working papers

Abstract:  Pricing regulation in the United States commonly allows firms in regulated markets to pass on increases in input costs onto captive consumers. However, when regulated firms are vertically integrated with input suppliers, this form of regulation creates incentives for firms to extract profits by overpaying their affiliated supplier and then recovering costs from consumers, a phenomenon known as "regulatory evasion." This paper tests for evidence of evasion by studying input procurement decisions of firms in a major price-regulated market in the US, specifically electric and natural gas utilities deciding to procure natural gas pipeline capacity. Using a hand-built dataset on bilateral contracts of pipeline companies, I apply a triple-differences approach to test whether utilities procure more capacity at higher prices when contracting with an affiliated pipeline company, relative to other buyers who do not face pricing regulation. Results show that evasion by utilities is significant: utilities procure too much capacity from affiliates causing pipeline companies to overbuild new capacity by 28-33 percentage points on average. In contrast, I do not find that utilities pay differentially higher markups to affiliated pipeline companies relative to non-regulated buyers. I develop a model of regulatory oversight that shows how asymmetric information can rationalize the limited impact of evasion incentives on prices. Extrapolating estimates of overbuilding to all interstate natural gas pipeline projects built between 2010 and 2021, my estimates suggest that regulatory evasion by utilities has shifted $2.4 billion in excessive input costs onto consumers. 

Abstract: Do firms factor in expected liability costs when entering contracts? This paper evaluates how joint liability laws influence market structure through contracting decisions between upstream and downstream partners. Using data on contracts from 2001-2017 between hazardous waste generators and disposal firms, I investigate whether weak joint liability rules increase the market share of disposal firms with higher rates of spills and accidents. I leverage a natural experiment created by the resolution of circuit split on the extent of joint liability prescribed by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and compare market shares for accident prone disposal firms in circuits where joint liability was weakened to those in circuits where expected liability costs of contracting were not affected. I find that the difference in market share between dirty and clean firms grew 28.7% on average in treated markets after the resolution of the circuit split with the greatest gains going to the dirtiest firms. These results suggest that firms actively make contracting decisions based on expected future liability costs and that removing joint liability rules may have significant effects on the likelihood of environmental damages. 

work in progress