Where Does It Go? Spending by the Financially Constrained
|Authors:||Shawn A. Cole, John Thompson, and Peter Tufano|
In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.
Download the paper: http://www.hbs.edu/research/pdf/08-083.pdf
Bridge Building in Venture Capital-Backed Acquisitions
|Authors:||Paul A. Gompers and Yuhai Xuan|
We compare three potential mechanisms for alleviating the asymmetric information between the public acquirers and private venture capital-backed targets. First, because venture capitalists repeatedly sell their portfolio companies through acquisitions, venture capitalists may be able to certify the quality of the assets that an outside party is buying because they are "staking their reputation" on not selling overvalued assets. Second, personal and professional relationships may "bridge" the asymmetric information. This bridge may be particularly strong if both firms were financed by the same venture capital firm. Third, geographic proximity may also reduce the asymmetric information between a target and an acquiring firm. In a sample of 1,083 acquisitions of venture capital-backed private companies from 1976 and 2001, we find strong evidence that venture capital firms can form a bridge between acquiring firms and target firms that reduces asymmetric information associated with the transaction. Acquisition announcement period returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, we find that having a common investor increases both the likelihood that a transaction will be all stock as well as the fraction of stock in the overall acquisition payment. Targets that are concerned that the acquirer is potentially overvalued may be less willing to accept stock in an acquisition. A common investor can reduce this uncertainty about overvaluation. Hence, our evidence shows that the bridge runs in both directions. In addition, an acquisition is more likely to take place when there is a common venture capital investor linking the acquirer and the target. Finally, we show that long-run post-acquisition abnormal returns are higher for the acquiring firms when the target and the acquirer share a common venture capital investor.
Download the paper: http://www.hbs.edu/research/pdf/08-084.pdf
Exploring the Duality between Product and Organizational Architectures: A Test of the Mirroring Hypothesis
|Authors:||Alan D. MacCormack, John Rusnak, and Carliss Y. Baldwin|
A variety of academic work asserts that a relationship exists between the structure of a development organization and the architecture of the products that this organization produces. Specifically, products are often said to "mirror" the architectures of the organizations from which they come. Such a link, if confirmed empirically, would be important, given that product architecture has been shown to be an important predictor of, among other things: product performance, product variety, process flexibility, and future industry evolution. We explore this relationship in the software industry by use of a technique called Design Structure Matrices (DSMs), which allows us to visualize the architectures of different software products and to calculate metrics to compare their levels of modularity. We use DSMs to analyze a number of matched-pair products-products that fulfill the same function but that have been developed via contrasting modes of organization, specifically, closed-source (or proprietary) versus open-source (or distributed) development. Our results reveal significant differences in modularity, consistent with a view that distributed teams tend to develop more modular products. We conclude by highlighting some implications of this result and assessing how future work in this field should proceed, based upon these first steps in measuring "design."
Download the paper: http://www.hbs.edu/research/pdf/08-039.pdf
Modeling Expert Opinions on Food Healthiness: A Nutrition Metric
|Authors:||Jolie Mae Martin, John Leonard Beshears, Katherine Lyford Milkman, Max H. Bazerman, and Lisa Sutherland|
Background—Research over the last several decades indicates the failure of existing nutritional labels to substantially improve the healthiness of consumers' food and beverage choices. The difficulty for policy-makers is to encapsulate a wide body of scientific knowledge in a labeling scheme that is comprehensible to the average shopper. Here, we describe our method of developing a nutrition metric to fill this void.
Methods—We asked leading nutrition experts to rate the healthiness of 205 sample foods and beverages, and after verifying the similarity of their responses, we generated a model that calculates the expected average healthiness rating that experts would give to any other product based on its nutrient content.
Results—The form of the model is a linear regression that places weights on 12 nutritional components (total fat, saturated fat, cholesterol, sodium, total carbohydrate, dietary fiber, sugars, protein, vitamin A, vitamin C, calcium, and iron) to predict the average healthiness rating that experts would give to any food or beverage. We provide sample predictions for other items in our database.
Conclusions—Major benefits of the model include its basis in expert judgment, its straightforward application, the flexibility of transforming its output ratings to any linear scale, and its ease of interpretation. This metric serves the purpose of distilling expert knowledge into a form usable by consumers so that they are empowered to make healthier decisions.
Download the paper: http://www.hbs.edu/research/pdf/08-082.pdf
Cases & Course Materials
Italy: If Not Now, When?
Harvard Business School Case 707-051
Describes Italy's main macroeconomic problems: low productivity growth, stagnant GDP growth, and high public debt. As of early 2007, the country's global competitiveness has plummeted and its debt remains well above the level allowed by the EU's Maastricht treaty. Historical and structural reasons for the current situation are explored, and Italy's possible strategies are discussed in the context of the country's challenging political climate. A replacement of an earlier case done in 2003.
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Harvard Business School Case 908-049
Microsoft considers alternatives to expand its presence in online advertising, especially text-based pay-per-click advertising. Google dominates, and it is unclear how Microsoft can grow, despite considerable technical and financial resources. Microsoft considers a set of alternatives, each with clear benefits but also serious challenges.
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Constructivism as an Approach to International Political Economy
|Publication:||In Handbook of International Political Economy, edited by Mark Blyth London: Routledge, forthcoming|
This Handbook gives an overview of the range and scope of International Political Economy (IPE) scholarship by mapping the different regional schools of IPE and noting the distinctive way IPE is practiced and conceptualized around the world. The Handbook examines, in a series of introductory chapters written by leading figures in each region, the evolution of IPE in the US, Canada, the UK, Asia, and Australia. These introductory chapters map out the contending approaches and key concerns that exist within each regional school. In each regional section, following the introductory chapter, chapters tackling key areas of IPE scholarship such as trade and development, finance, and global governance/globalization follow. Each chapter will be written by an established scholar and will showcase the particular approach(es) highlighted in the region-specific introduction.
Foreign Direct Investment, Productivity, and Financial Development: An Empirical Analysis of Complementarities and Channels
|Authors:||Laura Alfaro, Sebnem Kalemli-Ozcan, and Selin Sayek|
|Publication:||The World Economy (forthcoming). (Special Issue on "Foreign Direct Investment and Multinational Economic Activity.")|
This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI in flows and financial markets. In our earlier work, we find that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation-—physical and human capital-—does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences.
Sustainability through Partnering: Conceptualizing Partnerships between Businesses and NGOs
|Author:||James E. Austin|
|Publication:||Chap. 3 in Partnerships, Governance and Sustainable Development: Reflections on Theory and Practice. Cheltenham, U.K.: Edward Elger Publishing, Ltd., 2008|
No abstract is available at this time.
Toward a Theory of Behavioral Operations
|Authors:||Francesca Gino and Gary P. Pisano|
|Publication:||Manufacturing and Service Operations Management (forthcoming)|
Human beings are critical to the functioning of the vast majority of operating systems, influencing both the way these systems work and how they perform. Yet most formal analytical models of operations assume that the people who participate in operating systems are fully rational or at least can be induced to behave rationally. Many other disciplines, including economics, finance, and marketing, have successfully incorporated departures from this rationality assumption into their models and theories. In this paper, we argue that operations management scholars should do the same. We highlight initial studies that have adopted a "behavioral operations perspective" and explore the theoretical and practical implications of incorporating behavioral and cognitive factors into models of operations. Specifically, we address three questions: 1) What is a behavioral perspective on operations? 2) What might be the intellectual added value of such a perspective? 3) What are the basic elements of behavioral operations research?
Firm-Created Word-of-Mouth Communication: Evidence from a Field Test
|Authors:||David Godes and Dina Mayzlin|
|Publication:||Marketing Science (forthcoming)|
In this paper, we investigate the effectiveness of the firm's proactive management of customer-to-customer communication. We are particularly interested in understanding how, if at all, the firm should go about effecting meaningful word-of-mouth (WOM). To tackle this problem, we collect data from two sources: 1) We implemented a large-scale field test in which a national firm created word of mouth through two populations: customers and non-customers; and 2) We collected data from two laboratory studies. We break our theoretical problem into two subproblems. First, we ask, "What kind of WOM drives sales?" Motivated by previous research, we hypothesize that for a product with low initial awareness level, the WOM that is most effective at driving sales is created by less loyal customers, not loyals, and occurs between acquaintances (not friends). We find support for this in the field test as well as in a lab setting. Hence we demonstrate the potential usefulness of exogenously-created WOM: conversations are created where none would naturally have occurred otherwise. Then, we ask, "Which agents are most effective at creating this kind of WOM?" In particular, we are interested in evaluating the effectiveness of the commonly-used opinion leader designation. We find that while opinion leadership is useful in identifying potentially effective spreaders of WOM among very loyal customers, it is less useful for the sample of less loyal customers. We suggest a measure of one's social network breadth may help to identify less-loyal customers as potential WOM creators. The results are replicated in a laboratory study.
Modeling Social Interactions: Identification, Empirical Methods and Policy Implications
|Authors:||Wesley Hartmann, Puneet Manchanda, Harikesh Nair, Matthew Bothner, Peter Dodds, David Godes, Kartik Hosanagar, and Catherine Tucker|
|Publication:||Marketing Letters (forthcoming)|
Social interactions occur when agents in a network affect other agents' choices directly, as opposed to via the intermediation of markets. The study of such interactions and the resultant outcomes has long been an area of interest across a wide variety of social sciences. With the advent of electronic media that facilitate and record such interactions, this interest has grown sharply in the business world as well. In this paper, we provide a brief summary of what is known so far, discuss the main challenges for researchers interested in this area and provide a common vocabulary that will hopefully engender future (cross-disciplinary) research. The paper considers the challenges of distinguishing actual causal social interactions from other phenomena that may lead to a false inference of causality. Further, we distinguish between two broadly defined types of social interactions that relate to how strongly interactions spread through a network. We also provide a very selective review of how insights from other disciplines can improve and inform modeling choices. Finally, we discuss how models of social interaction can be used to provide guidelines for marketing policy and conclude with thoughts on future research directions.
Deferred Acceptance Algorithms: History, Theory, Practice, and Open Questions
|Author:||Alvin E. Roth|
|Periodical:||Prepared for Gale's Feast: A Day in Honor of the 85th Birthday of David Gale International Journal of Game Theory 36, nos. 3-4 (March 2008): 537-569|
The deferred acceptance algorithm proposed by Gale and Shapley (1962) has had a profound influence on market design, both directly, by being adapted into practical matching mechanisms, and, indirectly, by raising new theoretical questions. Deferred acceptance algorithms are at the basis of a number of labor market clearinghouses around the world and have recently been implemented in school choice systems in Boston and New York City. In addition, the study of markets that have failed in ways that can be fixed with centralized mechanisms has led to a deeper understanding of some of the tasks a marketplace needs to accomplish to perform well. In particular, marketplaces work well when they provide thickness to the market, help it deal with the congestion that thickness can bring, and make it safe for participants to act effectively on their preferences. Centralized clearinghouses organized around the deferred acceptance algorithm can have these properties, and this has sometimes allowed failed markets to be reorganized.
Coerced Confessions: Self-Policing in the Shadow of the Regulator
|Authors:||Jodi L. Short and Michael W. Toffel|
|Periodical:||Journal of Law, Economics and Organization 24, no. 1 (May 2008)|
As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive dataset for the "Audit Policy," a United States Environmental Protection Agency (US EPA) program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.
The Dangers of Wishful Thinking
|Authors:||Richard S. Tedlow and David Ruben|
|Periodical:||The American (January-February 2008)|
Too many U.S. businesses (including tires, super-markets, and information technology) have been infected with the disease of denial. The answer? In Lincoln's words, "We must disenthrall ourselves."
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