Market mechanisms encourage the delivery of environmental services at low cost, but targeting payments to participants whose behavior is affected by the incentive — “additionality” — is complicated by asymmetric information. We explore this market design challenge in the context of auctions for conservation contracts in one of the largest Payments for Ecosystem Services mechanisms in the world, the US Conservation Reserve Program. We use a regression discontinuity design to estimate that three of four marginal bidders would have counterfactually retired land in the absence of the incentive, and we show that heterogeneity in counterfactual land use introduces adverse selection in the market. We develop and estimate a joint model of bidding and land use (additionality) to quantify the implications of this market failure for the performance and design of procurement mechanisms and competitive offset markets. We find that feasible procurement schemes that set incentives based on heterogeneity in additionality generate substantial welfare gains. In offset markets, adverse selection limits trade (-15%) and reduces welfare (-5%) relative to optimal incentives, but feasible differentiated pricing reduces this gap. Our results highlight that, especially when well-designed, markets for environmental services can deliver welfare gains even in the presence of non-additionality.
Healthcare is often allocated without prices, sacrificing efficiency in the interest of equity. Wait times then typically serve as a substitute rationing mechanism, creating their own distinct efficiency and distributional consequences. I study these issues in the context of the Veterans Affairs (VA) healthcare system, which provides healthcare that is largely free but congested. To reduce this congestion, the VA implemented a large-scale policy intervention — the Choice Act — that subsidized access to non-VA providers. Using variation in eligibility for this new access in both patient-level and clinic-level difference-in-differences designs, I find that the price reduction for eligible veterans led to substitution away from the VA, an increase in overall healthcare utilization and spending, and reduced wait times at VA clinics. I then use both the policy-induced price variation and equilibrium, cross-clinic variation in wait times to estimate the joint distribution of patients’ willingness-to-pay and willingness-to-wait. I find that rationing via wait times redistributes access to healthcare to lower socio-economic-status veterans, but at a large efficiency cost (-24%). This equity-efficiency trade-off is steep: rationing by wait times is an inefficient form of redistribution regardless of a social planner’s equity objectives. By contrast, I find that a feasible, coarsely targeted, modest increase in copayments increases consumer surplus by substantially more than the Choice Act, at lower cost to the VA, while disproportionately benefitting low-income veterans.
The Effects of Floodplain Regulation on Housing Markets with Abigail Ostriker. July 2023.
We investigate the effects of housing regulations designed to correct a wedge between privately- and socially-optimal construction in areas at risk of flooding in Florida. Using a spatial regression discontinuity around regulatory boundaries and an event study around the policy’s introduction, we document that floodplain regulation reduces new construction in high-risk areas and increases the share of newly-built houses that are elevated. Embedding these effects in a model of residential choices with elastic housing supply, we find that the policy reduces expected flood damages by 60%. One-quarter of this reduction is driven by relocation of new construction to lower-risk areas, and three-quarters is driven by elevation of houses remaining in risky areas. However, this second-best policy achieves at best about one-tenth of possible welfare gains because of poor targeting. It overcorrects in many areas, inducing more consumers to elevate and relocate than is socially-optimal, while still allowing inefficiently-high construction in the riskiest places. By contrast, a flexible corrective tax on flood risk would achieve substantial welfare gains of more than $2,700 per newly-developed house.