Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft

I construct a dynamic model of transactions in used capital to understand the role of leasing when trading is subject to frictions. Firms trade assets to adjust their productive capacity in response to shocks to profitability. Transaction costs hinder the efficiency of the allocation of capital, and lessors act as trading intermediaries who reduce trading frictions. The model predicts that leased assets trade more frequently and produce more output than owned assets, for two reasons. First, high-volatility firms are more likely to lease than low-volatility firms, since they expect to adjust their capacity more frequently. Second, ownership's larger transaction costs widen owners' inaction bands relative to lessees'. Using data on commercial aircraft, I find that leased aircraft have holding durations 38-percent shorter and fly 6.5-percent more hours than owned aircraft. Additional tests indicate that most of these differential patterns in trading and utilization arise because owners have wider inaction bands than lessees, and carriers' self-selection into leasing plays a minor role.Leasing, Capital Goods, Aircraft

The role of trading frictions in real asset markets

This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid—i.e., more difficult to sell. Thus, firms hold on longer to them amidst profitability shocks. Hence, when markets for assets are thin, firms’ average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion.decentralized markets, search, productivity, asset prices, aircraft.

Dynamic Inefficiencies in Employment-Based Health Insurance System Theory and Evidence

We investigate how the employment-based health insurance system in the U.S. affects individuals' life-cycle health-care decisions. We take the viewpoint that health is a form of human capital that affects workers' productivities on the job, and derive implications of employees' turnover on the incentives to undertake health investment. Our model suggests that employee turnovers lead to dynamic inefficiencies in health investment, and particularly, it suggests that employment-based health insurance system in the U.S. might lead to an inefficient low level of individual health during individuals' working ages. Moreover, we show that under-investment in health is positively related to the turnover rate of the workers' industry and increases medical expenditure in retirement. We provide empirical evidence for the predictions of the model using two data sets, the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). In MEPS, we find that employers in industries with high turnover rates are much less likely to offer health insurance to their workers. When employers offer health insurance, the contracts have higher deductibles and employers' contribution to the insurance premium is lower in high turnover industries. Moreover, workers in high turnover industries have lower medical expenditure and undertake less preventive care. In HRS, instead we find that individuals who were employed in high turnover industries have higher medical expenditure when retired. The magnitude of our estimates suggests significant degree of intertemporal inefficiencies in health investment in the U.S. as a result of the employment-based health insurance system. We also evaluate and cast doubt on alternative explanations.

An empirical equilibrium model of a decentralized asset market

I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents’ direct transactions

The Influence of Temperature Gradients on Soil Moisture Flow

The isothermal movement of liquid water in saturated soil has been intensively studied, and a sound theoretical basis has been intensively studied, and a sound theoretical basis has been developed. Considerably less is known about the flow of water in unsaturated soils, but a general theory based on Darcy’s law of flow is beginning to develop. A good theoretical basis exists for the vapor diffusion under isothermal conditions. Inconsistent data and theories are found in the literature concerning the movement of water in both the vapor and liquid phases, under the influence of thermal fields

Demand Spillovers and Market Outcomes in the Mutual Fund Industry

When consumers concentrate their purchases at a single firm, a firm that offers more products than its rivals can gain market share for all its other products, as well. These spillovers induce firms to compete by offering a greater variety of products rather than lower prices, and a natural form of industry concentration with few large firms offering many products can arise if spillovers are strong enough. This paper presents a simple model that illustrates this mechanism explicitly. The empirical analysis documents strong demand spillovers in the retail segment of the U.S. mutual fund industry, in which fees are non-trivial, families offer a large number of funds, and the market is quite concentrated. Instead, spillovers are weaker, fees are lower, families offer fewer funds, and the market structure is more fragmented in the institutional segment. The current design of employer-sponsored defined-contribution retirement plans likely accounts for these differential demand patterns between the retail and the institutional segments

A Structural Model of the Retail Market for Illicit Drugs

We estimate a model of illicit drugs markets using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs’ quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers’ relative profitability of targeting loyal buyers versus first-time buyer

Demand Spillovers and Market Outcomes in the Mutual Fund Industry

When consumers concentrate their purchases at a single firm, a firm that offers more products than its rivals can gain market share for all its other products, as well. These spillovers induce firms to compete by offering a greater variety of products rather than lower prices, and a natural form of industry concentration with few large firms offering many products can arise if spillovers are strong enough. This paper presents a simple model that illustrates this mechanism explicitly. The empirical analysis documents strong demand spillovers in the retail segment of the U.S. mutual fund industry, in which fees are non-trivial, families offer a large number of funds, and the market is quite concentrated. Instead, spillovers are weaker, fees are lower, families offer fewer funds, and the market structure is more fragmented in the institutional segment. The current design of employer-sponsored defined-contribution retirement plans likely accounts for these differential demand patterns between the retail and the institutional segments.mutual funds, retirement plans, demand spillovers, sunk costs.

Credit shocks and equilibrium dynamics in consumer durable goods markets

This article studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) indivisible durable goods are vertically differentiated in their quality and (2) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. The model highlights a new transmission mechanism for macroeconomic shocks and successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, which depresses mid-quality car prices. In turn, this effect reduces wealthy households’ incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”)