Learning Firm Conduct: Pass-Through as a Foundation for Instrument Relevance

Adam Dearing, Lorenzo Magnolfi, Daniel Quint, Christopher J. Sullivan and Sarah B. Waldfogel

No 32863, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Researchers often test firm conduct models using pass-through regressions or instrumental variables (IV) methods. The former has limited applicability; the latter relies on potentially irrelevant instruments. We show the falsifiable restriction underlying the IV method generalizes the pass-through regression, and cost pass-through differences are the economic determinants of instrument relevance. We analyze standard instruments' relevance and link instrument selection to target counterfactuals. We illustrate our findings via simulations and an application to the Washington marijuana market. Testing conduct using targeted instruments, we find the optimal ad valorem tax closely matches the actual rate.

JEL-codes: L0 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-ecm
Note: IO
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