Department of Economics Graduate Theses
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Item Shadow Bank Branch Networks in the United States Mortgage Market(2024-07-29) Bui, Long; Economics; Clark, RobertThis dissertation explores the role and impact of shadow banks in the U.S. mortgage market through three interrelated studies. Following the global financial crisis, shadow banks rose to prominence, accounting for approximately half of U.S. mortgage originations by 2017. Despite technological advancements that reduce the need for physical branches, shadow banks maintain a tangible branch presence. The first study constructs a unique dataset by combining the Your-Economy Time Series dataset with the Home Mortgage Disclosure Act dataset, identifying active shadow bank lenders and their branch operations across the lower 48 states. This novel dataset was validated by matching it with the Summary of Deposits dataset for traditional banks, showing high reliability. The analysis reveals that shadow banks maintain branches across the U.S. but concentrate their branch operations in a select few. The second study examines the effects of shadow bank branches on market share and branching decisions. Using a two-stage least squares approach and a structural model, based on a many-player game with simultaneous moves under incomplete information, the study finds that additional branches increase market share, but the effect diminishes due to cannibalization and competition from rival branches. These factors also reduce the likelihood of shadow banks opening new branches. The third study investigates the competitive effects of mergers between shadow banks on interest rates at the county level. Utilizing loan-level regressions, two-way fixed effects regression models, and event studies, the analysis shows a small increase in interest rates following mergers, although not always statistically significant. This result suggests that competitive pressures persist due to the presence of numerous lenders and low market concentration. In summary, this dissertation provides insights into shadow banks' operations, competitive dynamics, and geographical distribution in the U.S. mortgage market. It shows the concentrated nature of shadow bank operations, branch expansion's diminishing returns, and mergers' competitive effects.Item Three Essays on New Product Introduction and Product Failures(2024-04-11) Gong, Yiran; Economics; Clark, RobertThis thesis presents an empirical study of new product introduction and product failures. First, I investigate reasons for product failures through a case study of the introduction and subsequent exit of Coca-Cola's Vanilla Coke. Using scanner data, we estimate a structural model of the soft drink industry to infer Coca-Cola’s profit gains from the new brand. Results show that they would not cover associated fixed costs. We then analyze the importance of market variables for explaining the failure and find that Vanilla Coke’s profitability is most sensitive to rival reactions. We also find Coca-Cola did anticipate some rival reaction that made survival harder, but the actual changes were even more intense and contributed to Vanilla Coke's exit. I also study the evaluation of new products’ welfare effects. Structural estimation of such effects largely relies on demand models with a logit error. In markets where consumers have both brand and option preferences, nested logit demand models are used. However, the logit errors lead to welfare overestimation and make welfare estimates sensitive to the number of nests. To address these problems, I develop an empirical framework to estimate a pure characteristics demand model that allows for option choices and eliminates logit errors. I provide an application using scanner data to evaluate four new products introduced to the U.S. shampoo market. Compared with models featuring logit errors, my approach reduces the implausibly large estimates by at least 73%. Finally, I explore supply-side optimization problems when the pure characteristics model is employed on the demand side. Pure characteristics models are well-suited for analyzing problems involving a changing number of products. Examples include pricing new products, product assortment, and merger analysis. However, it is challenging to incorporate a supply side because market share functions can be set-valued and discontinuous. To fill the gap, I utilize a regularization method proposed in the mathematical programming literature to obtain a unique and continuous market share function, which can be estimated feasibly. My simulation results suggest that such a method can provide accurate estimates for firms' marginal costs and new equilibrium prices when the number of products changes.Item Three Essays on US Corporate Bond Market and Canadian Newspaper Market(2024-04-09) Diao, Chengjie; Economics; Clark, RobertThis thesis presents an empirical study of the US Corporate Bond market and the consolidation of the Canadian Community Newspaper Market. First, we focus on the effects of post-crisis regulations designed to reduce risk exposure on dealers’ trading behaviors and market liquidity. A simple model is developed to illustrate the relationship between dealers’ trading behaviors and market liquidity, specifically predicting that optimizing relationships with long-term trading partners enables dealers to maintain the same level of liquidity while reducing inventory risk. Empirical regression analysis, using the Trace Academic dataset, was conducted to test this hypothesis. The findings support the notion that since the implementation of the Dodd-Frank Act, dealers have indeed optimized their trading partnerships to provide consistent liquidity levels under regulatory pressure, thereby enhancing market efficiency. The thesis also delves into the origins of the centrality premium in the US corporate bond market, which operates on an over the counter basis. In this market, dealers are positioned within a network, with more connected, central dealers at the core and less connected, peripheral dealers at the edges. A common observation is that core dealers typically charge higher markups than their peripheral counterparts, resulting in a centrality premium. The study investigates the factors contributing to this premium. It reveals that core dealers capitalize on their search efforts, retain bonds for longer periods, and engage with higher-valued clients, leading to a greater trading surplus. Finally, I explore the consolidation of the Canadian community newspaper market. In 2017, Postmedia and Metroland engaged in a swap involving dozens of newspapers across several local regional markets, followed by closing most of the swapped publications. This led to an increased concentration in these markets, potentially resulting in anti-competitive impacts. My investigation delves into the details of advertising rates before and after this event. My findings reveal that while there is indeed a spike in the average advertising rate in the treatment markets following the event. However, this is attributable to the strategic shutdown of lower-rate newspapers following the swap. There is no evidence of always existing newspapers increasing rates after the swap events.Item Three Essays on Procurement AuctionsArsenault, Alex; Economics; Clark, RobertThis thesis is an empirical study of procurement auctions. First, I explore how varying the timing of a sequence of auctions affects both bidder behaviour and the welfare of procurers and bidders. We develop a structural auction model with endogenous participation in which bidding may be simultaneous or sequential. Bidders perceive auctioned objects as either complements or substitutes. We apply this model to auctions for roof-maintenance projects in Montreal. We show that complementarities account for as much as 17\% of the total size of contract combinations. We develop an algorithm to search a schedule of auctions and show that the total cost of projects can be reduced by over 8\%. I also study the effect of corruption on outcomes of procurement auctions. I define corruption as any illegal behaviour used by firms to lower their costs. In Quebec, firms that are found to be involved in corruption are not allowed to bid in procurement auctions for a period of five years and added to a list. I consider the outcome of auctions in markets where firms on that list were active. Bids by corrupt firms are lower than bids by clean firms and corrupt firms are more likely to win auctions in which they participate. The behaviour of clean firms adjust as they interact with corrupt firms. Costs of corrupt firms recovered through structural estimation are shifted down by around 4.1\% relative to clean firms. Only half of this advantage is reflected in their bids. Finally, I run a case study of corruption in procurement auctions. The English Montreal School Board (EMSB) was placed under trusteeship by the government of Quebec in November 2019, following underreporting of contracts that the EMSB was legally required to report. Using public data, I confirm underreporting in the period that precedes the trusteeship and I find that the value of contracts reported by the EMSB after the trusteeship is in line with that of other school boards. Using a Difference-in-difference approach, I confirm that the underreporting disappears as the trusteeship begins. Simulations show damages of around \$16 millions between 2009 and 2015.Item Essays on International Trade and Financial EconomicsNoel, Antoine; Economics; Sun, Amy HongfeiThis dissertation examines two important aspects of economics: international trade and financial economics. In the part of the thesis which focuses on international trade, I analyze the impact of preferential trade agreements in boosting global trade liberalization. I find that permitting countries to sign preferential trade agreements fails to reduce global tariffs when countries only differ in their levels of production structure. Regarding financial economics, we provide an exact algorithm for efficient computation of models that have an ARCH(?) representation, a technique often used to estimate the volatility of exchange rates. Finally, we develop a model for analysis of information transparency of optimal financial contracts. In Chapter 2, I examine the effects of differences in production structure across countries on the liberalization of global tariffs in the coalition-proof Nash equilibrium sense. Using a static tariff-setting game with endogenous trade agreements, I develop a competing exporters model with three countries and consider three settings that are differentiated by the type of trade agreements that countries can sign: free trade agreements, customs unions, and trade agreements that comply with the most-favour-nation (MFN) clause, i.e. MFN trade agreements. Using two analytical exercises involving symmetric and asymmetric changes in production structure, I find that preferential trade agreements incentivize countries to have higher global tariffs than if they could not sign such agreements, for sufficiently large differences in production structure. Chapter 3 provides an exact algorithm for efficient computation of the time series of conditional variances of models that have an ARCH(?) representation. The efficiency of the algorithm allows estimation of ARCH(?) models, even with very large data sets and without the truncation of the filter commonly applied in the literature. This reduces the bias of the quasi-maximum-likelihood estimators and improves out-of-sample forecasting. Chapter 4 proposes a theory on information transparency of optimal financial contracts. Our model nests adverse selection and agency costs. We demonstrate that there exists a unique perfect Bayesian equilibrium with novel features. First, three types of optimal contracts can arise endogenously: equity, transparent debt, and opaque debt. The former two require firms to take on a costly verification technology while opaque debt does not. Second, the unique equilibrium is either pooling on opaque debt, or mixing with transparent and opaque financing. Third, firms with sufficiently high quality and intermediate levels of internal funds find it optimal to use a transparent contract.