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.

May 27, 2009

With home prices sagging in the wake of the subprime meltdown, new research describes exactly how far some prices have fallen. "Forced Sales and House Prices," a working paper coauthored by HBS visiting scholar John Y. Campbell, also suggests how foreclosures adversely affect the sale prices of nearby homes. Data for house transactions over the past 20 years in Massachusetts indicate that the price of a house is lowered by 1 percent when a foreclosure has taken place a tenth of a mile away. Houses sold after foreclosure are likely to be sold at a discount of 28 percent, too. The paper suggests the local-level ripple effect of real estate problems.

Improved health-care delivery is on the agenda of a faculty-authored book slated for June publication, Designing Care: Aligning the Nature and Management of Health Care, by Richard M.J. Bohmer, a medical doctor who co-directs the School's joint MD/MBA program. Bohmer's book emphasizes the need for two different management systems to tackle "sequential care," which responds to predictable, low-cost interventions, and "iterative care," which requires more time and effort for diagnosis and treatment.

Cases this week look at the industrious nature of singer-humanitarian Bono and the band U2, Merck's challenges in providing medicines to the poor, and the entertainment enterprise behind New York City nightclub Marquee, among other topics.

 

Working Papers

The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment

Abstract

The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative-term premia on inflation-indexed bonds.

Download the paper from SSRN ($5): http://papers.nber.org/papers/W14788

Measuring the Financial Sophistication of Households

Abstract

This paper constructs an index of financial sophistication that, in comprehensive data on Swedish households, best explains a set of three investment mistakes: underdiversification, risky share inertia, and the tendency to sell winning stocks and hold losing stocks (the disposition effect). The index of financial sophistication increases strongly with financial wealth and household size, and to a lesser extent with education and proxies for financial experience. The index is strongly positively correlated with the share of risky assets held by a household.

Download the paper from SSRN ($5): http://papers.nber.org/papers/w14699

Forced Sales and House Prices

Abstract

This paper uses data on house transactions in the state of Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of at least one seller, are sold at lower prices than other houses. Foreclosure discounts are particularly large, on average, at 28% of the value of a house. The pattern of death-related discounts suggests that they may result from poor home maintenance by older sellers, while foreclosure discounts appear to be related to the threat of vandalism in low-priced neighborhoods. After aggregating to the zip-code level and controlling for regional price trends, the prices of forced sales are mean-reverting, while the prices of unforced sales are close to a random walk. At the zip-code level, this suggests that unforced sales take place at approximately efficient prices, while forced-sales prices reflect time-varying illiquidity in neighborhood housing markets. At a more local level, however, we find that foreclosures that take place within a quarter of a mile, and particularly within a tenth of a mile, of a house lowers the price at which it is sold. Our preferred estimate of this effect is that a foreclosure at a distance of 0.05 miles lowers the price of a house by about 1%.

Download the paper from SSRN ($5): http://papers.nber.org/papers/w14866

Innovation Communication in Multicultural Networks: Deficits in Inter-cultural Capability and Affect-based Trust as Barriers to New Idea Sharing in Inter-cultural Relationships

Abstract

Innovative solutions to pressing global problems require effective inter-cultural communication. We propose that a barrier to the sharing of ideas pertinent to innovation in inter-cultural relationships is low affect-based trust, which arises from individuals' deficits in inter-cultural capability. Results from a study of a sample of executives' professional networks indicate that individuals lower in inter-cultural capability are less likely to share new ideas in inter-cultural ties but not intra-cultural ties. This effect is mediated by tie-level affect-based trust but not cognition-based trust. Theoretical and practical implications of these findings are discussed.

Download the paper: http://www.hbs.edu/research/pdf/09-130.pdf

Farsighted House Allocation

Abstract

In this note we study von Neumann-Morgenstern farsightedly stable sets for Shapley and Scarf (1974) housing markets. Kawasaki (2008) shows that the set of competitive allocations coincides with the unique von Neumann-Morgenstern stable set based on a farsighted version of antisymmetric weak dominance (cf., Wako, 1999). We demonstrate that the set of competitive allocations also coincides with the unique von Neumann-Morgenstern stable set based on a farsighted version of strong dominance (cf., Roth and Postlewaite, 1977) if no individual is indifferent between his endowment and the endowment of someone else.

Download the paper: http://www.hbs.edu/research/pdf/09-129.pdf

Altruistic Dynamic Pricing with Customer Regret

Abstract

A model is considered where firms internalize the regret costs that consumers experience when they see an unexpected price change. Regret costs are assumed to be increasing in the size of price changes and this can explain why the size of price increases is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs that depend on the size of price changes also raise the variability on the size of price increases. Lastly, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.

Download the paper from SSRN ($5): http://papers.nber.org/papers/w14933

 

Publications

Designing Care: Aligning the Nature and Management of Health Care

Abstract

Today's health-care providers face growing criticism—from policymakers and patients alike. As costs continue to spiral upward and concerns about quality of care escalate, the debate has focused on how to finance health care. Yet funding solutions can't address the underlying questions: Why have costs risen in the first place? And how can we improve the quality and affordability of care? In Designing Care, Harvard Business School professor Richard Bohmer argues that these fundamental questions must be answered. A medical doctor himself, Bohmer explains that health-care professionals are tasked with providing two very different types of care—sequential and iterative. With sequential care, a patient can be quickly diagnosed and given predictable, reliable, and low-cost care. But in the case of iterative care, a patient's condition is unknown, and tremendous resources may be required for diagnosis and treatment, often with uncertain outcomes. Bohmer shows that to reduce costs and manage care effectively, sequential and iterative care situations require different management systems. Through stories and cases drawn from years in the field, he reveals how health-care providers can successfully manage both modes. To do so, they must reevaluate traditional roles and embrace continuous learning across the organization. The benefits of this operational redesign? The predictable, responsive, and lower-cost care today's health-care leaders—and patients—seek.

Sovereign Wealth in Abu Dhabi

Abstract

By the turn of the century, oil had already made the tiny emirate of Abu Dhabi rich beyond anyone's wildest dreams. A sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), has invested extra oil revenues abroad for more than thirty years and amassed a still-growing portfolio worth approximately $750-900 billion. ADIA is widely believed to be the world's largest sovereign wealth fund—indeed the world's largest institutional investor. But Abu Dhabi is not yet a "developed" economy. So, in 2002, the Mubadala Development Company was established as a government-owned investment vehicle. Unlike ADIA's mandate to build and manage a financial portfolio, Mubadala's charge was to develop Abu Dhabi. According to some observers, ADIA was a "sovereign savings fund," while Mubadala was a government-owned investment firm. Mubadala is supposed to invest the wealth of the emirate in activities that would diversify the economy away from energy and into industry and services. Although each Mubadala investment is supposed to earn large returns, the strategy balances financial against "strategic" returns. ADIA and Mubadala are the institutional architecture to manage the wealth of the Abu Dhabi sovereign.

Plant-Size Distribution and Cross-Country Income Differences

Abstract

We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

Online Advertising: Rustlers and Sheriffs in the New Wild West

No abstract is available at this time.

Purchase the book: http://www.amazon.com/exec/obidos/ASIN/0596527489/benedelmanhom-20

Download the paper: http://www.hbs.edu/research/pdf/09-039.pdf

Expertise Utilization in Accounting & Consulting Teams: The Effects of Shared Representations

Abstract

Why are some teams more effective than others in using their members' knowledge? This paper identifies shared representations as a critical moderator of effective knowledge utilization in teams, revealing how and when teams appropriately draw on their members' expertise.

Feeling the Heat: The Effects of Performance Pressure on Teams' Knowledge Use and Performance

Abstract

Why do some teams fail to use their members' knowledge effectively, even after having correctly identified each other's expertise? This paper identifies performance pressure as a critical barrier to effective knowledge utilization in teams. I theorize that performance pressure creates threat rigidity effects in teams, meaning that they default to using the expertise of high-status members while becoming less effective at using team members with deep client knowledge. I test the model in a field study of 100+ accounting and consulting teams from a Big Four firm and use survey data from their clients to demonstrate the performance implications.

Market Reaction to the Adoption of IFRS in Europe

Abstract

This study examines European stock market reactions to 16 events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. European IFRS adoption represented a major milestone towards financial reporting convergence yet spurred controversy reaching the highest levels of government. We find an incrementally positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption. We find an incrementally negative reaction for firms domiciled in code law countries, consistent with investors' concerns over enforcement of IFRS in those countries. Finally, we find a positive reaction to IFRS adoption events for firms with high-quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption.

 

Cases & Course Materials

Bono and U2

Harvard Business School Case 809-148

This case traces the 30-year development of the rock band U2 and the development of its four members as artists, business leaders, and humanitarians (with particular attention paid to lead singer Bono's global humanitarian work). The case examines the beginnings of the band among four school friends and follows the development of the enterprise as a business and as a powerful social and cultural force in its own right. It also investigates the individual journeys of the band members during moments of great success and significant challenges. The case pays particular attention to the four men's evolving identities as musical artists and to the tradeoffs that have accompanied their fame and larger social commitments. The case takes up the evolution of the global music industry in the face of rapid technological and organizational change, examining how U2 and colleagues navigated such change, built a very powerful brand, and created a successful business model. The final part of the case traces lead singer Bono's involvement in political and humanitarian causes and the potential power of such a model as a framework for artistry, entrepreneurship, and effective leadership in the 21st century.

Purchase this case:
http://hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=809148

Marquee: The Business of Nightlife

Harvard Business School Case 509-019

Description: In December 2008, nightlife impresario Noah Tepperberg is celebrating the fifth anniversary of his New York City nightclub Marquee. While most clubs are over within their first one-and-a-half years, Tepperberg has succeeded in keeping Marquee one of NYC's hottest clubs for what seems an eternity in the nightlife industry. However, concerns remain about Marquee's staying power, rising costs, and increased competition. When is the right time for Tepperberg to pull the plug on Marquee?

Purchase this case:
http://hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=509019

Merck: Global Health and Access to Medicines

Harvard Business School Case 509-048

The case describes the effort of Merck, a global leader in pharmaceuticals, in making available its medicines to the poor. The challenge for the company (or for that matter, any pharmaceutical company) is how to integrate its business strategy with its corporate social responsibility, especially when operating in "lower income" countries.

Purchase this case:
http://hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=509048

Sanctuary Soft, Inc.

Harvard Business School Case 409-104

A U.S.-based security software company considers its options to expand. Different labor-market and labor-law situations are analyzed for the U.S., U.K., Germany, China, and India.

Purchase this case:
http://hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=409104

Welcome to a Wireless World

Harvard Business School Note 709-445

Wireless technologies and mobile devices have played crucial roles in the evolution of the digital ecosystem. This note looks at cell phones, smartphones, mobile technologies, and popular applications noting companies that are positioned to capture the value engendered by them.

Purchase this note:
http://hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=709445