Essays in Firm Behavior, Innovation, and Social Learning
The development and dissemination of new technologies are key components of economic progress. This dissertation studies these processes in the context of hydraulic fracturing, one of the most influential technologies to come to the energy market in decades. While hydraulic fracturing has up-ended energy markets, its improved use was not easy to predict or straightforward to achieve. Furthermore, its improvement has taken place in various competitive but regulated markets, ensuring that useful empiric data has been collected throughout. The two main chapters of the dissertation study, in related hydraulic fracturing contexts, how the availability of information from rival firms affects firm decision making.
Chapter 2 examines the drilling and fracture-input decisions in North Dakota's Bakken Shale in order to study the interaction between dynamic decision making and the possibility of social learning. The chapter first confirms that operators have changed their input decisions over time in a manner that is consistent with learning about how to better use the fracturing technology. It then develops an estimates an econometric model to quantify how much the possibility of learning from other firms' wells adds to one's own option value for an undrilled well. I find that this incremental value is small in practice, but could be dramatic in other situations, and demonstrate the role that different policies can play in improving it.
Chapter 3 considers the effects of a 2012 law in Pennsylvania mandating the disclosure of the chemicals used in each hydraulic fracturing treatment. My coathors and I take advantage of a unique dataset of chemical input decsions for wells treated prior to the disclosure law taking effect. We find that operators' chemical choices following disclosure tend to be more similar to each other, in a manner consistent with copying. We further find that this copying can have some economic value -- those wells that copy more productive firms enjoy higher productivity than those that do not. Finally, there we find evidence that firms reduce innovative activity in the wake of the disclosure law. These findings suggest that regulators face a tradeoff between discovery and dissemination of new knowledge when they write disclosure regulations.
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