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 (Draft coming soon)
Joint with Chirantan Chatterjee

We study the equilibrium effects of pharmaceutical 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 impacts of pharmaceutical bundling are theoretically ambiguous and potentially large. Empirically, we find that FDCs on average sell at a 28% discount relative to the sum of component prices, but increase prices of component molecules by 4%. To quantify the welfare effects of FDCs, we estimate the model in the context of the market for Alzheimer-related drugs and find that FDCs increase consumer surplus by 21% and firms' profits by 13%.


Publications

Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market
Joint with Panle Jia Barwick and Shanjun Li, forthcoming at American Economic Journal: Economic Policy

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 (Draft coming soon)
Joint with Luis Armona

In this paper, we study the equilibrium impact of student aid in the market for sub- baccalaureate higher education and consider the implications of alternative aid policies. We show that the current federal aid system distorts the incentives of private for-profit colleges and leads to higher tuition prices. We also present new descriptive evidence on the role of advertising in the demand for higher education. Using these facts, we then estimate a structural model of supply and demand in this market, which we use to simulate equilibrium outcomes from new student aid policies. We then derive an optimal policy for a social planner who wishes to maximize educational quality, as measured by the value-added of each institution. Counterfactual results show that switching from the existing federal aid regime to the optimal voucher system improves the overall quality provided to students by 12%. In contrast, implementing bans on low-quality colleges, while maintaining the current aid design, leads to a negligible increase of 1.5%. Our optimal voucher policy highlights that for-profit colleges are more responsive to government aid than constrained community colleges, and correspondingly are an important tool for regulators to improve the educational outcomes of students.

Competitive Bidding in Drug Procurement: Evidence from China (Submitted)
Joint with Lisa Xuejie Yi and Chuan Yu

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.