First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

October 15, 2008

How do artists know when their new creation is truly done? And what can other innovators—particularly those in business and technology—learn from the artists' interpretation of creation and completion? Such puzzles about creativity are explored in a forthcoming book chapter, "Innovation Processes and Closure," by HBS professor Robert D. Austin and Lotte Darsoe. Other publications in the works coauthored by Austin, and highlighted this week, also look deeply at different angles of creativity and their potential influence on making work satisfying and organizations adaptable.

Two business cases involving female protagonists also appear: "Keeping Google 'Googley,'" about what the company was doing to keep energy up and bureaucracy at bay as it expanded, and (as a supplement to an original case) "Martha Goldberg Aronson: Challenges at Mid-Career (B)," about a Medtronic executive planning a savvy career move.

 

Working Papers

Economic Factors Underlying the Unbundling of Advertising Agency Services

Abstract

This paper addresses a longstanding puzzle involving the unbundling of services that has occurred over more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency's decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquenial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.

Download the paper from SSRN ($5): http://papers.nber.org/papers/W14345

Can the Virtuous Mouse and the Wealthy Elephant Live Happily Ever After?

Abstract

What happens when small iconic socially oriented businesses are acquired by large corporations? Such mergers create significant opportunities for creating both business value and substantially expanded social value, but also pose unusually difficult challenges because the merging entities are often strikingly different in philosophy and operating styles as well as in scale. We examine three examples—Ben and Jerry's acquisition by Unilever, Stonyfield Farm by Groupe Danone, and Tom's of Maine by Colgate—to ascertain what is distinctive about the merger process and to analyze the elements critical to success. We develop suggestions about how other companies considering similar arrangements might best manage the process of courtship, developing agreements, and executing effectively within the newly merged entities.

No PDF is available at this time.

Reputation and Competition: Evidence from the Credit Rating Industry

Abstract

Fair and accurate credit ratings arguably play an important role in the financial system. In an environment absent free entry of rating agencies, the provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. The economically significant entry of a third agency into a market that was previously best described as a duopoly provides a unique experiment to examine the effect of increased competition on the disciplining effects of reputation. Using a variety of data sources, we find that competition leads to more issuer friendly and less informative ratings. First, the credit ratings issues by the two incumbent agencies increased toward good ratings. Second, the correlation between bond yields and ratings fell. And lastly, negative stock price responses to announced rating downgrades are larger in absolute value (a downgrade in this weaker ratings environment is even worse news). Ultimately, our findings are consistent with models that suggest competition can impede the reputational mechanism.

Download the paper: http://www.hbs.edu/research/pdf/09-051.pdf

Scale without Mass: Business Process Replication and Industry Dynamics

Abstract

In the mid-1990s, productivity growth accelerated sharply in the U.S. economy. In this paper, we identify several other industry-level changes that have occurred during the same time and argue that they are consistent with an increased use of information technology (IT). We use case studies to illustrate how IT has enabled firms to more rapidly replicate improved business processes throughout an organization, thereby not only increasing productivity but also market share and market value. We then empirically document a substantial increase in turbulence starting in the 1990s, as measured by the average intra-industry rank change in sales, earnings before interest, taxes, depreciation and amortization (EBITDA), and other metrics. In particular, we find that IT-intensive industries account for most of this increase in turbulence, especially after 1995. In addition, we find that IT-intensive industries became more concentrated than non IT-intensive industries after 1995, reversing the previous trend. The combination of increased turbulence and concentration, especially among IT-intensive industries, is consistent with recent theories of hypercompetition as well as Schumpeterian creative destruction. We conclude that the improved ability of firms to replicate business innovations has changed the nature of business competition.

Download the paper: http://www.hbs.edu/research/pdf/07-016.pdf

Do Voters Appreciate Responsive Governments? Evidence from Indian Disaster Relief

Abstract

Using rainfall, public relief, and election data from India, we examine how governments respond to adverse shocks and how voters react to these responses. The data show that voters punish the incumbent party for weather events beyond its control. However, we find evidence that fewer voters punish the ruling party when the party responds vigorously to the crisis. Moreover, severe crises are associated with increased voter sensitivity to disaster assistance. These results are consistent with models of government accountability and provide an explanation for Amartya Sen's claim that democratic governments respond better to salient emergencies than to less conspicuous ones. Even so, the results suggest that even the most responsive government will fare worse in the subsequent election than had there been no disaster.

Download the paper: http://www.hbs.edu/research/pdf/09-050.pdf

Was the Wealth of Nations Determined in 1000 B.C.?

Abstract

We assemble a dataset on technology adoption in 1000 B.C., 0 A.D., and 1500 A.D. for the predecessors to today's nation states. We find that this very old history of technology adoption is surprisingly significant for today's national development outcomes. Our strong and robust results are for 1500 A.D. determining per capita income today. We find technological persistence across long epochs: from 1000 B.C. to 0 A.D., from 0 A.D. to 1500 A.D., and from 1500 A.D. to the present. Although the data allow only some suggestive tests of rival hypotheses to explain long-run technological persistence, we find the evidence to be most consistent with a model of endogenous technology adoption where the cost of adopting new technologies declines sufficiently with the current level of adoption. The evidence is less consistent with a dominant role for population as predicted by the semi-endogenous growth models or for country-level factors like culture, genes, or institutions.

Download the paper: http://www.hbs.edu/research/pdf/09-052.pdf

'Fair Marriages:' An Impossibility

Abstract

For the classical marriage model (introduced in Gale and Shapley, 1962) efficiency and envy-freeness are not always compatible; i.e., fair matchings do not always exist. However, for many, allocation of indivisible goods models (see Velez, 2008, and references therein), fairness can be restored if a sufficiently large amount of money is available for distribution/compensation as well. Interpreting the agents as the objects to be allocated, one might try to restore fairness for marriage markets in a similar fashion. We prove that there are marriage markets where no amount of money can guarantee the existence of a fair allocation.

Download the paper: http://www.hbs.edu/research/pdf/09-053.pdf

 

Cases & Course Materials

Betfair vs. UK Bookmakers

Harvard Business School Case 709-417

Betting exchanges provide an electronic platform that allows ordinary consumers to not only back teams to win, but also to lay odds for other punters to back. This business model allows punters to cut out the middleman of the bookmaker and leads to a much more efficient two-sided market. Betfair.com's domination of the betting exchange has threatened to undermine the core of the traditional bookmakers' business model. The case examines two aspects of the industry: (1) What specific choices did Betfair make to become the dominant betting exchange, winning the competitive battle over Flutter.com? (2) At what stages do Betfair.com's business model and those of the bookmakers interact? Will Betfair.com naturally come to dominate the industry, and if so how should the bookmakers react?

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=709417

Chocolates El Rey

Harvard Business School Case 508-052

In late November 2006, Jorge Redmond, CEO of Chocolates El Rey, called a meeting with senior management to discuss the company's growth strategy. A relatively small firm with sales of around $14 million, El Rey produced top quality chocolate made with single origin Venezuelan cocoa beans. The firm sold its chocolates in four different segments—food services, industry, retail, and beverages—and exported 17% of its production, mostly to the United States, Europe, and Japan. El Rey needed to grow, but Redmond wondered how to achieve growth and how to market the "El Rey" brand to its different target segments and international markets. With only 0.5% of the cocoa's world production, was it worth the effort to try and establish a country-of-origin image for Venezuelan chocolate? If so, how could El Rey go about it?

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=508052

Ithmar Capital

Harvard Business School Case 809-032

The founders of Ithmar Capital, a mid-market private equity fund targeting businesses in and addressing the Gulf Co-operation Council countries, are about to raise their third fund, targeting $1 billion. The firm's current strategy as demonstrated in Funds I ($70 million) and II ($250 million) emphasized careful targeting of sectors and in-depth work to develop the portfolio companies post-acquisition. With the industry's greater velocity and deal size, can Ithmar continue to pursue this strategy even with a larger fund?

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=809032

Keeping Google 'Googley'

Harvard Business School Case 409-039

This case, set in 2008, examines how Google has worked to avoid potential negative byproducts of rapid growth such as bureaucracy, slow decision-making, lack of visibility, and organizational inconsistency. When the case protagonist, Kim Scott, started with Google in 2004, she wondered if she would still be there in several years as she liked small, entrepreneurial companies. In 2008, she was pleased that Google still had the same entrepreneurial energy that it had when she joined. She and her colleagues reflect on how Google has been able to maintain its culture as the company keeps doubling in size.

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=409039

Martha Goldberg Aronson: Challenges at Mid-Career (B)

Harvard Business School Supplement 409-030

Martha Goldberg Aronson of Medtronic is trying to decide whether to accept the offer from Medtronic CEO Bill Hawkins to become senior vice president and chief talent officer. Aronson returned from an executive role in Europe just 18 months before as vice president, investor relations, but sees herself as a fine executive. Thus, she is undecided about taking a senior staff position.

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=409030

Martingale Asset Management L.P. in 2008, 130/30 Funds and a Low Volatility Strategy

Harvard Business School Case 209-047

In early July of 2008, William (Bill) Jacques, Chief Investment Officer at Martingale Asset Management, a quantitative value-oriented investment manager in Boston, Massachusetts, was busy preparing for an upcoming meeting with the group that made new product decisions within the firm. The objective of the meeting was to review the backtesting and real-time investment results of a new minimum-variance strategy within the framework of a 130/30 fund. The performance results were very encouraging, but Bill still wondered if they were a fluke of the data, a result of data mining rather than the reflection of a true market anomaly. He wanted to discuss several possible explanations of the phenomenon and to decide whether Martingale should offer the strategy to its clients.

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=209047

Note on the Nonprofit Coherence Framework

Harvard Business School Note 309-035

This note presents the Nonprofit Coherence Framework. It helps nonprofit leaders identify the key elements that support an organizational strategy focused on attaining high performance, bring those elements into a coherent relationship with the strategy and each other, and help guide the actions of people throughout an organization in the pursuit of high levels of individual and organizational achievement. This note proposes that to attain high performance, a nonprofit organization must have all of its organizational elements—culture, structure, systems, resources, stakeholders, and the operating environment—working together to drive strategy.

Purchase this note:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=309035

Pat Fili-Krushel (A)

Harvard Business School Case 909-009

Pat Fili-Krushel, CEO and president of WebMD and past president of ABC Network, contemplates accepting Richard Parson's offer to become the first executive vice president of administration at AOL Time Warner. Accepting this position would be a move back into mainstream media but also a career shift from line positions to a corporate staff role. The case profiles Fili-Krushel's media experiences, and her use of interpersonal influence and negotiation, leading up to the critical decision point. After consulting with colleagues throughout the media industry, Fili-Krushel's decision rests on her own career aspirations and her expectations about the future of AOL Time Warner.

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=909009

Pat Fili-Krushel (B)

Harvard Business School Case 909-010

Pat Fili-Krushel has agreed to take on the job of first executive vice president of administration for AOL Time Warner, leading corporate human resources, internal communications, real estate and facilities, and other administrative roles for the combined company. She must figure out how to structure the job, and how to start her relationship with her new boss, CEO Richard Parsons. Two factors complicate this decision. First, AOL Time Warner is experiencing significant internal conflict and Fili-Krushel is stepping into the middle of it. Second, Fili-Krushel has built her career on increasingly large line leadership positions, such as the president of ABC Network, and has no experience in getting things done without line authority. The case lays out the steps she takes to build authority and respect within the firm, and outlines the process of moving the firm's leaders from conflict to collaboration.

Purchase this case:
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Tong Lung Metal Industry Co., Ltd

Harvard Business School Case 609-034

Develop its own branded line, or continue as an original design manufacturer (ODM)? Tung Lung Metal Industries Co. Ltd. is a Taiwanese maker of door lock hardware that is faced with the question of whether to continue to focus on its ODM business or start placing more emphasis on its own brand development and growth in global markets. The case explores the bumpy history of the company and raises questions around the downstream consequences of global outsourcing strategies.

Purchase this case:
http://harvardbusinessonline.hbsp.harvard.edu/ b01/en/common/item_detail.jhtml?id=609034

 

Publications

The Adventures of an IT Leader

Abstract

Becoming an effective IT manager presents a host of challenges—from anticipating emerging technology to managing relationships with vendors, employees, and other managers. Ultimately, a good IT manager must be a strong business leader, not just a technical specialist. By inviting you to "walk in the shoes" of an IT leader, this book will help you better understand the role of IT in your organization and navigate your own career with greater confidence. Accompany Jim Barton as he struggles through a challenging first year as the IT director of IVK Corporation, handling (and fumbling) situations that, although fictional, are based on true events. You can read this engaging narrative from beginning to end, like a regular book, or treat it as a series of cases. You can also skip around and use the book to satisfy your most pressing needs. For example, need to learn about crisis management and security? Read chapters 10-12. Or formulate your own responses to a CIO's management obstacles by reading the authors' recurring "Reflection" questions. You'll turn to this book again and again-thumbing through to reference critical chapters when you face troubling IT-related issues in your own career.

Corporate Information Strategy and Management: Text and Cases (8th ed.)

Abstract

The 8th edition of Corporate Information Strategy and Management: Text and Cases is written for students and managers who desire an overview of contemporary information systems technology management. This new edition examines how information technology enables organizations to conduct business in radically different and more effective ways. The authors' objective is to provide readers with a better understanding of the influence of twenty-first century technologies on business decisions. The 8th edition discusses today's challenges from the point of view of the executives who are grappling with them. This text is comprised of an extensive collection of Harvard Business School cases devoted to information technology.

Learning (Not) to Talk About Race: When Older Children Underperform in Social Categorization

Abstract

The present research identifies an anomaly in sociocognitive development, whereby younger children (8 and 9 years) outperform their older counterparts (10 and 11 years) in a basic categorization task in which the acknowledgment of racial difference facilitates performance. Though older children exhibit superior performance on a race-neutral version of the task, their tendency to avoid acknowledging race hinders objective success when race is a relevant category. That these findings emerge in late childhood, in a pattern counter to the normal developmental trajectory of increased cognitive expertise in categorization, suggests that this anomaly indicates the onset of a critical transition in human social development.

Not Just a Pretty Face: The Economic Drivers Behind the Arts in Business Movement

Abstract

Interest in the uses and effects of art and methods of art making in businesses of all kinds is on the rise. This is no passing fad but the result of two seismic shifts moving the business world. These shifts will influence how companies, especially those based in developed economies, compete. To survive, companies and their managers will adapt. As some are now beginning to realize, an important part of that adaptation will require a new understanding of art and art making, a sophisticated appreciation of, and a feel for, aesthetic principles.

Knowledge Work, Craft Work, and Calling

Abstract

Social critics have often complained that industrial revolution management transfers control of a job away from workers, encourages human exploitation in pursuit of cost minimization, and alienates workers from their labor. But the arrangements of work that have been so criticized have continued to change. The work of a UNIX systems lab technician in the 21st century differs extravagantly from the work of a factory worker 100, or even 20, years earlier. In this paper, we argue that technological transformations now underway create the potential for work structures more favorable to workers. Using a theoretical model that relates work to its determinants, and to consequent management implications, we demonstrate that future work might have a worker-centered structure resembling that of pre-industrial craft work.

Artistic Methods and Business Disorganization

Abstract

The idea that artists' work can usefully inform business practice has gained support in recent years. Managers have long described some business activities as "more art than science," but usually they've meant by this that they don't understand the activity and can't do it reliably themselves. In this view, artistic methods and art-like activities are personal and intuitive, even magical, not yet sufficiently analyzed, routinized, or rationalized to be trustworthy. Authors such as Adler (2006), however, note that an increasing number of companies are abandoning the notion that art practice within business signifies a problem; they've embraced artistic processes in approaches to strategic and day-to-day management, leadership, and team work. Management researchers, too, have drawn practical lessons from artistic methods in design (Bolland and Collopy, 2004), music (Hackman, 2002; Zander and Zander, 1998), theatre (Austin and Devin, 2003), and other areas. Scholars have also proposed art principles and art-based philosophies as organizing bases for business firms (Guillet de Monthoux, 2004) and as conceptual lenses through which we can more completely understand organizations (Strati, 1999). In this article, we survey, discuss, and critique this development in management research.

Innovation Processes and Closure

Abstract

In this paper we examine the concept of "closure" in relation to the innovation process. We suggest that managers need a richer and more encompassing framework than what presently exists for navigating, coaching, and managing the innovation process, particularly in relation to "closure." Closure is a point of convergence that happens once or repeatedly in productive activity; it signifies an important shift from open to closed, from undetermined to determined, from undefined to defined. We describe two basic forms of closure in the innovation process: forced closure and crystallization. We consider also situations in which products are "never finished," as when a software product oscillates between degrees of defined-ness and undefined-ness, adapting to changing business conditions in an ongoing process. The emergence of important examples of never finished products is our primary reason for reconsidering the idea of closure; we therefore seek a framework that will also encompass this characteristic of productive activity. Our data consist of action research and interviews with managers and artists involved in innovation and processes of creation, and our intention is to explore the following questions: How do business innovators know when to keep things open and when to allow closure to happen or even force it? In comparison, how do artists know when they are done? Could artists' ways help us understand the innovation process and the concept of closure better? What kind of knowledge, experience, methods, or signals can help innovators manage closure? What strategies are available? Helpful? Effective?

Managing Differences

Abstract

Reflections on what the example of Specialisterne, a company that employs people with autism for their particular talents in the exacting but repetitive tasks involved in software testing, might teach us about leveraging human assets, in all their diversity, in an innovation economy.

Care Platforms: A Basic Building Block for Care Delivery

Abstract

Without significant operational reform within the nation's health care delivery organizations, new financing models, payment systems, or structures are unlikely to realize their promise. Adapting insights from high-performing companies in other high-risk, high-cost, science- and technology-based industries, we propose the "care platform" as an organizing framework for internal operations in diversified provider organizations to increase the quality, reliability, and efficiency of care delivery. A care platform organizes "care production" around similar work, rather than organs or specialties; integrates standard and custom care processes; and surrounds them with specifically configured information and business systems. Such organizational designs imply new roles for physicians.

The Price Is (Almost) Right

Abstract

Most previous research tests market efficiency using average abnormal trading profits on dynamic trading strategies and typically rejects the joint hypothesis of market efficiency and an asset-pricing model. In contrast, we adopt the perspective of a buy-and-hold investor and examine stock price levels. For such an investor, the level of price is more relevant than the short-horizon expected return, and betas of cash-flow fundamentals are more important than high-frequency stock return betas. Our cross-sectional tests suggest that there exist specifications in which differences in relative price levels of individual stocks can be largely explained by their fundamental betas.

The Evidence Does Not Speak for Itself: Expert Witnesses and the Organization of DNA-Typing Companies

Abstract

During the past 15 years, new biotechnology companies have promoted DNA typing as a sophisticated criminal and paternity identification technique. Private testing laboratories produce results that link individuals with crime scenes and fathers to their children. Special problems of trust have arisen, because the domain of scientific practice termed 'DNA typing' emerged in a commercial context, and its results serve as the basis for expert witness testimony in contentious courtroom settings. Firms accordingly had to develop their own rules for legitimating truth-claims and standardizing and regulating laboratory practices. I argue here that the primary commodity crafted by DNA-typing companies—the courtroom credibility of DNA prints—required an intertwining of scientific authority, corporate practices, and the persona of the expert witness. This paper describes an actor-network coming into being and shows how credible institutions, organizations that manufacture integrity as their main sellable product, adopted a vertically integrated structure in order to control the production of DNA evidence from the laboratory to the courtroom.

The Gordon Research Conferences as Scientific Infrastructure

Abstract

Conferences serve as a crucial part of scientific infrastructure by offering participants the opportunity to announce novel findings, discuss research methods, and take part in a variety of networking activities. Presenting papers and learning about unpublished new work is vital for a scientist to stay current in their discipline. Yet conferences have drawn minimal attention from historians and sociologists of science, whose analysis of scientific infrastructure has instead focused on formal scientific communication through journal articles and online forums, the formation of new disciplines and subfields, and shifting funding structures for academic and industrial labs. This article focuses on the Gordon Research Conferences (GRC) as a case study of the significance of conferences to the scientific enterprise. We argue that GRC's growth is a product of internal and external factors: conferences stimulate intensive discussion and real-time peer review, new topics are chosen through a review process oriented to frontier areas of science, and the GRC format fosters intimacy among participants even as the overall size of the scientific enterprise expands. More generally, we seek to make visible the otherwise hidden role of conferences within scientific infrastructure.

The Decentering of the Global Firm

Abstract

This paper describes recent changes in the relationship between firms and nation states. Firms are typically linked to the nation in which they began and are considered to have fixed national identities. While firms have reallocated various activities around the world in response to value creation opportunities, they have largely retained their national identities, and their headquarter activities remained bundled in their home countries. This characterization is increasingly tenuous. Firms are redefining their homes by unbundling their headquarters functions and reallocating them opportunistically across nations. A firm's legal home, its financial home and its homes for managerial talent no longer need to be colocated and, consequently, the idea of firms as national actors rooted in their home countries is rapidly becoming outdated. The implications for policy makers and researchers are outlined.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1279535

Diversification of Chinese Companies: An International Comparison

Abstract

The purpose of this paper is to provide a systematic comparison of the level of business diversification in China and eight other large economies for the 2001-2005 period. The reasons why publicly listed Chinese firms are more diversified than companies elsewhere are investigated.

Agriculture as a Source of Fuel: Prospects and Impacts, 2007 to 2017

Abstract

No abstract is available at this time.

Download the paper: http://www.mda.state.mi.us/renewablefuels/documents/AgforFuel.pdf

Media Markets and Localism: Does Local News en Español Boost Hispanic Voter Turnout?

Abstract

Since the dawn of broadcasting, and especially in the past decade, Americans have turned their attention from local to more distant sources of news and entertainment. While the integration of media markets will raise the private welfare of many consumers, critics of a globalized information and entertainment industry claim that transnational media undermine civic engagement, transforming locally engaged citizens into viewers consuming programming from distant sources. In response to such concerns, many regulatory agencies, including the Federal Communication Commission in the United States, curtail the integration of media markets to promote "localism." To find the right balance between the private benefits of integrated markets and the public value of civic engagement, evidence on the size of the positive spillovers from local media is needed. To date, such evidence is scant. In this paper, we exploit the rapid growth of Hispanic communities in the United States to test whether the presence of local television news affects local civic behavior. Spanish-language local television news programming was available in 25 U.S. metro areas in 2002, up from only 14 areas in 1994. Our estimates indicate that Hispanic voter turnout increased by 5 to 10 percentage points, relative to non-Hispanic voter turnout, in markets where local Spanish-language television news became available. We conclude that the tradeoff between integrated media markets and civic engagement is real. The results of this study provide a basis for the continued pursuit of regulatory policies that promote localism.

Fairness in Extended Dictator-Game Experiments

Abstract

We test the robustness of behavior in dictator games by offering allocators the choice to play an unattractive lottery. With this lottery option, mean transfers from allocators to recipients substantially decline, partly because many allocators now keep the entire endowment for themselves (without playing the lottery). In our standard dictator game, the median transfer amounts to 41% of the dictators' endowment. Once the lottery option is present, the median transfer falls to zero. Introducing an additional unattractive choice thus leads subjects to violate the weak axiom of revealed preference (WARP).

Friend or Foe? Cooperation and Learning in High-Stakes Games

Abstract

Why do people frequently cooperate in defiance of their immediate incentives? One recent explanation is that individuals are conditionally cooperative: They prefer to cooperate with cooperative persons but would rather punish those who are not. As an explanation of behavior in one-shot settings, such preferences require individuals to be able to discern their opponents' preferences prior to play. Using data from two seasons of a television game show, we provide evidence about how individuals implement conditionally cooperative preferences. We show that (1) contestants forgo large sums of money to be cooperative; (2) players cooperate at heightened levels when their opponents are predictably cooperative; and (3) players whose observable characteristics predict less cooperation fare worse (monetarily) over time, as opponents avoid cooperating with them.