Abstract—We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data include manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals, and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance, which are typically observed in isolation, can instead be interpreted within a simple unified matching framework.
Publisher's link: http://ssrn.com/abstract=1561903
Abstract—We demonstrate that legislation has a simple, yet previously undetected impact on stock prices. Exploiting the voting record of legislators whose constituents are the affected industries, we show that the votes of these "interested" legislators capture important information seemingly ignored by the market. A long-short portfolio based on these legislators' views earns abnormal returns of over 90 basis points per month following the passage of legislation. Industries that we classify as beneficiaries of legislation experience significantly more positive earnings surprises and positive analyst revisions in the months following passage of the bill, as well as significantly higher future sales and profitability. We show that the more complex the legislation, the more difficulty the market has in assessing the impact of these bills; further, the more concentrated the legislator's interest in the industry, the more informative are her votes for future returns.
Publisher's link: http://www.people.hbs.edu/lcohen/pdffiles/dimalcoII.pdf
Abstract—We demonstrate that personal connections amongst U.S. politicians have a significant impact on Senate voting behavior. Networks based on alumni connections between politicians are consistent predictors of voting behavior. We estimate sharp measures that control for common characteristics of the network, as well as heterogeneous impacts of a common network characteristic across votes. We find that the effect of alumni networks is close to 60% as large as the effect of state-level considerations. The network effects we identify are stronger for more tightly linked networks, and at times when votes are most valuable. We show that politicians use school ties as a mechanism to engage in vote trading ("logrolling"), and that alumni networks help facilitate the procurement of discretionary earmarks.
Publisher's link: http://www.people.hbs.edu/lcohen/pdffiles/malco.pdf
Technology Diffusion: Measurement, Causes, and Consequences
Abstract—This chapter discusses different approaches pursued to explore three broad questions related to technology diffusion: what general patterns characterize the diffusion of technologies, and how have they changed over time; what are the key drivers of technology; and what are the macroeconomic consequences of technology. We prioritize in our discussion unified approaches to these three questions that are based on direct measures of technology.
Dysfunction in the Boardroom: Understanding the Persistent Gender Gap at the Highest Levels
Abstract—The article examines the gender gap that is present in boardrooms in U.S. corporations and internationally in 2013 as more women attempt to reach executive-level positions. Countries in the European Union are attempting to institute laws regarding the minimum percentage of women on a company's board, while research suggests that women enter executive positions earlier and work harder than male counterparts. Other topics include a discussion of a female director's strengths in fields like board experience, leadership, and organization, why men believe women are more emotionally intelligent, and the challenges female directors of corporations face in interacting with their male counterparts.
Abstract—Top management structures in large U.S. firms have changed significantly since the mid-1980s. While the size of the executive team-the group of managers reporting directly to the CEO-doubled during this period, this growth was driven primarily by an increase in functional managers rather than general managers, a phenomenon we term "functional centralization." Using panel data on senior management positions, we show that changes in the structure of the executive team are tightly linked to changes in firm diversification and IT investments. These relationships depend crucially on the function involved: those closer to the product ("product" functions, e.g., marketing, R&D) behave differently from functions further from the product ("administrative" functions, e.g., finance, law, HR). We argue that this distinction is driven by differences in the information-processing activities associated with each function and apply this insight to refine and extend existing theories of centralization. We also discuss the implications of our results for organizational forms beyond the executive team.
Publisher's link: http://ssrn.com/abstract=1982531
Abstract—VC-entrepreneur partnership agreements often contain flaws that become highly damaging as the parties come up against issues of power, trust, and much more. Yet many of the flaws are systematic and predictable-and hence preventable. The author, a longtime consultant to the VC industry, outlines four recommendations for entrepreneurs sitting down at the table with prospective funders. Understand your leverage. Your leverage is not only a function of your alternatives; it has a lot to do with the VC's as well. Seek to understand them, and be prepared to educate the VC about why his exercising too much power could hurt both parties in the long-term. Maximize trust. Beneath all the financial projections, the VC negotiation is a process in which people are deciding whom they want to associate with for years to come. If the VC is vulnerable, use the opportunity to build trust rather than to take advantage. Focus on value-not just valuation. Nonfinancial considerations such as control are also important. Strive for understanding. Seemingly abstruse provisions can be highly consequential. And bear in mind that the choices a VC makes when negotiating can contain important clues about her assessments and expectations. Above all, when you're negotiating with a VC, think not only about what will look good in a press release today but also about what will help you create and capture value over the long run.
Publisher's link: http://hbr.org/2013/05/how-to-negotiate-with-vcs/ar/1
Abstract—Using new data on market-based transactions we construct real estate price indexes for Manhattan between 1920 and 1939. During the 1920s prices reached their highest level in the third quarter of 1929 before falling by 67% at the end of 1932 and hovering around that value for most of the Great Depression. The value of high-end properties strongly co-moved with the stock market between 1929 and 1932. A typical property bought in 1920 would have retained only 56% of its initial value in nominal terms two decades later. An investment in the stock market index (including dividends) would have outperformed an investment in a typical property (including net rental income), by a factor of 5.2 over our time period.
Publisher's link: http://www.people.hbs.edu/tnicholas/Anna_tom.pdf
Abstract—One of the largest gaming companies in the world expanded its sustainability efforts using a scorecard to guide and goad managers. This response assesses Caesars Entertainment's CodeGreen scorecard, advocates a more comprehensive environmental assessment to target subsequent improvement efforts, and describes how the company can leverage and scale its environmental efforts by advocating climate change mitigation policies within its supply chain and in government policy.
Abstract—Quantifying the gains from multinational production has been a vital topic of economic research. Positive productivity gains are often attributed to knowledge spillover from multinational to domestic firms. An alternative, less emphasized explanation is market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We develop a model that incorporates both aspects and quantify their relative importance in the gains from multinational production by exploring their distinct predictions for domestic distributions of productivity and revenue. We show that knowledge spillover shifts both distributions rightward while market reallocation raises the left truncation of the distributions and shifts revenue leftward. Using a rich firm-level panel dataset that spans 60 countries, we find that both market reallocation and knowledge spillover are significant sources of productivity gain. Ignoring the role of market reallocation can lead to significant bias in understanding the nature of gains from multinational production.
Download working paper: http://ssrn.com/abstract=2101302
Abstract—This paper investigates whether the religious identity of state legislators in India influences development outcomes, both for citizens of their religious group and for the population as a whole. To control for politician identity to be correlated with constituency level voter preferences or characteristics that make religion salient, we use quasi-random variation in legislator identity generated by close elections between Muslim and non-Muslim candidates. We find that increasing the political representation of Muslims improves health and education outcomes in the district from which the legislator is elected. We find no evidence of religious favoritism: Muslim children do not benefit more from Muslim political representation than children from other religious groups.
Download working paper: http://www.hbs.edu/faculty/product/45023
Abstract—This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists' investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner's human capital is two to five times more important than the VC firm's organizational capital in explaining performance.
Download working paper: http://www.people.hbs.edu/mrhodeskropf/Partner_Persist_20130115.pdf
Abstract—We test a method for visualizing and measuring enterprise application architectures. The method was designed and previously used to reveal the hidden internal architectural structure of software applications. The focus of this paper is to test if it can also uncover new facts about the applications and their relationships in an enterprise architecture, i.e., if the method can reveal the hidden external structure between software applications. Our test uses data from a large international telecom company. In total, we analyzed 103 applications and 243 dependencies. Results show that the enterprise application structure can be classified as a core-periphery architecture with a propagation cost of 25%, core size of 34%, and architecture flow through of 64%. These findings suggest that the method could be effective in uncovering the hidden structure of an enterprise application architecture.
Download working paper: http://www.hbs.edu/faculty/product/45024
Abstract—The substantial increase in inequality in the United States over the past three decades has provoked considerable debate, with some analysts characterizing rising inequality as among the greatest threats facing the nation and others dismissing it as little more than a hiccup-or even celebrating it as a favorable development-in the progress of American capitalism. Despite numerous claims in popular venues that high inequality has slowed growth, precipitated financial instability, and profoundly distorted the nation's political system, our review of the literature finds no academic consensus on the consequences of inequality for the health of the economy or the democracy, or for nearly any other macro-level outcome. With the academic community reaching inconclusive and conflicting findings, we suggest that careful empirical study of possible mechanisms by which income inequality may exert macro-level effects is warranted. We suggest further that the one potential mechanism that may be especially worthy of investigation relates to possible effects of high or rising inequality on individual decision making. Drawing on nascent research, we examine a handful of pathways through which inequality may plausibly influence individual decisions. Finally, we propose ways that these and other pathways might be productively explored and assessed through behavioral experiments. By bringing together what are today two separate areas of research-decision making and inequality (or social disparity)-this new line of inquiry could help to break the stalemate that has, until now, characterized the study of inequality and its consequences.
Download working paper: http://www.hbs.edu/faculty/product/44996
Abstract—This extended memorandum identifies episodes of sustained double-digit growth in real GDP, defined as a compound annual growth rate of 10% or more over a period of 8 years or longer. Using a measure of real GDP reported in the World Development Indicators, we identify 33 country episodes of double-digit growth since 1960. The narrative of each episode is presented and key drivers of growth described. The double-digit growth episodes are then compared to episodes of sustained 6%-7% growth on a number of economic and development indicators. Statistical tests show that differences in average episode values between the two groups are significant for the following: amount of FDI received, the share of natural resource rents in GDP, investment, export growth, industrial composition, and public spending on education. Double-digit growth countries also tended to show worse performance on a number of business environment and governance indicators. From this analysis, lessons are drawn for Liberia. We conclude that with a continued inflow of aid, foreign direct investment, and a rapid increase in natural resource production, Liberia has the potential to achieve double-digit growth. However, as experiences of double-digit growth countries show, the challenge will be to convert the surge in unearned income into sustainable growth, sound policy reforms, and effective governance.
Download working paper: http://www.theigc.org/sites/default/files/Eric%20Werker%20RR%20final.pdf
Cases & Course Materials
- Harvard Business School Case 313-024
In 2010, Tom Linebarger, president and COO of Cummins, Inc., the Columbus, Indiana-based manufacturer of diesel engines, has to decide where to locate the company's new manufacturing line for high horsepower engines. He has three choices to decide from: Seymour, Indiana; Daventry, England; and Pune, India. The Community Education Coalition (CEC) in Columbus has had success in improving the city's schools to make the area more competitive in attracting and retaining highly educated employees to this small Midwestern city. The CEC is planning an expansion into Seymour with Cummins' help. Will the CEC be able to improve the school system in Seymour enough to make it a viable choice for the new high horsepower engine line? The case highlights the role of Cummins' long-term effort at community development as a key element of its corporate strategy.
Purchase this case:
- Harvard Business School Case 313-085
In 2007 Royal DSM, a leading life science and materials company, entered a partnership with the World Food Programme (WFP) to combat hidden hunger around the world by providing micronutrient solutions. The case investigates the unexpectedly large impact the partnership had on DSM and on the global nutrition discussion and discusses the benefits and challenges of scaling up the Nutrition Improvement Program-a key component of DSM's human nutrition and health division-beyond the WFP partnership, despite the need to build significant additional capabilities and its somewhat lower margins.
Purchase this case:
- Harvard Business School Case 413-060
Iz-Lynn Chan, assistant director of retail business group and service quality and vice president of Far East retail consultancy for Far East Organization, a private real estate developer group in Singapore, raises service standards in the company's hospitality portfolio, Far East Hospitality. Chan and her small team in the Service Quality and Standards Department (SQSD) for Far East Organization apply to the Singapore government for the National Customer Centric Initiative (CCI) for Far East Hospitality. After being awarded the CCI, Chan must make some tough decisions about how to carry out the CCI. Despite Far East Hospitality's leading market share in mid-tier hotels and serviced residences, there had been a number of new entrants into the market, and competition is fierce in Singapore's hospitality industry.
Purchase this case:
- Harvard Business School Case 113-124
Explores the decision faced by AIG's board on whether to join shareholder and ex-CEO Maurice Greenberg's lawsuit against the U.S. government. The suit, argued by super-lawyer David Boies (of Bush v. Gore and California gay marriage fame), claims that in September 2008 the U.S. arbitrarily set aside the rights of AIG's shareholders-violating the Fifth Amendment by taking private property without just compensation-while preserving shareholder rights in other troubled financial institutions, including Goldman Sachs whose ex-CEO was the then Treasury Secretary. The U.S. government moves to dismiss the case arguing that it has wide discretion in times of crisis, but a federal judge allows the suit to proceed. The case raises two issues central to understanding capitalism: (1) the importance of and limits to property rights and (2) the role of the state in choosing between varieties of capitalism, here between oligarchic and entrepreneurial capitalism.
Purchase this case:
- Harvard Business School Case 713-085
In 2010, the European Union faces the challenges of the global financial crisis. With 27 member states, each facing different challenges, can new EU institutions respond effectively? Will its new currency, the euro, survive?
Purchase this case:
- Harvard Business School Case 713-078
In the spring of 2013, Barak Obama faced a difficult budgetary challenge-reducing fiscal deficits over 10 years without dampening the weak economic recovery but soon enough to avoid another breach of the debt ceiling, with potential default. Finally, in April, he released his budget-calling for spending cuts and tax hikes adding to $1.8 trillion (over 10 years). However, in the preceding two weeks, both the House Republicans and the Senate Democrats had approved budget resolutions that were exceedingly different. Now, amid flurries over gun control and immigration reform came the time to bargain on the macroeconomy of the United States.
Purchase this case: