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.

August 4

With nearly 140,000 students enrolled in kindergarten through 12th grade, Montgomery County in suburban Washington, D.C. has the 16th largest public school system in the United States. Like many other public school district, yet with more success than most, it has struggled to identify and remove barriers between race and class on the one hand and academic achievement on the other. Leading for Equity: The Pursuit of Excellence in the Montgomery County Public Schools is a new book by HBS senior lecturer Stacey M. Childress, Professor David A. Thomas, and Schoolnet cofounder Denis P. Doyle detailing the district's leadership in public education. Chapters focus on six core themes and highlight the practical lessons for other districts.

Also this week, "Silenced by Fear: The Nature, Sources, and Consequences of Fear at Work," a forthcoming article in Research in Organizational Behavior, examines the negative consequences of fear in the workplace. According to the authors, who include HBS professor Amy C. Edmondson, "Our aim is to introduce new directions for future research on silence as well as to encourage further attention to the powerful and pervasive role of fear across numerous areas of theory and research on organizational behavior."


Working Papers

The Impact of Private Equity Ownership on Corporate Tax Avoidance


This study investigates how private equity ownership affects corporate tax avoidance. Private equity (PE) firms have been accused of aggressively managing their own tax liabilities and those of their portfolio firms. We investigate the latter assertion based on a sample of private firms for which there is financial statement data available. We first document that firms significantly alter their tax avoidance patterns in anticipation of "going public" and "going private'" transactions. We then find that majority PE-backed private firms engage in less book-tax nonconforming tax planning than public years; nonetheless, they exhibit substantially lower marginal tax rates. We attribute these results to the larger debt tax shields of majority-owned PE-backed firms, which reduce their need for nonconforming (i.e., more aggressive) tax strategies. Lastly, we examine how different private ownership structures (e.g., majority PE ownership vs. management-owned) affect tax planning at private firms. Our results indicate that majority-owned PE-backed firms engage in more book-tax conforming and nonconforming tax planning than other private firms. We attribute these results to the managerial sophistication and resources available to majority-owned PE-backed firms.

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What Should GAAP Look Like? A Survey and Economic Analysis (revised)


Based on extant literature, we articulate a positive theory of GAAP under the assumption that GAAP's objective is to facilitate efficient capital allocation within an economy. The theory predicts that GAAP's principal focus, as shaped by the demand for and supply of financial information, is on the use of the income statement and balance sheet for performance measurement and control (stewardship). The theory allows us to compare and contrast extant GAAP, as observed in a regulated setting, with GAAP that might arise endogenously as a result of market forces. Building on previous research, we argue that verifiability and conservatism, while detracting from accounting's role in equity valuation, are critical features of GAAP under efficient contracting. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to areas such as intangibles where they could be used opportunistically. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

Patent Policy, Patent Pools, and the Accumulation of Claims in Sequential Innovation


We present a dynamic model where the accumulation of patents generates an increasing number of claims on sequential innovation. We study the equilibrium innovation activity under three regimes: patents, no-patents, and patent pools. Patent pools increase the probability of innovation with respect to patents, but we also find that (1) their outcome can be replicated by a licensing scheme in which innovators sell complete patent rights, and (2) they are dynamically unstable. We find that none of the above regimes can reach first or second best. Finally, we consider patents of finite duration and determine the optimal patent length.

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The Effect of Labor on Profitability: The Role of Quality (revised)


Determining staffing levels is an important decision in retail operations. While the costs of increasing labor are obvious and easy to measure, the benefits are often indirect and not immediately felt. One benefit of increased labor is improved quality. The objective of this paper is to examine the effect of labor on profitability through its impact on quality. I examine both conformance quality and service quality. Using longitudinal data from stores of a large retailer, I find that increasing the amount of labor at a store is associated with an increase in profitability through its impact on conformance quality but not its impact on service quality. While increasing labor is associated with an increase in service quality, in this setting there is no significant relationship between service quality and profitability. My findings highlight the importance of attending to process discipline in certain service settings. They also show that too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability.

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Cases & Course Materials

Compass Box Whisky Company

Harvard Business School Case 108-032

Compass Box Whisky Company is facing a changing supply situation and is evaluating switching to a business model with high inventory and long lead times. The company must consider what the change will mean for operations, risk, and measuring profitability.

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Delphi Corp. and the Credit Derivatives Market (A)

Harvard Business School Case 210-002

In 2005, Jane Bauer-Martin, a hedge fund manager, is considering what she should do with the fund's large investment in the publicly traded bonds of Delphi Corp., a financially troubled auto parts supplier. Delphi is General Motor's key auto parts supplier, and, like GM, it is burdened with large pension and other retiree liabilities that threaten to push it into bankruptcy. Bauer-Martin is considering using various credit derivatives (credit default swaps, credit-linked notes, credit default swap indices, total return swaps, etc.) to hedge her position in Delphi debt, or to speculate on future Delphi bond prices.

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Denmark: Globalization and the Welfare State

Harvard Business School Case 709-015

This case describes how Denmark has balanced the impacts of globalization, including outsourcing and movement of labor, with its social welfare offerings. Reforms implemented during the past two decades drove down unemployment, promoted new company formation, and put the country at or near the top of international polls on the ease of doing business. The case describes how Danes forged a consensus that embraced international trade and outsourcing while supporting continuous upgrading of workplace skills. In April 2009, the new Prime Minister, Lars Løkke Rasmussen, is balancing short-term responses to a global recession against longer-term planning for the Danish labor market and macroeconomy. Can Denmark keep its borders open to the free movement of goods, services, and labor while also sustaining the breadth of its welfare offerings?

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Partners in Health: HIV Care in Rwanda

Harvard Business School Case 709-474

In 2005, Partners in Health (PIH) was invited by the Rwandan Ministry of Health to assume responsibility for the management of public health care in two rural districts in Eastern Rwanda and create an HIV treatment program at these sites. PIH successfully implemented a comprehensive program focusing on four principles: health systems improvement, HIV prevention and care, accompaniment, and social and economic support. By January 2007, the Rwinkwavu site had conducted 67,137 HIV tests and provided antiretroviral therapy to more than 2,000 patients, of which, fewer than 1% had been switched to second-line drug regimens, 3.8% had died, and only one patient had been lost to follow up. A costing analysis done by the Clinton HIV/AIDS Initiative suggested that the model could feasibly be spread to other districts. Dr. Agnes Binagwaho, Executive Director of Rwanda's National AIDS Control Commission, and her colleagues in the Ministry of Health are contemplating how the program could be improved and whether it should be expanded nationally.

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Leading for Equity: The Pursuit of Excellence in the Montgomery County Public Schools


Leading for Equity tells the compelling story of the Montgomery County (Maryand) Public Schools and its transformation--in less than a decade--into a system committed to breaking the links between race and class and academic achievement. In chapters organized around six core themes, the authors lay out the essential elements of MCPS's success. They identify key lessons other districts can draw from MCPS's experience and offer a framework for applying them. A dramatic departure from "business as usual," MCPS has won nationwide attention as a compelling model for tackling the achievement and opportunity issues that confront our nation as a whole.

Two-Terminal Routing Games with Unknown Active Players


We analyze two-terminal routing games with linear cost functions and with an unknown number of active players. We deal with both splittable and unsplittable models. We prove the existence and uniqueness of a symmetric safety-level equilibrium in such games and show that in many cases every player benefits from the common ignorance about the number of players. Furthermore, we prove new theorems on existence and uniqueness of equilibrium in two-terminal convex routing games with complete information.

Silenced by Fear: The Nature, Sources, and Consequences of Fear at Work


In every organization, individual members have the potential to speak up about important issues, but a growing body of research suggests that they often remain silent instead, out of fear of negative personal and professional consequences. In this chapter, we draw on research from disciplines ranging from evolutionary psychology to neuroscience, sociology, and anthropology to unpack fear as a discrete emotion and to elucidate its effects on workplace silence. In doing so, we move beyond prior descriptions and categorizations of what employees fear to present a deeper understanding of the nature of fear experiences, where such fears originate, and the different types of employee silence they motivate. Our aim is to introduce new directions for future research on silence as well as to encourage further attention to the powerful and pervasive role of fear across numerous areas of theory and research on organizational behavior.