Learning by Viewing? Social Learning, Regulatory Disclosure, and Firm Productivity in Shale Gas
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Research by @T_Robert_Fetter finds that fracking firms’ productivity increased after regulation forced disclosure of trade secrets, as lagging firms caught up with market leaders.
T. Robert Fetter, Andrew L. Steck, Christopher Timmins and Douglas Wrenn, "Learning by Viewing? Social Learning, Regulatory Disclosure, and Firm Productivity in Shale Gas," National Bureau of Economic Research, December 2018, https://www.nber.org/papers/w25401
"...Firms in the oil and gas industry, as in many industries, rely on secrecy as a mechanism to capture value from their investments in innovation and maintain their competitive advantage....In this paper, we shed light on whether innovations in fracturing fluids do in fact constitute a competitive advantage. In particular, we compare detailed, well-level information on inputs to test whether the chemicals used become more similar with public disclosure....Our paper makes three primary contributions. Our first contribution is to the literature on the relationship between secrecy and innovation: We provide insight into the importance of the social tradeoffs policy makers face when considering disclosure laws. There may be a compelling social benefit from disclosing specific information, such as when production processes involve toxic chemicals in residential areas, but this social benefit must be weighed against the ability of firms to realize economic returns from their innovations. We provide evidence that innovations in hydraulic fracturing chemicals are valuable, and furthermore that innovation decreases following the disclosure rule suggesting that this tradeoff may be important at least in this context.Second, this paper expands the literature on the empirical effects of transparency or disclosure regulations in a new direction. Our analysis is the first, to our knowledge, to combine a study of the effects of information disclosure regulations with social learning. We find strong evidence that disclosure regulations about an emerging technology can enable social learning or spillovers that would not have occurred otherwise.Prior papers in the industrial organization literature have examined the effect of price or quality disclosure on market structure and competition....while other work has documented the effects of disclosure laws on environmental and health outcomes.....as well as investor behavior....Separately, other authors have studied the phenomenon of social learning....without considering the role of disclosure regulations specifically. Our research bridges these streams. Third, we study the role that chemical additives have played in the development of hydraulic fracturing technology. Several recent papers, beginning with Covert (2015), and continuing with Steck (2018) and Agerton (2018), have documented the rise of hydraulic fracturing and the role that learning plays on different firm decisions. We are the first to seriously consider the role of chemicals in firm learning, and thereby contribute to the literature on hydraulic fracturing specifically and social learning about emerging technologies more generally.... We find evidence for convergence in chemical inputs following the mandatory public disclosure law, and a link between that convergence and well productivity. In sum, the evidence suggests that disclosure laws affecting oil and gas production firms in Pennsylvania opened a new channel for social learning, and that operators who exploited this channel were able to increase their wells' productivity. This finding supports the argument that public disclosure laws can erode innovative firms' competitive advantages. Our last finding, that the disclosure law may be associated with a reduction in innovative activity, further corroborates this concern, and suggests that policymakers ought to consider the potential long-run costs of reduced innovation. Nonetheless, the net effect of such disclosure laws on public welfare over the longer term remains an open question: any welfare loss from reduced innovation needs to be weighed against the gains from transparency and dissemination...."
they don't estimate a net effect on sector productivity, ie the increase in productivity versus decreased innovation
Ed Comment:Note this ties to the paper that shows innovation slowed down during the 1940s when the military kept tech secret.Steve Note: Attached That Paper For Reference
interesting factoid/finding from NBER. using data from the fracking industry, where regulation forces firms to disclose trade secrets (the makeup of fracking fluids for example) finds that productivity increases as lagers catch up (as the information diffuses to competing firms), but innovation declines"...We find firms' chemical choices following disclosure converge in a manner consistent with inter-firm imitation and that this leads to more productive wells for firms that carefully choose whom to copy-but also a decline in innovation among the most productive firms, whose innovations are also those most often copied by other firms...."