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Scholars dating back to the early 1900s have been interested in the idea that organizations benefit from locating in close proximity to other similar organizations (Marshall, 1920). Largely, this research suggests that economies of agglomeration accrue to clustered organizations which create performance advantages when compared to more isolated organizations. Recently, agglomeration theory researchers have focused on high technology clusters where the primary benefit of collocation is argued to be access to knowledge spillovers from local organizations. This dissertation argues that in order to access local knowledge, firms must be active participants in the local research community. Furthermore, in clusters where inventive activity, measured using patent data, is highly concentrated in one or a few organizations, firms derive less benefit from their participation in local research. Clustering does not come without a price, however. Membership in local research networks, which initially provides an advantage for clustered organizations, ultimately drives a convergence of inventions in the cluster. That is, networks of organizations in clusters channel institutional pressures which ensure that firms' inventions come to resemble the inventions of other organizations in the cluster, over time.

This thesis explores three important topics spanning international asset pricing, empirical capital structure, U.S. politics, and corporate law: relationship-specific investment (RSI), contracting environment and financial performance; RSI, contracting environment and the choice of capital structure; and political value and SEC enforcement actions. Firms that engage in long-term bilateral relationships with their buyers or suppliers are usually required to make relationship-specific investments. We examine how the values of these long-term specific investments are affected by the quality of governmental contract enforcement. We find that firms in relationship-specific industries have higher valuations, measured by Tobin’s Q, when their countries of origin are able to strongly enforce contractual agreements. Our finding is robust to a variety of empirical specifications and regression methods. We also show that as legal quality improves, firms with relationship-specific investments exhibit lower operating performance, presumably due to risk or in order to motivate further investments from their stakeholders. Further analysis of the cross-section of stock returns supports a risk-based explanation. Firms in long-term bilateral relationships with their customers or suppliers are required to make relationship-specific investments in the form of physical equipment, human resources, specific production sites, or brand names. These dedicated assets are usually tied to a particular use or relationship and cannot be redeployed if the firm is liquidated. In the absence of legal enforcement, firms are required to limit their use of debt financing and, consequently, signal a reduced default risk to encourage investment by their contracting parties. Using a sample of 143,278 firm-year observations, and measures of industry-level relationship-specificity and the quality of legal enforcement across 57 countries, we find strong evidence that good quality contract enforcement mitigates the negative association between relationship-specificity and debt financing. The Securities and Exchange Commission (SEC) plays a central role in investigating potential violations of securities laws and initiating enforcement actions in the United States. We examine the association between political culture and political connections and the penalties imposed at the end of SEC enforcement actions. Our analysis is based on two key ideas. First, the political culture of a firm indicates its ethical boundaries and explains the propensity of misconduct across different domains, such as securities laws. Second, political connections signal a firm’s willingness to challenge SEC’s enforcement decisions. We find that the individual defendants associated with Republican firms are less likely to receive a bar or suspension penalty. This finding supports the notion that Republican managers are less likely to commit securities fraud since the Republican ideology stresses market discipline. Moreover, in line with prior research, our results show that political connections and firm size, as a proxy for bargaining power, also reduce penalties imposed in SEC enforcement actions. / Thesis / Doctor of Philosophy (PhD)

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In Chapter 1, I describe the hospice industry in California and highlight the key institutional details, then estimate a structural model of hospice choice by patients. Hospices are firms that give palliative care to dying patients. There is no price competition because Medicare pays hospices a fixed per-day rate for each patient, so hospices compete on reputation. I define a hospice's reputation as a stock of its past quality choices. Thus, a hospice can build up its reputation stock over time by consistently choosing high quality. The reputation stock also partially depreciates every period, meaning that a hospice which repeatedly shirks on quality will lose its reputation over time. To study reputation and hospice choice in this setting, I build and estimate a demand model of hospices using yearly hospice-level data from California for 2002-2018. Each consumer makes a discrete choice from a set of hospices in her market, taking into account hospices' reputations and characteristics. The demand estimates show that reputation plays a significant role in consumer choice and depreciates at an annual rate of 53%. In Chapter 2, I build a dynamic oligopoly model of hospices choosing quality to compete on reputation against rivals. This is used to recover the hospice cost function. I use my model and estimates to conduct the following policy counterfactuals. As reputation becomes more persistent - for instance, through the creation of an online hospice rating system - hospices choose higher quality. Hospices also choose higher quality as Medicare prices increase, but the response depends on how differentiated they are in characteristics from rivals. Finally, a hybrid per-day per-visit hospice reimbursement scheme achieves the same quality with nearly 30% lower spending than the current per-day Medicare scheme. In Chapter 3 (joint work with Rena Conti), we study market dynamics in the pharmaceutical industry after loss of market exclusivity by a branded drug. Branded drug manufacturers often respond to generic entry by releasing an Authorized Generic (AG), which is chemically identical to the branded drug but without the brand label attached. This is used to price discriminate between consumers, with the branded drug charging high price and AG charging low price to compete with generics. Using total drug sales and revenue data on US for 2004-2016, we build a stylized structural model to study entry and pricing decisions. We estimate a random-coefficients discrete choice demand model and find significant heterogeneity in brand valuation and price sensitivity among consumers. Then we build a dynamic structural model of generic entry, AG release, and pricing. Combined with calibrated entry-cost parameters, this is used to conduct policy counterfactuals. First, we study the impact of various demand-side policies (such as improving consumer valuation of non-branded drugs and increasing price-sensitivity) on market outcomes. Second, we show that a faster generic approval rate leads to greater generic entry, lower likelihood of AG being released, and lower prices. Third, we find that banning AGs leads to greater generic entry but also higher industry prices overall.