I analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier – organized labor. Because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a firm with external finance constraints has an incentive to use the cash flow demands of debt service to improve its bargaining position with workers. Using both firm-level collective bargaining coverage and state changes in labor laws to identify changes in union bargaining power, I show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions.

Many U.S. states limit awards for non-economic damages in malpractice cases. Proponents often argue that such tort reform increases physician supply and access to care. However, the degree to which marginal changes in malpractice liability affect physician supply is theoretically ambiguous. If patients bear the full incidence of cost changes and market demand is inelastic, then tort reform will not affect physicians' net income or location decisions. I use county-level, specialty-specific annual counts of physicians from 1970 to 2000 to estimate the effect of damage caps on physician supply. The results suggest that caps do not affect physician supply for the average resident of states adopting reforms. On the other hand, caps appear to increase the supply of frontier rural, specialist physicians by 10-12 percent. This is likely because rural doctors face greater uninsured litigation costs and a more elastic demand for medical services.

This paper analyzes the importance of agency conflicts arising from managers’ exposure to their firms’ risk. In particular, we study how a typical firm responds to an exogenous increase in legal liability arising from its workers’ exposure to newly identified carcinogens. We find that such firms, particularly those with weak balance sheets, tend to undertake aggressive growth through acquisitions. The acquired firms tend to be large, unrelated businesses with relatively high operating cash flows, recent growth, and total payouts. These deals are associated with high takeover premiums and negative abnormal returns. These findings support a managerial agency model: we find that firms with weak external governance, high management ownership, or low institutional ownership are most likely to grow. The results suggest that corporate governance can be particularly important when firms encounter a negative shock.

This paper analyzes the effect of competition on a supermarket firm’s incentive to provide product quality. In the supermarket industry, product availability is an important measure of quality. Using U.S. consumer price index microdata to track inventory shortfalls, I find that stores facing more intense competition have fewer shortfalls. Competition from Wal-Mart – the most significant shock to industry market structure in half a century – decreases shortfalls by up to 24 percent. The risk of customers switching stores appears to provide strong incentives for investments in product quality.

While many researchers and policymakers infer from correlations between eating out and body weight that restaurants are a leading cause of obesity, a basic identification problem challenges these conclusions. We design a natural experiment using highways in rural areas to exploit exogenous variation in the effective price of restaurants and examine the impact on body mass. We find no causal link between restaurant consumption and obesity. Analysis of food-intake micro-data suggests that consumers offset calories from restaurant meals by eating less at other times. We conclude that regulation targeting restaurants is unlikely to reduce obesity but could decrease consumer welfare.

This paper examines whether debt financing can undermine a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of quality. Using U.S. consumer price index microdata to track inventory shortfalls, I find that limited corporate liquidity and financial constraints are associated with more frequent shortfalls. Taking on high leverage increases shortfalls by about 10 percent. Highly leveraged firms appear to be degrading their products' quality in order to preserve current cash flow for debt service. Although reducing quality can erode both current sales and customer loyalty, firms appear to be willing to risk these outcomes in order to achieve benefits associated with debt finance.

Multi-product retailers use complicated pricing strategies that vary across items and over time. Using a large data set containing prices on twenty categories of goods from thirty U.S. metro areas for the period 1988-1997, we provide systematic evidence on the use of sales promotions by grocery retailers. Sales are common; while retailers seem to generally offer items at a “regular” price, 10 percent of sampled items are temporarily offered at a 5 percent discount on a typical day. Sales behavior displays considerable heterogeneity both across goods within a category and over time. Within each category of goods, retailers regularly offer some items on sale, while other items are rarely, if ever, put on sale. Over time, retailers are more likely to offer an item on sale when demand for that item is high. These results suggest that studies that use retail prices, but do not account for sales behavior, are likely to yield misleading results.