Effects of Student Loans on Tuition and Enrollment

"The Incidence of Student Loan Subsidies," by Mahyar Kargar and William Mann. July 2016. SSRN #2814842.

In the Summer 2016 issue, Robert Archibald and David Feldman examined the effect of federal student loan programs on the behavior of university "list" tuition and financial aid. They argued that at most nonprofit universities, the (presumably wealthy) marginal student's willingness to pay list tuition is not affected by financial aid. But universities may "tax" federal financial aid by reducing their own financial aid offered to students.

Mahyar Kargar and William Mann examined a different federal loan program in a setting in which the marginal student's ability to pay was affected and hence tuition effects are likely to be observed. Parent Loans for Undergraduate Students (PLUS) are unlimited up to the cost of attendance. Some 13% of parents of fulltime undergrads have PLUS loans, averaging $13,000 per year.

Prior to 2010, PLUS loans were available under two federal loan programs: the Federal Family Education Loan program (FFEL) and the Direct Loan (DL) program. In 2010 the two programs merged. As a result, credit history rules that had applied only to PLUS loans under FFEL were applied to all PLUS loans. The net effect of this rule change was to increase PLUS loan denials. Prior to the change, PLUS loan denials were 42% under FFEL but only 21% under DL.

The authors examine the effect of this unexpected reduction in credit availability on tuition at schools in which the marginal student's decision to enroll is most likely to be affected by this reduction in credit availability: schools with more credit-constrained low-income students and more use of PLUS loans. They construct two variables: the percentage of students who use PLUS loans and the percentage of financial aid students whose family income is $30,000 or less. They take the product of these two variables and divide schools into two groups based on above (treated) and below (untreated) median values of this variable.

Undergraduate charges for the two groups of schools grew at a similar rate prior to 2011. But after 2011, tuition charges grew more slowly for the "treated" group of schools. Enrollment also dropped in the treated schools. Treated schools experienced a 5% tuition decrease and 2.5% enrollment decrease. The authors conclude that a grant equal to 10% of tuition would expand enrollment by 10% and tuition by 7.5% at schools in the treated group.

Corporate Accounting

"Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b)," by Dhammika Dharmapala. July 2016. SSRN #2817151.

The Sarbanes-Oxley Act of 2002 (SOX) was enacted after the bankruptcies and subsequent findings of questionable accounting practices at Enron and WorldCom. Academic criticism of SOX was fairly intense in the years immediately after its enactment. Yale law professor Roberta Romano deemed the law "Quack Corporate Governance," to quote the title of her article that appeared in this journal (Winter 2005–2006). But in a paper evaluating the first 10 years of the SOX regime, Harvard law professor John Coates concluded that SOX's costs and benefits are roughly equal or net positive (Working Papers, Spring 2014).

Dhammika Dharmapala uses a different method to evaluate the net costs and benefits of SOX: examining the distribution of firms that are near an important legal threshold requiring SOX compliance. Most significant provisions of SOX apply to firms that have a "public float" (market value of shares held by others than firm insiders) of $75 million or more. The author collects public float information for firms from 1993 to 2015, allowing for many years of data before and after SOX. Given the legal threshold of $75 million, the author asks whether there is evidence of "bunching" of firms just above or below that threshold. Bunching above would be evidence of net benefits of SOX, while bunching below would be evidence of net costs.

In the pre-SOX period (1993–2002) there is no evidence of bunching. The frequency distribution of public float data shows no discontinuities around $75 million. But in the years 2003–2015, following the enactment of SOX, there were 257 more firm-years below the $75 million threshold than would be expected. And those firms reduced their public float by $1.7 million on average. Using the average relationship between public float and market capitalization, the market value reduction implied by a $1.7 million reduction in public float is about $6 million dollars or 4–5% of the typical firm near the threshold. Thus, small firms facing the prospect of SOX compliance forgo $6 million to avoid SOX regulation.

Patent Trolls

"Patent Trolls: Evidence from Targeted Firms," by Lauren Cohen, Umit G. Gurun, and Scott Duke Kominers. August 2016. SSRN #2464303.

Non-practicing entities (NPEs) are firms whose sole assets are intellectual property rights that they have purchased rather than developed themselves. Such firms' main activity is suing other companies for patent infringement. They have been criticized (see "The Private and Social Costs of Patent Trolls," Winter 2011–2012, and Working Papers columns in Fall and Winter 2013) as well as defended (see "The $83 Billion Patent Litigation Fallacy," Spring 2016) in Regulation.

The current paper is a comprehensive analysis of all NPE lawsuits (21,300) from 2005 through 2015. NPEs appear to behave opportunistically. NPEs disproportionately sue cash-rich firms. A one–standard deviation increase in cash holdings results in an increase in the probability of being sued from 8.6% for the average firm to 16% for the firm with more cash.

NPEs even sue cash-rich firms whose cash isn't from the business segments that allegedly engaged in infringing. In contrast, practicing entity firms, which develop intellectual property and then manufacture products based on that knowledge, do not disproportionately sue cash-rich firms. Nor, for that matter, do small inventors.

NPEs also forum-shop, looking for courtrooms where their suits are more likely to succeed. NPEs litigate 43% of their cases in the Eastern District of Texas, which is considered "friendly" to such cases. Only 7% of the cases brought by PEs are litigated in East Texas.

"While none of our results alone proves opportunistic legal behavior (patent trolling) on the part of NPEs, the mass of the evidence to this point appears most consistent with NPEs behaving as patent trolls," write the authors.

NPE suits have consequences for spending on research and development. After NPE settlement, defendant firms reduce R&D investment by more than 25%. Small inventors, the alleged beneficiaries of NPEs, do not appear to be getting much of the settlements nor increasing invention activity.

Minimum Wages

"Minimum Wage and Real Wage Inequality: Evidence from Pass-Through to Retail Prices," by Justin Leung. September 2016. SSRN #2786411.

Economic analyses of the minimum wage often focus on the negative employment effects for low-skilled, young workers. Using scanner data from 35,000 retail stores in the United States, this paper asks whether minimum wage increases result in increased prices for some products.

The author concludes that a 10% increase in the minimum wage raises retail prices at grocery stores in poor counties (defined as those with ratios of minimum wage to average wage [the Kaitz index] above the median for the country) by 0.7%. When counties are divided into quartiles according to the Kaitz index, the poorer the county the larger the pass-through effect on prices.

This result is not simply because of an increase in labor costs at grocery stores in poor counties. The percentage of minimum wage workers in grocery stores in poor counties is not higher relative to rich counties. And the quantities purchased in grocery stores increase rather than decrease when the minimum wage is increased consistent with the minimum wage augmenting demand.

A 10% increase in the minimum wage results in a wage increase for workers in the 10th percentile of the wage distribution of about 1.6% relative to the median wage. But price increases in food stores reduce this increase by about 0.3–0.6% in poor counties.

Congressional Regulatory Mandates

"Preventing a Regulatory Train Wreck: Mandated Regulation and the Cautionary Tale of Positive Train Control," by Jerry Ellig and Michael Horney. August 2016. SSRN #2821113.

Regulatory agencies are often blamed for imposing costs on the economy that result in few if any benefits. But much of the blame should be directed at Congress. According to Jerry Ellig of the Mercatus Center, 49% of the economically significant regulations (costs exceeding $100 million) proposed from 2008 through 2013 were required by law. That is, Congress specifically instructed agencies or departments to issue the rule. The executive order that requires review of economically significant regulations to determine whether they create benefits that exceed costs has little effect in such situations because the executive branch does not have discretion over whether to implement congressionally mandated regulations.

In 2008 Congress enacted legislation requiring the National Highway Traffic Safety Administration to issue a rule by 2011 to enhance rear view visibility for drivers. NHTSA did not issue the rule until 2014. Normally, such a delay would be an example of bureaucratic ineptitude and waste. But in this case, NHTSA was responding to its own analysis that determined that driver error is the major determinant of the effectiveness of backup assist technologies such as cameras. In addition, NHTSA concluded that the cost per life saved for the cameras ranged from about 1.5 to three times the $6.1 million value of a statistical life used by the Department of Transportation to evaluate the cost effectiveness of its regulations. Given those poor cost-benefit results, NHTSA delayed until the possibility of intervention by the courts forced it to issue the rule.

This paper examines another such rule, the requirement that railroads install automated positive train control to prevent train collisions and derailments. Health and safety regulations are often enacted after scandals or disasters, and this example follows that pattern. Congress required positive train control in October 2008 after a September 2008 commuter train crash in California killed 25 people.

The Federal Railroad Administration had conducted cost-benefit analyses of positive train control in 1994 and 2004. The estimated 20-year costs were $10–$13 billion while the safety benefits from lives saved and damages prevented were only $440–$670 million. The railroads balked at the cost and Congress punted, extending the compliance deadline from the end of 2015 to the end of 2018.