What is the Role of Government Vis-à-Vis Capitalism?
| Published: | November 4, 2009 |
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| Feature: | What Do YOU Think? |
| Forum: | open for comment; 4 Comments posted |
Online forum OPEN through November 24. A new monograph by HBS professor emeritus Bruce R. Scott describes the role that government plays in preserving both capitalism and democracy. Professor Jim Heskett asks: How should a government best support or constrain markets? What do you think?
Systemic Risk and the Refinancing Ratchet Effect
| Authors: | Amir E. Khandani, Andrew W. Lo, and Robert C. Merton |
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| Published: | October 1, 2009 |
| Paper Release Date: | September 2009 |
| Feature: | Working Papers |
During periods of rising house prices, falling interest rates, and increasingly competitive and efficient refinancing markets, cash-out refinancing is like a ratchet, incrementally increasing homeowner debt as real-estate values appreciate without the ability to symmetrically decrease debt by increments as real-estate values decline. This paper suggests that systemic risk in the housing and mortgage markets can arise quite naturally from the confluence of these three apparently salutary economic trends. Using a numerical simulation of the U.S. mortgage market, the researchers show that the ratchet effect is capable of generating the magnitude of losses suffered by mortgage lenders during the financial crisis of 2007-2008. These observations have important implications for risk management practices and regulatory reform.
Financing Constraints and Entrepreneurship
| Authors: | William R. Kerr and Ramana Nanda |
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| Published: | September 11, 2009 |
| Paper Release Date: | August 2009 |
| Feature: | Working Papers |
Financing constraints are one of the biggest concerns impacting potential entrepreneurs around the world. Given the important role that entrepreneurship is believed to play in the process of economic growth, alleviating financing constraints for would-be entrepreneurs is also an important goal for policymakers worldwide. In this paper HBS professors William R. Kerr and Ramana Nanda review two major streams of research examining the relevance of financing constraints for entrepreneurship. They then introduce a framework that provides a unified perspective on these research streams, thereby highlighting some important areas for future research and policy analysis in entrepreneurial finance.
Why Competition May Not Improve Credit Rating Agencies
| Q&A with: | Bo Becker |
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| Published: | August 31, 2009 |
| Feature: | Research & Ideas |
Competition usually creates better products and services. But when competition increased among credit rating agencies, the result was less accurate ratings, according to a study by HBS professor Bo Becker and finance professor Todd Milbourn of Washington University in St Louis. In our Q&A, Becker discusses why users of ratings should exercise a little caution.
The Impact of Private Equity Ownership on Corporate Tax Avoidance
| Authors: | Brad Badertscher, Sharon P. Katz, and Sonja Olhoft Rego |
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| Published: | August 28, 2009 |
| Paper Release Date: | July 2009 |
| Feature: | Working Papers |
Although private firms are important components of the U.S. economy, their tax practices remains largely unknown due to the lack of publicly available financial information. In recent years, private equity (PE) firms have been broadly criticized based on the substantial tax benefits enjoyed by their owners and managers. Editorials have inflamed public opinion by accusing PE firm owners and managers as having excessively low tax rates, and pointing out that the substantial wealth generated by PE firms can "pay for sophisticated tax planning," including the use of offshore investment companies based in tax havens. More generally, critics contend that PE firms aggressively manage their tax liabilities and those of their portfolio companies. This study investigates the latter contention. In particular, the authors look at whether private companies that are majority-owned by PE firms ("majority PE-backed firms") engage in more tax avoidance than other publicly traded and privately held firms. This may be the first study to compare the tax practices of firms with different private ownership structures.
Where Cash for Clunkers Ran Off the Road
| Published: | August 26, 2009 |
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| Feature: | Views on News |
Marketing professor John Quelch says the federal government's "Cash for Clunkers" program was poorly run and failed to meet its main objectives, proving again the government has no business trying to shape consumer behavior. Join the discussion.
Informed and Interconnected: A Manifesto for Smarter Cities
| Authors: | Rosabeth Moss Kanter and Stanley S. Litow |
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| Published: | July 23, 2009 |
| Paper Release Date: | June 2009 |
| Feature: | Working Papers |
To make our cities and communities smarter, we must become a little smarter ourselves, seeking information and an agenda to forge connections enabling collaboration, according to HBS professor Rosabeth Moss Kanter and IBM's Stanley S. Litow. Their vision is that someday soon, leaders will combine technological capabilities and social innovation to help produce a smarter world. That world will be seen on the ground in smarter cities composed of smarter communities that support the well-being of all citizens. This paper outlines eight challenges facing cities and the communities they encompass, based on experience in the United States. Kanter and Litow provide examples of practices and programs led by both government and nonprofit organizations, many technology-enabled, that point the way to solutions, and they conclude with a call for leaders to embrace an agenda for change.
Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes
| Authors: | Katherine L. Milkman, Mary Carol Mazza, Lisa L. Shu, Chia-Jung Tsay and Max H. Bazerman |
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| Published: | July 15, 2009 |
| Paper Release Date: | June 2009 |
| Feature: | Working Papers |
Citizens hope their elected representatives will pass legislation that creates net gains that outweigh net harms—in other words, legislation that has positive expected value for society. However, economist Joseph Stiglitz has noted that legislators often fail to pass such legislation, even when its net positive expected value is highly significant. The psychology and economics literature suggests that legislators face an uphill battle when proposing legislation that has both costs and benefits due to the power of loss aversion, a cognitive bias that has been found to cause individuals to dramatically overweight losses relative to gains. Here the authors propose and test a new type of policy bundling technique in which related bills that have both costs and benefits are combined in a way that reduces the harmful effects of loss aversion.
Diagnosing the Public Health Care Alternative
| Published: | July 13, 2009 |
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| Feature: | Op-Ed |
With deep experience in health insurance reform, HBS faculty describe how improved competition in insurance plans could improve value for patients. Professors Regina E. Herzlinger, Robert Huckman, and Michael E. Porter take the pulse of a debate.
"Too Big To Fail": Reining In Large Financial Firms
| Published: | June 22, 2009 |
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| Feature: | Research & Ideas |
Four little words have cost U.S. taxpayers dearly in government bailouts of once-mighty Wall Street firms. Congress can put an end to such costly rescues, says HBS professor David A. Moss, and the Federal Reserve could be a super regulator, adds senior lecturer Robert C. Pozen. But will Congress enact the regulatory cure that is required? From the HBS Alumni Bulletin.
Elections and Discretionary Accruals: Evidence from 2004
| Authors: | Karthik Ramanna and Sugata Roychowdhury |
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| Published: | June 18, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
How does the political process affect accounting? During the 2004 U.S. congressional elections, outsourcing of American jobs was a major campaign issue. Because outsourcing is assumed to be net profitable, the use of income-decreasing accruals would enable donor firms to deflect public scrutiny of both the firm and the political candidate over outsourcing. HBS professor Karthik Ramanna and MIT Sloan School professor Sugata Roychowdhury examine the accrual choices made by outsourcing firms with links to U.S. congressional candidates during the 2004 elections, and specifically test for income-decreasing discretionary accruals. Evidence is consistent with firms using earnings management to reduce both direct political costs and the costs associated with causing embarrassment to affiliated political candidates.
An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System
| Author: | David A. Moss |
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| Published: | May 4, 2009 |
| Paper Release Date: | January 2009 |
| Feature: | Working Papers |
The present financial crisis should remind us that private financial institutions and markets cannot always be counted upon to manage risk optimally on their own. Almost everyone now recognizes that the government has a critical role to play—as the lender, insurer, and spender of last resort—in times of crisis. But effective public risk management is also needed in normal times to protect consumers and investors and to help prevent financial crises from starting in the first place. According to HBS professor David Moss, the biggest threat to our financial system today is posed not by commercial banks (as in 1933), but rather by systemically significant institutions (outside of commercial banking) that have the potential to trigger financial avalanches. The threat posed by these financial institutions is only compounded by the unprecedented federal guarantees introduced in response to the current crisis and the pervasive moral hazard they spawn. Under the system that Moss proposes, no financial institution would be too big to fail.
Where is the Pharmacy to the World? International Regulatory Variation and Pharmaceutical Industry Location
| Author: | Arthur Daemmrich |
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| Published: | April 22, 2009 |
| Paper Release Date: | April 2009 |
| Feature: | Working Papers |
The era of paternalistic medicine has passed, but the notion that patients can act as consumers and make appropriate decisions concerning medical treatment poses countervailing risks of its own. A better accommodation among key players needs to be struck to foster the safe use of pharmaceuticals, according to HBS professor Arthur Daemmrich. The "pharmacy to the world," once located at the intersection of Germany, Switzerland, and France, today is found in the United States. Studies of the industry have attributed this sustained competitive advantage to a variety of factors, including U.S. intellectual property policies, funding for biomedical research through the National Institutes of Health, the absence of government controls on drug prices, and the availability of venture capital and other factors that fostered the growth of the biotechnology industry. The data and analysis presented in this working paper, however speculative, are an initial step toward deepening the understanding of interrelationships between government regulation, patients' mobilization both as regulators and as consumers, and the functioning of the pharmaceutical industry.
Corporate Misgovernance at the World Bank
| Authors: | Ashwin Kaja and Eric Werker |
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| Published: | April 20, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
This paper examines the politics of corporate governance at the world's largest appropriations committee, the World Bank's Board of Executive Directors, and exposes a weakness in the design of the World Bank's decision-making structure. Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body. In 2008, the Bank's two primary component institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did it go? By exploring the political dynamics and corporate governance of an international appropriations committee, we not only learn about international organizations but also the nature of the international system itself.
The Bloody Millennium: Internal Conflict in South Asia
| Author: | Lakshmi Iyer |
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| Published: | March 26, 2009 |
| Paper Release Date: | January 2009 |
| Feature: | Working Papers |
What accounts for the disturbing trend of increasing terrorism and associated fatalities in South Asia? In 2007, a quarter of all terrorist attacks worldwide were committed in South Asia, second only to Iraq. HBS professor Lakshmi Iyer presents the first comprehensive analysis of internal conflict in South Asia using multiple data sources and incorporating a long-run time frame. She finds that the intensity of internal conflict in the post-2001 period is strongly associated with poverty, both in a cross-country comparison and in a comparison of districts within India and Nepal. Measures implemented by regional and national governments to combat internal violence vary considerably across countries and over time. Typically, the use of military force or relying on unofficial militias has not proved to be a successful counterinsurgency tactic in South Asia; strengthening police activity and using a political accommodation approach has led to some successes in the past.
Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms
| Author: | Mihir A. Desai |
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| Published: | March 24, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
Popular imagination often links two significant economic developments: the rapid escalation of the foreign activities of American multinational firms over the last 15 years, and rising levels of economic insecurity, particularly among workers in certain sectors. The presumed linkages between these phenomena have led many to call for a reconsideration of the tax treatment of foreign investment. Increasing the tax burden on outbound investment by American multinational firms, it is claimed, offers the promise of alleviating domestic employment losses and insecurity while also raising considerable revenue. HBS professor Mihir A. Desai looks beneath the trends, examining the economic determinants of outbound investment decisions and synthesizing what is known about the relationship between domestic and foreign activities.
HBS Cases: The Energy Politics of Russia vs. Ukraine
| Published: | March 11, 2009 |
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| Feature: | Lessons from the Classroom |
A recent Harvard Business School case looks at Russia's decision in 2006 to cut off supply of natural gas to Ukraine's energy company—a move repeated this year. Is Russia just an energy bully? Students of professor Rawi Abdelal learn there is nothing black and white when it comes to Russia's energy politics. From HBS Alumni Bulletin.
Credit is Not the Bogey
| Published: | March 4, 2009 |
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| Feature: | Op-Ed |
"As we attempt to jump-start the economy of 2009, we should recognize both the risks and the advantages inherent in a robust credit industry," write HBS lecturer Nicolas P. Retsinas and Eric S. Belsky. The director and executive director, respectively, of Harvard University's Joint Center for Housing Studies, they offer a prescription for making credit neither too easy nor too hard to get.
Podcast: Preventing Future Financial Failures
| Podcast with: | David A. Moss |
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| Published: | February 26, 2009 |
| Feature: | Research & Ideas |
Professor David Moss says we need ongoing federal regulation of the few "systemically significant" institutions whose demise could threaten financial stability.
Barriers to Acting in Time on Energy and Strategies for Overcoming Them
| Author: | Max H. Bazerman |
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| Published: | February 26, 2009 |
| Paper Release Date: | October 2008 |
| Feature: | Working Papers |
What can the new presidential administration do to address our energy problems? For the past decade, most experts have accepted climate change as a fact, making the issue difficult to ignore—yet many politicians, and the voters who elect them, have done exactly that: ignored the problem. Scientists, policymakers, and others have come up with good ideas to address climate change and other energy issues. Many people seek to identify one cause of climate change, when it is abundantly clear that there are multiple causes. Cognitive, organizational, and political barriers exist that prevent us from addressing energy problems despite clearly identified courses of action. The creation and implementation of wise policy recommendations requires us to anticipate resistance to change and develop strategies that can overcome these barriers. Enacting wise legislation to act in time to solve energy problems requires surmounting cognitive, organizational, and political barriers to change.
