Michaela Pagel, Washington University in St. Louis
Huan Tang, London School of Economics and Political Science
Emily Williams, Harvard University
Abstract: This study examines the impact of enhanced data privacy on online shopping. Specifically, we analyze the staggered adoption of cookie permission and compliance systems by US retailers in response to the European Union’s data protection standards and the California Privacy Act. We combine information on when specific retailers implemented a cookie compliance system with individual-level bank and credit card transactions data from a US data aggregation and analytics provider. We find that online spending at retailers decreases significantly after they introduce cookie compliance systems. To address potential selection into who and when individuals shop with enhanced privacy, we also use exposure to cookie compliance systems, based on pre-policy shopping baskets, in a reduced form IV specification. Our IV specification results confirm the initial findings with respect to spending and show that individuals incur less overdraft and late fees, roll over less credit card debt, and borrow less in other high-interest unsecured credit such as payday loans when they are treated with enhanced privacy. We discuss targeted advertising, third-degree price discrimination, and shopping convenience as the three main channels behind these results. Our findings provide insights into the relationship between data privacy regulations and consumer actions, informing policy considerations at the state and federal levels.
Discussant: Sheisha Kulkarni, University of Virginia
Abstract: Reward programs are often a prominent feature of credit cards. Collaborating with a leading bank in China, I combine proprietary consumer-level data and a survey to study the causal effect of rewards on consumption and consumers' subjective expectations. I leverage a fuzzy regression discontinuity (RD) design to show that a more generous reward design causes consumption increases across both reward-earning and non-reward-earning categories. Applying the fuzzy RD to the survey data, I find that consumers correctly understand the impact of reward design on reward-earning consumption but underestimate its effect on total consumption. Using a stylized model, I study the implications of this misperception for market structure and welfare. My calibration results show that consumer misperceptions incentivize banks to offer more generous rewards, which ultimately diminishes market efficiency and leads to a cross-subsidy from less to more sophisticated consumers.
Discussant: Benedict Guttman-Kenney, Rice University
Abstract: How costly is a corporate default? This question is central to corporate finance: according to the “tradeoff theory,'' firms choose a debt structure by trading off the benefits of debt with the costs of a potential default. A long literature shows that firms use low leverage despite large benefits of debt, implying default costs are large. Yet large firms often resolve defaults using Chapter 11 bankruptcy, avoiding liquidation and paying puzzlingly small direct legal costs. The prevailing explanation for this puzzle is that indirect bankruptcy costs must be large --- firms use little debt because a bankruptcy would scare off customers, destroying value. However, these indirect costs are notoriously difficult to quantify because unobserved negative shocks can cause both a bankruptcy and a loss of customers. Existing estimates of indirect costs confound defaults with the shocks that cause them. We develop a new method to measure the indirect costs of bankruptcy. Specifically, we use three incentivized experiments to estimate the causal effect of corporate bankruptcy on consumer demand for a bankrupt firm's products. We randomly vary the firm's bankruptcy status, holding all other firm and product details fixed. We find that knowledge of a Chapter 11 bankruptcy filing causally reduces a consumer's willingness to pay for the bankrupt firm's products by 18-35%, depending on the industry. We also find that up to 48% of consumers are aware of major corporate bankruptcies, so a bankruptcy impacts a large fraction of the bankrupt firm's consumer base. Estimating a structural discrete-choice model, we show that the indirect costs of bankruptcy can destroy 10% to 31% of producer surplus, depending on the industry. By these estimates, indirect bankruptcy costs alone are large enough for trade-off-theory models to explain observed leverage ratios. We show that these costs are unlikely to arise before bankruptcy. Our results thus provide novel support for the tradeoff theory, a pillar of corporate finance.
Discussant: Jacelly Cespedes, University of Minnesota
