Shengmao Cao
Job Market Candidate

Stanford University
Department of Economics
579 Jane Stanford Way
Stanford, CA 94305
shengmao@stanford.edu

I am on the academic job market in the 2021-2022 academic year and am available for virtual interviews at your convenience.

Curriculum Vitae

Primary Field:
Industrial Organization

Secondary field:
Health Economics

Expected Graduation Date:
June, 2022

Thesis Committee:
Liran Einav (Primary):
leinav@stanford.edu

Jose Ignacio Cuesta:
jicuesta@stanford.edu

Matthew Gentzkow:
gentzkow@stanford.edu

Job Market Paper

Equilibrium Effects of Pharmaceutical Bundling: Evidence from India
Joint with Chirantan Chatterjee

We study the equilibrium effects of competitive bundling on market outcomes and social welfare in the context of the Indian pharmaceutical industry. Fixed-dose combinations (FDCs), which bundle two or more drugs in a single pill, account for over 50% of pharmaceutical revenue in India. Using an equilibrium model of drug demand and supply, we show that the price and welfare effects of FDCs are theoretically ambiguous. Empirically, we find that FDCs on average sell at a 28% discount but increase the prices of component molecules by 3%. New FDCs significantly increase sales of drug bundles. To quantify the welfare effects of FDCs, we estimate the model in the context of the market for Alzheimer's drugs and find that FDCs increase consumer surplus by 21% and firm profits by 13%. Counterfactual analysis shows that applying FDC regulations from the US to India may deter FDC entry and forestall the welfare benefits.


Publications

Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market
Joint with Panle Jia Barwick and Shanjun Li. 2021. American Economic Journal: Economic Policy, 13 (4): 112-51.

This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China's automobile market. A salient feature of China's auto market is that vehicle models by joint ventures (JVs) and state-owned enterprises (SOEs) command much higher market shares in their headquarter provinces than at the national level. Through county border analysis, falsification tests, and a consumer survey, we uncover protectionist policies such as subsidies to local brands as the primary contributing factor to the observed home bias. We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual analysis shows that local protection leads to significant consumer choice distortions and results in 21.9 billion yuan of consumer welfare loss, amounting to 41% of total subsidy. Provincial governments face a prisoner's dilemma: local protection reduces aggregate social welfare, but provincial governments have no incentive to unilaterally remove local protection.


Working Papers

Redesigning Federal Student Aid in Higher Education
Joint with Luis Armona (Luis' job market paper)

In this paper, we study the equilibrium impact of student aid in the United States market for sub-baccalaureate higher education and consider the implications of alternative aid policies. We document that the current federal aid system, by subsidizing marginal price increases, incentivizes private for-profit colleges to charge high tuition prices. We also present new descriptive evidence on the importance of advertising in the demand for higher education. Using these facts, we estimate a structural model of supply and demand in this market. We then derive an optimal voucher policy that maximizes educational quality, holding the quality of schools fixed. We measure quality by estimating the value-added in earnings generated by each sub-baccalaureate college. Counterfactual results show that the optimal voucher system improves the overall quality provided by 12%. Our optimal voucher policy highlights the fact that for-profit colleges, despite being lower quality on average, are more effective at increasing enrollment than public community colleges. Consequently, these schools play an important role in improving the educational outcomes of students.

Competitive Bidding in Drug Procurement: Evidence from China
Joint with Lisa Xuejie Yi and Chuan Yu, submitted

We study the impact of competitive bidding in the procurement of off-patent drugs. In 2019, China introduced competitive bidding with a quantity guarantee for thirty-one molecules in nine provinces. Using a difference-in-difference design, we show that the program reduced drug prices by 47.4%. Generic drug companies won the majority of the bids and on average cut prices by 59.4%. Losing branded drug companies cut prices by 7.5%. We develop a model of demand and supply to quantify the trade-off between lower prices and choice distortions. We find that competitive bidding increases consumer welfare if policymakers consider brand preferences welfare irrelevant.

Quid Pro Quo, Knowledge Spillover, and Industrial Quality Upgrades: Evidence from the Chinese Auto Industry
Joint with Jie Bai, Panle Jia Barwick, and Shanjun Li, NBER Working Paper No. 27644

While there is a vast body of research on the benefits of FDI in developing countries, whether and how the form of FDI matters has received limited attention. This paper studies the impact of FDI via quid pro quo (technology for market access) in facilitating knowledge spillover and quality upgrades. Our context is the Chinese automobile industry, where foreign automakers are required to set up joint ventures (the quid) with domestic automakers in return for market access (the quo). The identification strategy exploits a unique dataset of detailed vehicle quality measures along multiple dimensions and relies on within-product quality variation across dimensions. We show that the quality strengths adopted by affiliated domestic automakers are more similar to the strengths of their joint ventures than to those of their nonaffiliated counterparts. The results suggest that quid pro quo generates knowledge spillover to affiliated domestic automakers in addition to any industry-wide spillover. We rule out alternative explanations involving endogenous joint venture network formation, overlapping customer bases, or direct technology transfer via market transactions. Analyses leveraging additional micro datasets on worker flows and shared upstream suppliers among automakers demonstrate that labor mobility and supplier networks are important channels mediating knowledge spillover. On the other hand, while quid pro quo facilitates learning, it is not a prerequisite for knowledge spillover. Counterfactual exercises show that quid pro quo is not the primary driver of the overall quality improvement experienced by domestic automakers.