Research Summary

The primary goal of my research, more broadly, is to apply economic theory and econometric methodology to better understand markets with asymmetric information.  Information asymmetry between buyers and sellers may lead to severe economic inefficiency, and may diminish social welfare in a variety of ways. However, both the market and the government can provide sellers with appropriate incentives to truthfully reveal the quality of their products.  For example, sellers may convey information on quality through pricing, advertising, or an impartial quality certification agency.  Alternatively, the government can mandate all sellers to disclose their private quality information or establish minimum quality standards (MQS) to assure buyers that all products are of a certain quality level.  To fully understand demand and supply of information and evaluate the role public policy can play in information dissemination, it is important to analyze how various information mechanisms take effect and how they interact with each other in the real world.

My dissertation uses the child care market as a context to study various aspects about quality information supply, emphasizing on incentives, effectiveness and welfare impact.  The main chapter focuses on the effectiveness and the welfare impact of quality certification. The ineffectiveness of a quality certification mechanism can be attributed to consumers' low willingness to pay for what certifiers consider good quality.  Or, it can be attributed to the inability of certification status to provide consumers with information they do not already possess.  I formulate a structural model of demand allowing consumers to infer quality from both certification status and firm reputation. I then estimate this model to assess the effectiveness and the impact of the national accreditation system for childcare centers on consumer welfare.  My results suggest that in the childcare market consumers do value quality as measured by the accreditation agency, but that on average they do not gain much information beyond what they infer from a firm's reputation.  Still, consumers gain some information about quality that otherwise would not be available, and I use the estimates of structural parameters to quantify the value of this information to consumers.

Another line of my dissertation addresses the interaction of different information mechanisms.  I ask the following questions: with various information disclosing mechanisms available in the market, would a choice of one mechanism promote, or suppress, the use of another?  Do they work separately or jointly?  In other words, are different information mechanisms substitutable or complementary?  Specifically, I look at how resources and referral services, accreditation, and state-mandated minimum quality standards interact to convey information about the quality of childcare services

Overall, my empirical work is intended to improve our understanding of the extent to which market mechanisms alleviate the information asymmetry among economic parties and the role that government regulation plays in information markets.  Lessons learned from the childcare market should be useful for policy design in health care, personal services, and other markets, as they share the same basic attributes of information markets.

A related line of my research concerns firms' incentives to voluntarily disclose otherwise private quality information.  I completed a study with Prof. V. Joseph Hotz investigating firms' strategic disclosure behaviors when consumers have heterogeneous preferences over multiple product attributes.  In particular, we focus on whether the so-called "unraveling result"-in equilibrium, firms fully disclose the quality of their products voluntarily when disclosure costs are zero-holds when disclosure of quality information adds vertical differentiation into a product world with existing horizontal differentiation. We show that there exist certain configurations of consumer multi-dimensional preferences under which firms, even with high-quality products, may not have the incentive to disclose. This failure to disclose voluntarily will arise when disclosure results in more elastic demand for products and hence triggers more intense price competition among firms, leading to lower prices for all products. The escalation of competition can make all firms worse off and lead firms not to disclose the quality of their products, even with zero disclosure costs. As a result, the equilibrium in which quality disclosure is voluntary may diverge from that in which quality disclosure is mandatory. Our research suggests that privately-informed firms' decisions to reveal their quality should be considered as an integrated part of firms' positioning choice among an array of product attributes over which consumers have heterogeneous preferences.

Besides my research on economics of information, I am also conducting research on how regulations affect firm behavior.  Prof. V. Joseph Hotz and I are examining the impact of minimum quality standards on the supply side of the childcare market, using a unique panel data set merged from the Census of Services Industries (1987-1997, establishments with payroll), (1987-1997), state regulation Data (1987-1996), and accreditation data (1986-1997) from National Association of Education for Young Children (NAEYC). The welfare effect of minimum quality standards is theoretically controversial and empirically not well documented due to data limitations. The panel nature of this data set will allow us to control for state fixed effects and time fixed effects, in order to better answer the following questions: Will more stringent minimum quality standards reduce supply in the child care market? Will more stringent standards force more firms to exit the market? Will more stringent standards motivate firms to pursue higher quality via accreditation? This study will be the first in the field to use panel data to analyze the supply side of a market subject to minimum quality standards.

In summary, my main research seeks to improve our understanding of the use of alternative, and possibly multiple, mechanisms for information provision to consumers. In addition, I am researching on what impact public policies have on firms' entry, exit and quality choices.  In line with my interest on the empirical side of industrial organization, I am also interested in econometrics of panel data, estimation of structural models and discrete choice models.  In the future, I plan to conduct analogous research on information markets in other industries.