Research
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Kim, Donggeun, Myongjin Kim, and Kerry Tan. (2021). "Tacit Collusion and Price Dispersion in the Presence of Southwest Airlines," Southern Economic Journal 88(1), 3-32.ABSTRACT: We study the impact of tacit collusion on price dispersion in the U.S. airline industry. We find that tacit collusion driven by multimarket contact has a positive effect on prices, but a negative effect on price dispersion. Our empirical results suggest that airfares throughout the price distribution increases, yet the price distribution becomes more compressed since 10th percentile airfares increase by a larger amount than 90th percentile airfares. Moreover, we also find that this pricing phenomenon does not exist if Southwest Airlines is present on the route. Thus, route-level price competition is softened when the same airlines directly compete more frequently, except when Southwest Airlines services that route. As such, our empirical analysis provides evidence that the presence of Southwest Airlines exhibits an anti-collusive effect.
Working Paper Version Online Appendix
Samuel, Andrew, Jeremy Schwartz, and Kerry Tan. (2021). "Licensing and the Informal Sector in Rental Housing Markets: Theory and Evidence," Contemporary Economic Policy 39(2), 325-347.
ABSTRACT: Although the goal of licensing is to ensure the quality of services, it can also induce firms to operate informally or exit altogether. This paper examines licensing in the rental housing market by developing a model that indicates licensing's impact on the size of the underground rental market, the number of vacancies, and homelessness are ambiguous. As a result, we calibrate the model using a unique dataset from Baltimore, which allows us to directly observe underground rentals and vacancies. Our calibrations show that licensing may have a modest impact on rents, while increasing quality more substantially.
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Sedgley, Norman, John Burger, and Kerry Tan. (2019). "The Symmetry and Cyclicality of R&D Spending in Advanced Economies," Empirical Economics 57(5), 1811-1828.
ABSTRACT: This paper explores the impact of cyclical macroeconomic fluctuations on corporate R&D spending. Most existing studies are conducted at the industry or firm level and find procyclical corporate R&D. Some of these studies also provide evidence suggesting credit constraints play an important role in explaining the cyclical behavior of R&D. Our analysis of the relationship between GDP, credit, and R&D begins with a theoretical model that allows for the possibility of credit constraints. We then turn to an empirical analysis of a panel of 22 advanced economies. Our most robust empirical finding is that R&D is symmetrically procyclical even after controlling for credit market conditions. We conclude that credit market conditions are not sufficient to fully explain the procyclical behavior of R&D and that procyclical incentives for innovative activity are also likely to play an important role.
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Rupp, Nicholas and Kerry Tan. (2019). "Mergers and Product Quality: A Silver Lining from De-Hubbing in the U.S. Airline Industry," Contemporary Economic Policy 37(4), 652-672.
ABSTRACT: This paper investigates how de-hubbing, which occurs when an airline ceases hub operations, impacts product quality. Examining four cases of de-hubbing following U.S. airline mergers between 1998 and 2016, we analyze three product quality measures: on-time performance, travel time, and flight cancellations. In order to isolate a merger's impact on product quality, we compare the results of four de-hubbing events that followed a merger with three de-hubbing cases that occurred independently of a merger. We find a silver lining from mergers since product quality improvements are isolated to de-hubbing events which follow airline mergers rather than non-merger induced de-hubbing.
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Tan, Kerry M. (2018). "Outsourcing and Price Competition: An Empirical Analysis of the Partnerships between Legacy Carriers and Regional Airlines," Review of Industrial Organization 53(2), 275-294.
ABSTRACT: This paper investigates the determinants and competitive effects of legacy carriers' outsourcing decision with independent regional airlines. Legacy carriers allocate a larger share of their operations to an independent regional airline partner compared to their own fleet or a wholly owned regional airline on routes that experience stronger competition, particularly from low-cost carriers. Moreover, legacy carriers' airfares are lower on routes that they outsource more prominently to an independent regional airline. The results suggest that increased route competition is a motivation for the growing use of independent regional airlines by legacy carriers.
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Burger, John D., Norman Sedgley, and Kerry M. Tan. (2017). "Macroeconomic Shocks and Corporate R&D," The B.E. Journal of Macroeconomics 17(2).
ABSTRACT: This paper investigates the impact of output and credit market shocks on R&D spending in advanced economies and builds on the commonly accepted view that credit constraints lead to procyclical R&D spending. A theoretical model is developed where output and credit shocks are treated separately, though these shocks may be highly correlated. The estimation procedure utilizes a panel vector autoregression (VAR) in order to empirically identify the role of credit market shocks separately from the output shocks more commonly studied in the existing literature. The primary empirical findings can be summarized as follows: (1) R&D responds pro-cyclically to output shocks at the macroeconomic level, and (2) R&D co-moves positively with credit. More concretely, the results indicate that negative output shocks induce a simultaneous and subsequent contraction in credit and R&D consistent with a model where credit constraints drive cyclical adjustments to R&D. The impact of output and credit shocks on R&D are economically significant and a simulation exercise suggests the shocks associated with the global financial crisis have reduced US R&D by 10% relative to the pre-crisis path.
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Tan, Kerry M. (2016). "Incumbent Response to Entry by Low-Cost Carriers in the U.S. Airline Industry," Southern Economic Journal 82(3), 874-892.
ABSTRACT: This paper studies incumbent price response to entry by low-cost carriers in the U.S. airline industry. I find that legacy carrier incumbents decrease their mean airfare, 10th percentile airfare, and 90th percentile airfare following entry by a low-cost carrier. Airfares decrease by a larger percentage at the right tail of the incumbents' price distribution than at the left tail, suggesting that increased competition from low-cost carrier entrants leads to lower price dispersion.
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Tan, Kerry M. and Andrew Samuel. (2016). "The Effect of De-Hubbing on Airfares," Journal of Air Transport Management 50, 45-52.
ABSTRACT: This paper studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. We develop a simple theoretical model to study the impact of de-hubbing on prices and quantities of direct flights at the hub airport. Using an event study of seven cases of de-hubbing between 1993 and 2009, we analyze how average airfares change following de-hubbing. Consistent with the theoretical implications, the empirical results suggest that airfares decrease when there is a low-cost carrier presence at the de-hubbed airport, whereas airfares increase when the de-hubbed airport is not serviced by a low-cost carrier.
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Sedgley, Norman H. and Kerry M. Tan. (2015). "The Roles of Innovators and Labor in a Schumpeterian Factor Endowments Based Model of Intraindustry Trade," Review of International Economics 23(5), 873-896.
ABSTRACT: This paper builds a model of Schumpeterian innovation and trade that emphasizes endowments of innovators and labor as a key factor in determining the pattern of trade. The model suggests a strong complementarity between intraindustry and interindustry trade. The pattern of interindustry vs. intraindustry trade is analyzed using the Grubel Lloyd index. The theoretical model predicts that the prominence of intraindustry trade is a nonlinear function of the ratio of the proportion of world knowledge domestically generated to the domestic share of the world labor supply. Strong empirical evidence for this key result is presented and implications are discussed.
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Dresner, Martin, Cunyet Eroglu, Christian Hofer, Fabio Mendez, and Kerry Tan. (2015). "The Impact of Gulf Carrier Competition on U.S. Airlines," Transportation Research Part A: Policy and Practice 79, 31-41.
ABSTRACT: Gulf carriers, such as Emirates Airline, Etihad Airways, and Qatar Airways, have expanded aggressively and are creating an increasingly dense global network. These carriers’ future growth prospects, however, hinge on their ability to gain access to lucrative markets in Europe and America, for example. Existing bilateral agreements stifle the Gulf carriers' ambitious expansion plans in some instances, and incumbent carriers lobby to restrict further market access. To contribute to this debate, the objective of this research is to empirically examine the effects of Gulf carrier competition on U.S. carriers’ passenger volumes and fares in international route markets. Based on data obtained from the U.S. Department of Transportation, the empirical results suggest that greater competition by Gulf carriers in U.S. international markets is associated with 1) significant growth in U.S.-Middle East traffic volumes and 2) small but statistically significant traffic losses and fare reductions for U.S. carriers in route markets connecting the U.S. with Africa, Asia, Australia and Europe.
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Working Papers
"An Evaluation of Legislation Designed to Improve Airline Pilots' Safety and Performance," with Nicholas Rupp. (Revise & Resubmit: Journal of Economics & Management Strategy)ABSTRACT: H.R. 5900, which was passed by Congress in July 2010, legislated more restrictive pilot rest requirements and increased the number of pilot training hours required to obtain an airline transport pilot license. This paper examines the effect that raising the occupational licensing standards have had on airline service quality. A priori, the effect is ambiguous since putting in place more restrictive licensing requirements reduces the available pool of replacement pilots and may cause airline pilots to behave opportunistically and put forth less effort, which suggests a detriment to on-time performance. On the other hand, well-rested and more experienced pilots may provide enhanced productivity leading to improved on-time performance. Our event study analysis surrounding the effective date of H.R. 5900 (August 2013) shows an increase in traditional delays in the short run amid an ongoing pilot shortage, while extended delays were also exacerbated in the short run as a result of binding work schedule restrictions.