicala, Steven Joseph. 2013. Essays on the Allocation of Scarce Resources among Competing
Ends. Doctoral dissertation, Harvard University.
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Essays on the Allocation of Scarce Resources Among
Competing Ends
A dissertation presented
by
Steven Joseph Cicala
to
The Department of Economics
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy
in the subject of
Economics
Harvard University
Cambridge, Massachusetts
May 2013
(cid:13)c 2013 Steven Joseph Cicala
All rights reserved.
Dissertation Advisor: Author:
Professor Edward Ludwig Glaeser Steven Joseph Cicala
Essays on the Allocation of Scarce Resources Among Competing Ends
Abstract
The first chapter of this dissertation evaluates changes in fuel procurement practices by
coal- and natural gas-fired electricity generating plants in the United States following
state-level legislation that ended cost-of-service regulation. I construct a detailed dataset
thatlinksconfidential,shipment-leveldataonthepriceofvirtuallyallofthefueldelivered
to coal- and gas-fired electricity plants in the United States from 1990-2009, with plant-
level data on operations and regulatory status. I find the price of coal drops by 12% at
deregulated plants relative to matched plants that were not subject to any regulatory
change, whereas there was no relative drop in the price of gas. I show how my results
lend support to theories of asymmetric information between generators and regulators,
regulatory capture, and capital-bias as important sources of distortion under cost-of-
service regulation.
The second chapter analyses changes in the cost of generating electricity following
the introduction of regional wholesale electricity markets. I use proxy methods based on
Olley and Pakes (1996); Levinsohn and Petrin (2003) to estimate fuel-specific production
functions, and construct the Olley-Pakes productivity index to decompose costs in to
within-plant productivity and allocative efficiency changes. I then apply a potential
outcomes framework to the derived productivity estimates, allowing the construction of
counterfactual costs that explicitly account for permanent differences between market
iii
and non-market areas and common transitory shocks. I find that the introduction of
market-based dispatch methods has reduced fossil-fuel production costs by upwards of
15%.
The third chapter is based on joint work with Roland Fryer and Jorg Spenkuch. We
develop a Roy model in which individuals sort into peer groups based on comparative
advantage. Two key results emerge: First, when comparative advantage is the guiding
principle of peer group organization, the effect of moving a student into an environment
with higher-achieving peers depends on where in the ability distribution she falls and the
effective wages that clear the social market. As a result, linear in means estimates of peer
effects are not identified. We show that the model’s testable prediction in the presence of
this confounding issue is borne out in two data sets.
iv
Contents
Abstract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
1 When Does Regulation Distort Costs? Lessons from Fuel Procurement in US
Electricity Generation 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Background on the U.S. Electricity Industry . . . . . . . . . . . . . . . . . . 5
1.3 Sources of Regulatory Imperfection . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.6 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.7 Transfers versus Efficiency Gains . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2 Productive Versus Allocative Efficiency Gains from Market-Based Electricity
Generation: A Potential Outcomes Approach 52
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.2 Background on Power Control Areas and Dispatch in the United States . . 54
2.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.3.1 Structural Estimation of Electricity Production Functions . . . . . . 59
2.3.2 Accounting for Selection. . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.3.3 Causal Estimation of Allocative Efficiency Gains. . . . . . . . . . . . 66
2.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
v
3 A Roy Model of Social Interactions 82
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
3.2 The Market for Peers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
3.2.1 A Roy Model of Social Interactions . . . . . . . . . . . . . . . . . . . 86
3.2.2 ReinterpretingthePeerEffectsLiteratureThroughtheLensofaRoy
Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.2.3 Predicting the Efficacy of Social Interventions in the Presence of
Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.2.4 An Extension to the Basic Model . . . . . . . . . . . . . . . . . . . . 109
3.3 Empirical Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
3.3.1 The Empirical Content of a Roy Model of Social Interactions . . . . 110
3.3.2 EvidenceConsistentwithaRoyModelApproachtoSocialInteractions113
3.4 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Bibliography 127
A Data Appendix for Chapters 1 and 2 142
B Appendix for Chapter 3 151
B.1 New York City Public Schools Data . . . . . . . . . . . . . . . . . . . . . . . 151
B.2 National Educational Longitudinal Study Data . . . . . . . . . . . . . . . . . 152
B.3 Embedding the Roy Model in a Social Multiplier Framework . . . . . . . . 153
vi
List of Tables
1.1 Characteristics of Divested and Non-Divested Plants in 1997 . . . . . . . . . 22
1.2 Characteristics of Coal Deliveries to Divested and Non-Divested Plants in
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.3 Characteristics of Divested and Non-Divested Generating Units in 1997 . . 31
1.4 Coal: Matched DID Estimates of Log(Price) and Divestiture . . . . . . . . . 32
1.5 Coal: Difference-in-Difference Estimates of Log(Price) and Divestiture . . . 33
1.6 Gas: Matched DID Estimates of Log(Price) and Divestiture . . . . . . . . . 40
1.7 Matching DID Estimates of Sulfur Compliance Strategy . . . . . . . . . . . 41
1.8 Matching DID Estimates of Log(Price) and Divestiture, by Coal Rank
Switching and Import Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1.9 Matching DID Estimates of Percent of In-State Coal Among Plants Burning
In-State Coal in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.1 Characteristics of Coal- and Oil-Fired Facilities 1990-1996 . . . . . . . . . . 70
2.2 Characteristics of Gas-Facilities by 1996 Incumbency . . . . . . . . . . . . . 71
2.3 Electricity Production Function Estimates: Coal-Fired . . . . . . . . . . . . . 72
2.4 Electricity Production Function Estimates: Gas-Fired . . . . . . . . . . . . . 72
2.5 Electricity Production Function Estimates: Oil-Fired . . . . . . . . . . . . . . 73
2.6 Difference-in-Differences Estimates of Market Dispatch on Plant Productivity 78
2.7 Difference-in-Differences Estimates of Marginal Fuel Cost on Plant Output 79
3.1 Summary Statistics for NYCPS Data . . . . . . . . . . . . . . . . . . . . . . . 116
3.2 Estimates of the Relationship between Individuals’ Rank and Behavior: ELA120
3.3 Estimates of the Relationship between Individuals’ Rank and Behavior: Math121
3.4 Summary Statistics for NELS Data . . . . . . . . . . . . . . . . . . . . . . . . 123
A.1 Summary of Coal Plant Divestitures by State . . . . . . . . . . . . . . . . . . 143
vii
List of Figures
1.1 Coal-Fired Plants in The United States, 1990-2009 . . . . . . . . . . . . . . . 8
1.2 Estimated Shipping Costs per MMBTU of Coal. . . . . . . . . . . . . . . . . 16
1.3 Distance Between Divested and Matched Facilities . . . . . . . . . . . . . . . 19
1.4 Divested and Control Coal-Fired Plants within 200 miles . . . . . . . . . . . 20
1.5 Price per MMBTU by Coal Type, 1990-2009 . . . . . . . . . . . . . . . . . . . 24
1.6 Coal Price per MMBTU by Divestiture Class, 1990-2009 . . . . . . . . . . . . 24
1.7 Matching Estimates of Delivered Coal Price at IOU and Gov/Muni/Coop
Plants within 100 miles, 1990-2009 . . . . . . . . . . . . . . . . . . . . . . . . 25
1.8 Pre-Trend Test: Matching Estimates of Delivered Coal Price, 1990-1997 . . . 29
1.9 Matching by Year from Divestiture: Log(Price) . . . . . . . . . . . . . . . . . 35
1.10 Matching by Year from Divestiture: Log(Net Generation), 10 nearest neigh-
bors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1.11 Divested and Control Gas-Fired Plants, 1990-1997 . . . . . . . . . . . . . . . 38
1.12 Pre-Trend Test: Matching Estimates of Delivered Gas Price, 1990-1997 . . . 39
1.13 Matching by Year from Divestiture: Sulfur Compliance Strategies , 10
nearest neighbors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.14 Matching by Year from Divestiture: Fraction of Coal Sourced In-State, 10
nearest neighbors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1.15 Matching by Year from Divestiture: Mine Labor, 10 nearest neighbors . . . 49
1.16 Matching by Year from Divestiture: Source Mine Characteristics, 10 nearest
neighbors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2.1 U.S. Electricity Grid in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.2 Inverse Fuel Productivity by Dispatch Method, Weighted by Quantity . . . 75
2.3 Across-Plant Inverse Fuel Productivity by Dispatch Method, Unweighted . 76
viii
2.4 Covariance Between Inverse Fuel Productivity and Production Share by
Dispatch Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2.5 Observed Average Fuel Costs versus Estimated Counterfactual in Absence
of Market Dispatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.1 Equilibrium with Diminishing Marginal Product in Both Social Sectors . . 90
3.2 The Effect of Higher Peer Quality when Marginal Product is Diminishing
in Both Sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3.3 Multiple Equilibria when Marginal Product is Increasing in Sector Labor
Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.4 METCO: The Effect of Lowering Academic Quality at the Bottom of the
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
3.5 Constant and Positive Effect of Average Ability on Sector Membership . . 100
3.6 Reconciling Heterogeneous Treatment Effects with the Comparative Ad-
vantage Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.7 Reconciling Results from Carrell et al. (2010) with the Comparative Advan-
tage Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.8 Reconciling Results from Moving To Opportunity with the Comparative
Advantage Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
3.9 Evidence from New York City Public Schools . . . . . . . . . . . . . . . . . 118
3.10 Evidence from the National Educational Longitudinal Study . . . . . . . . 125
A.1 Total Heat Content and Cost of Coal Deliveries by Rank, 1990-2009 . . . . . 145
A.2 U.S. Coal Production and Labor Demand, 1990-2009 . . . . . . . . . . . . . 149
ix