Small firms need to access R&D subsidies to grow, but if they grow, then they cannot continue to access R&D subsidies. Minor changes to eligibility constraints can and do address the catch-22 situation. That is according to new research by Alexandre Lehoux, a PhD candidate with the Department of Economics at the University of Toronto.

Lehoux examined how eligibility reforms to Canada’s largest R&D program in 2004 allowed firms to increase their production while maintaining eligibility for the program. He found the changes made no impact on R&D spending in the short-term, but that there were significant increases in value-added per worker following the reform. The key benefit to workers? Income improvements by around 2% after the reform.

“An important finding of my paper is that less financially constrained firms were the most responsive in expanding their production following the reform. This result emphasizes how the initial eligibility threshold was introducing what could be called a ‘growth tax’ for these firms,” Lehoux explained.

“Alexandre’s paper produces cutting-edge research on the impacts of R&D subsidies on firms and workers,” said Kory Kroft, Professor of Economics at the University of Toronto and Lehoux’s dissertation supervisor. “His findings indicate that subsidies which target small firms can prevent these firms from growing to maintain their eligibility. Relaxing eligibility constraints leads firms to expand production and he finds that workers capture some of these productivity gains.”

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If alcohol is on your annual holiday shopping list, you could soon have more choice. A University of Toronto researcher suggested a retail reform that would put a greater selection of products on LCBO shelves while increasing the Crown corporation’s profits by 16%.

Francis Guiton, a PhD Candidate with the Department of Economics, examined data from the Liquor Control Board of Ontario’s (LCBO) retail outlets. The data, obtained through a Freedom of Information request, details the inventories, product prices, and sales figures for each of the LCBO’s locations.

In Misaligned Objectives and Within-Firm Competition in Retail Chains, Guiton examined how performance-based bonuses paid to store managers effect the company’s profits and consumers’ interests.

“Individual store managers have the ability to choose which products to carry at their store, but pricing decisions are centralized and uniform across all the LCBO stores and managers take retail prices as given when making their inventory decisions,” Guiton explained in the paper. “Ultimately, the extent to which store managers behave in their own self-interest is correlated with the size of their store and the number of same-district stores in their neighbourhood.”

Across the retail industry, annual performance bonuses are a common incentive for retail managers. In the context of the LCBO, Guiton found that those bonuses work for the managers, but they do not necessarily work for the company because store managers compete with other LCBO outlets in their district.

“Within the LCBO, store managers, driven by annual bonuses tied to their stores’ profits, engage in competition for customers and higher bonus payments,” said Professor of Economics Victor Aguirregabiria, who sits on Guiton’s supervision committee. “While this competition enhances effort and sound decision-making, it introduces a misalignment between individual managers’ objectives and the company’s goals.”

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Candidate Spotlight is a showcase of research by PhD students coming onto the job market from the Department of Economics, University of Toronto. Today’s post introduces Jie Fang whose job market paper entitled When are Patents Traded and Why: A Dynamic Structural Model of Drug Development and Patent Trading examines the role of patent trade and its impact on innovation outcomes and incentives in the pharmaceutical industry. Assistant Professor Murat Çelik, a member of Fang’s supervision committee, describes the paper and its contribution to the discipline.

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Candidate Spotlight is a showcase of research by PhD students coming onto the job market from the Department of Economics, University of Toronto. Today’s post introduces Paul Z. Han whose job market paper entitled Biased Learning, Dynamic Effort and Course Design, utilizes a behavioural model in the study of the economics of education. Professor Victor Aguirregabiria, a member of Han’s supervision committee describes the paper and its contribution to the discipline. 

Paul Han specializes in structural econometrics, with a specific focus on dynamic structural models. His job market paper is in education economics where he investigates how certain aspects of student assessment in a university course influence students’ hours of study and their acquisition of knowledge.

His model assumes that students make decisions based on their expected utility, which considers the grades they aim to achieve, and the associated effort required. What sets Paul’s model apart is its recognition that, at the outset of the course, students may hold biased beliefs regarding the connection between study hours and grades, as well as their skills related to the course material. As the course unfolds, students update these beliefs in response to their test grades. Paul employs data from an undergraduate course at the University of Toronto to estimate his model. His dataset encompasses both objective data, including student attendance records and test results, and survey-generated information on students’ hours of study, as well as their elicited preferences and beliefs.

He ingeniously combines these diverse data sources to develop an identification approach that integrates revealed and elicited preferences and beliefs. Through his counterfactual analysis, he uncovers a significant positive influence of students’ biased perceptions about the benefits of studying hours on their effort and knowledge acquisition.

Conversely, on average, their skewed beliefs about their course-specific skills have a negative impact on their study hours. Furthermore, Paul’s findings indicate that the sign and magnitude of the effect on study hours of incorporating more frequent tests hinges on the relative speed at which students adjust their misconceptions about their skills compared to their misperceptions about the returns of hours of study. This paper demonstrates Paul’s strong technical skills.

Author: Victor Aguirregabiria is Professor of Economics at the University of Toronto. His most recent paper with Alessandro Iaria, and Senay Sokullu is Identification and Estimation of Demand Models with Endogenous Product Entry and Exit (August 28, 2023). Is is available at SSRN.

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