Essays on Market Design and Industrial Organization

Abstract

This dissertation contains three essays. They offer contributions to the study of matching in foster care (Chapters 1 and 2), and to the study of the effect of product market competition on managerial incentives (Chapter 3). Chapter 1 presents an empirical framework to study the assignment of children into foster homes and its implications on placement outcomes. The empirical application uses a novel dataset of confidential foster care records from Los Angeles County, California. The estimates of the empirical model are used to examine policy interventions aimed at improving placement outcomes by increasing market thickness. If placements were assigned across all the administrative regions of the county, the model predicts that (i) the average number of foster homes children go through before exiting foster care would decrease by 8% and (ii) the distance between foster homes and children’s schools would be reduced by 54%. Chapter 2 proposes and studies a dynamic model of centralized matching in foster care. The optimal matching policy is characterized by minimizing the number of children who remain unmatched in every period. The main finding is that the optimal matching policy gives priority to younger children. The model captures several dynamic trade-offs, most notably between children’s ages and the heterogeneity in the expected duration of placements. I also analyze federal data from the Adoption and Foster Care Analysis and Reporting System (AFCARS). I find that, in Los Angeles County, placements and their durations are strongly correlated with the race of children and their foster parents. Chapter 3, co-authored with Kaniṣka Dam, develops an incentive contracting model under oligopolistic competition to study how incumbent firms adjust managerial incentives following deregulation policies that enhance competition. We show that firms elicit higher managerial effort by offering stronger incentives as an optimal response to entry, as long as incumbent firms act as production leaders. Our model draws a link between an industry-specific feature, the time needed to build production capacity, and the effect that product market competition has on executive compensation. We offer new testable implications regarding how this industry-specific feature shapes the incentive structure of executive pay.