Management and the Financial Crisis (We Have Met the Enemy and He is Us …)

We have spent the past year mired in a global financial crisis that few saw coming and that will plague us for years to come. Such crises are gut-wrenching. Collectively and individually, we search for causes and solutions. Too often, we look for quick fixes that do long‐term damage, or we put the equivalent of duct tape on obvious problems, missing the true root causes. HBS professor William A. Sahlman argues that the macroeconomic problems were the result of terrible microeconomic decisions. The root cause of bad decision‐making resides in the nexus of culture, incentives, control and measurement, accounting, and human capital. We now have a unique opportunity to force a review of all the players in the financial system, from individual consumers to politicians and regulators to management teams at financial services firms.

India Transformed? Insights from the Firm Level 1988-2005

Between 1986 and 2005, Indian growth put to rest the concern that there was something about the "nature of India" that made rapid growth difficult. Following broad-ranging reforms in the mid-1980s and early 1990s, the state deregulated entry, both domestic and foreign, in many industries, and also hugely reduced barriers to trade. Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill analyze the evolution of India's industrial structure at the firm level following the reforms. Despite the substantial increase in the number of private and foreign firms, the overall pattern that emerges is one of continued incumbent dominance in terms of assets, sales, and profits in both state-owned and traditional private firms.

Walking Through Jelly: Language Proficiency, Emotions, and Disrupted Collaboration in Global Work

As organizations increasingly globalize, individuals are required to collaborate with coworkers across international borders. Many organizations are mandating English as the lingua franca, or common language, regardless of the location of their headquarters, to facilitate collaboration across national and linguistic boundaries. What is the emotional impact of lingua franca adoption on native and nonnative speakers who work closely together and often across national boundaries? This study examines the communication experience for native and nonnative English speakers in an organization that mandates English as the lingua franca for everyday use, and the impact of the lingua franca on collaboration among globally distributed coworkers. HBS professor Tsedal Neeley and coauthors describe in detail how emotions and actions were intertwined and evolved recursively as coworkers attempted to release themselves from unwanted negative emotions and inadvertently acted in ways that transferred negative experiences to their distant coworkers. Their findings have implications for managers who are charged with overseeing internationally distributed projects.

Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

Do endowments matter in determining the cost of capital for a country or state? Endowments, according to Banco de México's André C. Martínez Fritscher and HBS professor Aldo Musacchio, are the conditions that determine what kind of commodities can be produced and exported in a determined geographical region. Studying the determinants of the risk premium of the bonds issued by Brazilian states between 1891 and 1930—a period of extreme decentralization of fiscal revenues and expenditures in Brazil—the researchers find that risk premia are highly correlated with state public revenue per capita. Because these revenues came, to a large extent, from the taxes states levied on commodity exports, the researchers argue that endowments mattered to determine the cost of capital for states.

Medium Term Business Cycles in Developing Countries

At the end of 2007, the U.S. economy entered a recession that, by the first quarter of 2009, had reduced U.S. GDP by 2.2 percent. The Mexican economy was showing no sign of distress until the U.S. recession began. Despite that, Mexican GDP declined by 7.8 percent during the same period. This and similar episodes from other developing countries motivate several questions: Why do shocks to developed economies affect developing countries to such an extent? Does the response of developing economies to shocks that originate in their developed neighbors account for the larger volatility of developing economies? More broadly, what ingredients do macroeconomic models need to incorporate in order to account for the unique features of economic fluctuations in developing economies? To investigate these questions, the researchers developed a two-country asymmetric model to study the business cycle in developing countries. The mechanisms introduced in the model should provide an accurate account of business cycles in other developing countries.

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Are large shareholders good monitors of management? A public firm's shareholders have extensive legal control rights in the corporation, but in practice much of this control is delegated to managers. In companies with small, dispersed shareholders, owners may find it costly to coordinate and exercise monitoring and control, leaving management with considerable discretion. Large shareholders, however—by concentrating a block of shares in the hands of a single decision-maker—may play a beneficial role in facilitating effective owner control. Yet large shareholders are not without their costs. HBS professor Bo Becker and coauthors develop and test a framework to quantify the impact of large owners (individual non-managerial blockholders, not mutual funds or other institutions) on several key aspects of firm behavior. They show that such shareholders play an important role for corporate governance in sizable U.S. public firms, and can affect several firm policies.

Stock Price Fragility

Does the composition of ownership of a financial asset influence future returns and risk? Previous economic research has documented significant price effects of investor demand in numerous settings, including retail demand for options, investor demand for bonds, and mutual funds' flow-driven demand for stocks. This paper provides a methodology to identify assets that are vulnerable to such investor demand shocks. The central idea is that assets are risky if the current owners of the asset face correlated liquidity shocks—i.e., they buy and sell at the same time. We call assets with a high concentration of owners who trade in the same direction "fragile." A related concept is "co-fragility." Two assets are "co-fragile" if their owners have correlated trading needs, even if the holdings of these owners do not directly overlap. The authors build measures of fragility for U.S. stocks between 1990 and 2007. Consistent with their predictions, more fragile stocks are more volatile, and two co-fragile stocks exhibit high correlations among their stock returns.

Strategies to Fight Ad-sponsored Rivals

Many companies choose to finance themselves using ad revenues and offer their products or services—from newspapers to software applications, television programs, and online search—free to consumers. Yet the emergence of ad-sponsored entrants in various industries poses significant threats to the incumbents in these markets whose business models are often based on subscriptions or fees charged to their customers. Faced with the threat from ad-sponsored entrants, incumbents must choose strategies to respond. HBS professor Ramon Casadesus-Masanell and University of Southern California professor Feng Zhu create an analytical framework to establish guidelines for incumbent firms facing these issues. The researchers consider four alternative business models: pure-subscription-based; pure-ad-sponsored; mixed-single-product; and mixed-product-line-extension. Analysis shows that the optimal strategic and tactical choices change dramatically in the presence of an ad-sponsored rival. This is the first study to provide a comprehensive analysis of the competition between a free ad-sponsored entrant and an incumbent that has the option of choosing different business models.

Mixed Source

As most managers know, commercial firms may benefit from participating in open source software development by selling complementary goods or services. Open source has the potential to improve value creation because it benefits from the efforts of a large community of developers. Proprietary software, on the other hand, results in superior value capture because the intellectual property remains under the control of the original developer. While the straightforward rationale for "mixed source" (a combination of the two) is appealing, what does it mean for a business model? Under what circumstances should a profit-maximizing firm adopt a mixed source business model? How should firms respond to competitors' adoption of mixed source business models? And what are the right pricing structures under mixed source compared with the proprietary business model? In this paper the researchers analyze a model where firms with modular software must decide which modules to open and which to keep proprietary. Findings can be directly applied to the design of optimal business strategies.

Clusters of Entrepreneurship

Economic growth is highly correlated with an abundance of small, entrepreneurial firms. This relationship is even stronger looking across industries within cities, and has been taken as evidence for competition spurring technological progress, product cycles where growth is faster at earlier stages, and the importance of entrepreneurship for area success. Any of these interpretations is possible, however, and the only thing that we can be sure of is that entrepreneurial clusters exist in some areas but not in others. This paper first documents systematically some basic facts about average establishment size and new employment growth through entrepreneurship, then analyzes entry and industrial structures at the region and the city levels using the Longitudinal Business Database.

Specific Knowledge and Divisional Performance Measurement

Performance measurement is one of the critical factors that determine how individuals in an organization behave. It includes subjective as well as objective assessments of the performance of both individuals and subunits of an organization such as divisions or departments. Besides the choice of the performance measures themselves, performance evaluation involves the process of attaching value weights to the different measures to represent the importance of achievement on each dimension. This paper examines five common divisional performance measurement methods: cost centers, revenue centers, profit centers, investment centers, and expense centers. The authors furnish the outlines of a theory that attempts to explain when each of these five methods is likely to be the most efficient.

Systemic Risk and the Refinancing Ratchet Effect

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.

Breakthrough Inventions and Migrating Clusters of Innovation

In just a short period of time the spatial location of invention can shift substantially. The San Francisco Bay Area grew from 5 percent of U.S. domestic patents in 1975-1984 to over 12 percent in 1995-2004, for example, while the share for New York City declined from 12 percent to 7 percent. Smaller cities like Austin, Texas, and Boise, Idaho, seem to have become clusters of innovation overnight. Despite the prevalence of these movements, we know very little about what drives spatial adjustments in U.S. invention, the speed at which these reallocations occur, and their economic consequences. In this paper, HBS professor William R. Kerr investigates whether breakthrough inventions draw subsequent research efforts for a technology to a local area. Evidence strongly supports the conclusion that centers of breakthrough innovations experience subsequent growth in innovation relative to their peer locations.

"I read Playboy for the articles": Justifying and Rationalizing Questionable Preferences

We want others to find us good, fair, responsible and logical; and we place even more importance on thinking of ourselves this way. Therefore, when people behave in ways that might appear selfish, prejudiced, or perverted, they tend to engage a host of strategies designed to justify questionable behavior with rational excuses: "I hired my son because he's more qualified." "I promoted Ashley because she does a better job than Aisha." Or, "I read Playboy for the articles." In this chapter from a forthcoming book, HBS doctoral student Zoë Chance and professor Michael I. Norton describe various means of coping with one's own questionable behavior: through preemptive actions and concurrent strategies for re-framing uncomfortable situations, forgoing decisions, and forgetting those decisions altogether.

Operational Failures and Problem Solving: An Empirical Study of Incident Reporting

Operational failures occur within organizations across all industries, with consequences ranging from minor inconveniences to major catastrophes. How can managers encourage frontline workers to solve problems in response to operational failures? In the health-care industry, the setting for this study, operational failures occur often, and some are reported to voluntary incident reporting systems that are meant to help organizations learn from experience. Using data on nearly 7,500 reported incidents from a single hospital, the researchers found that problem-solving in response to operational failures is influenced by both the risk posed by the incident and the extent to which management demonstrates a commitment to problem-solving. Findings can be used by organizations to increase the contribution of incident reporting systems to operational performance improvement.

Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery

Many professions rely on highly and variably skilled individuals. If a new firm is looking to enter a specific market, in addition to setting up a physical facility the company needs to hire or contract with specialized labor. In the short term, the supply of these specialists is relatively inelastic. From the point of view of economics, there remains a well-known potential for free entry to be inefficient when firms make entry decisions without internalizing the costs associated with the business they "steal" from incumbent firms. In 1996 Pennsylvania eliminated its certificate-of-need (CON) policy that had restricted entry by hospitals into expensive clinical programs, such as coronary artery bypass graft (CABG) programs—leading to an increase from 43 to 63 in the number of hospitals providing this service. HBS professor Robert Huckman and coauthors examine the welfare implications of entry in the market for cardiac surgery.

Repetition of Interaction and Learning: An Experimental Analysis

As the global economy grows increasingly knowledge-based, organizations in a wide variety of settings, from manufacturing to service operations, rely increasingly on project teams. Organizational performance is therefore strongly affected by the learning that occurs within teams. But how do teams learn best? This study examines whether and how learning in teams is dependent on the teams' prior experience working together. Findings may help managers to design well-functioning learning organizations.

Financing Constraints and Entrepreneurship

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.

Banking Deregulations, Financing Constraints and Firm Entry Size

How do financing constraints on new start-ups affect the initial size of these new firms? Since bank debt comprises the majority of U.S. firm borrowings, new ventures are especially sensitive to local bank conditions due to their limited options for external finance. Liberalization in the banking sector can thus have important effects on entrepreneurship in product markets. As HBS professors William Kerr and Ramana Nanda explain, the 1970s through the mid-1990s was a period of significant liberalization in the ability of banks to establish branches and to expand across state borders, either through new branches or through acquisitions. Using a database of annual employment data for every U.S. establishment from 1976 onward, Kerr and Nanda examine how U.S. branch banking deregulations impacted the entry size of new start-ups in the non-financial sector. This paper is closely related to their prior work examining how the deregulations impacted the rates of startup entry and exit in the non-financial sector.

Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior

Helping others takes countless forms and springs from countless motivations, from deep-rooted empathy to a more calculated desire for public recognition. Social scientists have identified a host of ways in which charitable behavior can lead to benefits for the giver, whether economically via tax breaks, socially via signaling one's wealth or status, or psychologically via experiencing well-being from helping. Charitable organizations have traditionally capitalized on all of these motivations for giving, with a recently emerging focus on highlighting the mood benefits of giving—the feelings of empowerment, joy, and inspiration that giving engenders. Indeed, if giving feels good, why not advertise the benefits of "self-interested giving," allowing people to experience that good feeling while increasing contributions to charity at the same time? HBS doctoral candidate Lalin Anik, Professor Michael I. Norton, and coauthors explore whether organizations that seek to increase charitable giving by advertising the benefits of giving are making claims supported by empirical research and, most importantly, whether such claims actually increase donations.

Perspectives from the Boardroom—2009

Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future?

This white paper [PDF] first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement: 1) clarifying the board's role; 2) acquiring better information and deeper knowledge of the company; 3) maintaining a sound relationship with management; 4) providing oversight of company strategy; 5) assuring management development and succession; 6) improving risk management. Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders. This paper was written by Jay Lorsch with the assistance of Joseph Bower, Clayton Rose, and Suraj Srinivasan. The interviews were conducted by Joseph Bower, Srikant Datar, Raymond Gilmartin, Stephen Kaufman, Rakesh Khurana, Jay Lorsch, and Clayton Rose.

Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads

What is the role of fair values in the current economic crisis? The interplay between information risk—that is, uncertainty regarding valuation parameters for an underlying asset—and the reporting of financial instruments at fair value has been a subject of high-level policy debate. Finance theory suggests that information risk is reflected in firms' equity betas and the information asymmetry component of bid-ask spreads. HBS professor Edward Riedl and doctoral candidate George Serafeim test predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Overall, banks with higher exposures to level 3 financial assets have both higher equity betas and higher bid-ask spreads. Both results are consistent with higher levels of information risk, and thus cost of capital, for these firms.

The Impact of Private Equity Ownership on Corporate Tax Avoidance

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.

Measuring and Understanding Hierarchy as an Architectural Element in Industry Sectors

In an industry setting, classic supply chains display strict hierarchy, whereas clusters of firms have linkages going in many different directions. Previous theory has often assumed the existence of the hierarchical relationships among firms, and empirical industry studies tend to focus on a single-layer industry, or a two-layer structure comprising buyers and suppliers. And yet, some industries have a multilayer structure with a multistep supply chain. Others comprise a cluster of complementary firms producing different parts of a large system. HBS professor Carliss Y. Baldwin and colleagues use network analysis to study multilayer industries both empirically (in the case of Japan) and theoretically and to explore how industries are organized at the sector level in an attempt to reveal the underlying rules that determine how industry architectures form and change.

A Decision-Making Perspective to Negotiation: A Review of the Past and a Look into the Future

The art and science of negotiation has evolved greatly over the past three decades, thanks to advances in the social sciences in collaboration with other disciplines and in tandem with the practical application of new ideas. In this paper, HBS doctoral student Chia-Jung Tsay and professor Max H. Bazerman review the recent past and highlight promising trends for the future of negotiation research. In the early 1980s, Cambridge, Massachusetts, was a hot spot on the negotiations front, as scholars from different disciplines began interacting in the exploration of exciting new concepts. The field took a big leap forward with the creation of the Program on Negotiation, an interdisciplinary, multicollege research center based at Harvard University. At the same time, Roger Fisher and William Ury's popular book Getting to Yes (1981) had a pronounced impact on how practitioners think about negotiations. On a more scholarly front, a related, yet profoundly different change began with the publication of HBS professor emeritus Howard Raiffa's book The Art and Science of Negotiation (1982), which for years to come transformed how researchers would think about and conduct empirical research.

Optimal Taxation in Theory and Practice

Are developments in the theory of taxation improving tax policies around the world? The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. The authors find that there has been considerable change in the theory and practice of taxation over the past several decades—although the two paths have been far from parallel. Overall, tax policy has moved in the directions suggested by theory along a few dimensions, even though the recommendations of theory along these dimensions are not always definitive.

The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution

A tax on height follows inexorably from a well-established empirical regularity and the standard approach to the optimal design of tax policy. Many readers of this paper, however, will not so quickly embrace the idea of levying higher taxes on tall taxpayers. Indeed, when first hearing the proposal, most people either recoil from it or are amused by it. That reaction is precisely what makes tax policy so intriguing, according to N. Gregory Mankiw of Harvard University and Matthew Weinzierl of HBS. This paper addresses a classic problem: the optimal redistribution of income. A Utilitarian social planner would like to transfer resources from high-ability individuals to low-ability individuals, but is constrained by the fact that he cannot directly observe ability. Taxing height helps the planner achieve redistribution efficiently because height, the data show, is an indicator of income-earning ability. Although readers might take this paper in one of two ways—some seeing it as a small, quirky contribution aimed to clarify the literature on optimal income taxation, others as a broader effort to challenge the entire literature—the authors' results raise a fundamental question about the framework for optimal taxation for which William Vickrey and James Mirrlees won the 1996 Nobel Prize in Economics and which remains a centerpiece of modern public finance.

Insider Trading Preceding Goodwill Impairments

Do insiders strategically sell their stock holdings prior to the accounting disclosure of goodwill impairment losses? While a number of recent studies provide evidence of insider trading prior to the announcement of earnings performance measures, a remaining puzzle is what types of information aggregated into reported earnings constitute the source of insiders' private information. This study provides evidence of a specific reporting item, goodwill impairments, about which insiders are able to strategically trade before its full discovery by the equity market and its recognition within the financial statements. Goodwill impairments represent likely sources of information for insiders to trade on for two reasons. First, they tend to be economically large, averaging 11.9 percent of the market value of equity during the sample period of 2002-2007. Second, managers likely have material private information regarding future cash flow estimates through their internal budgeting processes; and managers' private information advantage may be relatively long-lived due to goodwill impairment testing rules that may delay the accounting recognition of economic goodwill impairments.

In Favor of Clear Thinking: Incorporating Moral Rules into a Wise Cost-Benefit Analysis

Policy decisions may be the most important set of decisions we make as a society. In this realm, moral rules often play an active and dysfunctional role. The typical way in which we make decisions—by weighing them individually—leads us to overuse moral rules in a manner that is inconsistent with the more reflective set of preferences we would identify through joint consideration of options. In their response to a companion article in Perspectives on Psychological Science, Max Bazerman, of HBS, and Joshua D. Greene, of Harvard University, argue that cost-benefit analysis (CBA) is unfairly stereotyped. The critique of CBA in the companion article could be better framed as a set of considerations that can contribute to more careful CBAs.

Culture Clash: The Costs and Benefits of Homogeneity

Culture clash is often considered a major cause for the failing of mergers and acquisitions, and for this reason it is an important consideration for corporate strategy. Although less publicized, culture clash has also plagued alliances and long-term market relationships. It provides a unique lens on the performance effects of corporate culture itself, and thus culture's potential to generate a competitive advantage. This paper develops an economic theory of the costs and benefits of corporate culture—in the sense of shared beliefs and values—in order to study the effects of culture clash in mergers and acquisitions.

Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion

From Silicon Valley to Herzliya, Israel, venture capital firms are concentrated in very few locations. More than half of the 1,000 venture capital offices listed in Pratt's Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas: San Francisco, Boston, and New York. More than 49 percent of the U.S.-based companies financed by venture capital firms are located in these three cities. This paper examines the location decisions of venture capital firms and the impact that venture capital firm geography has on investments and outcomes. Findings are informative both to researchers in economic geography and to policymakers who seek to attract venture capital.

Authority versus Persuasion

In directing employees, managers often face a choice between invoking authority and persuasion. In particular, since a firm's formal and relational contracts and its culture and norms are quite rigid in the short term, a manager who needs to prevent an employee from undertaking the wrong action has the choice of either trying to persuade the employee or relying on interpersonal authority. In choosing between persuasion and authority the manager makes a cost-benefit trade-off. This paper studies that trade-off, focusing in particular on conflicts that originate in open disagreement.

Variation in Experience and Team Familiarity: Evidence from Indian Software Services

In the context of team performance, common wisdom suggests that performance is maximized when individuals complete the same work with the same people. Although repetition is valuable, at least up to a point, in many settings such as consulting, product development, and software services organizations consist largely of fluid teams executing projects for different customers. In fluid teams, members bring their varied experience sets together and attempt to generate innovative output before the team is disassembled and its individual members move on to new projects. Using the empirical setting of Wipro Technologies, a leading firm in the Indian software services industry, this study examines the potential positive and negative consequences of variation in team member experience as well as how fluid teams may capture the benefits of variation while mitigating the coordination costs it creates.

Firsthand Experience and the Subsequent Role of Reflected Knowledge in Cultivating Trust in Global Collaboration

How can workers better collaborate across vast geographical distances? Distributed collaboration—in which employees work with, and meaningfully depend on, distant colleagues on a day-to-day basis—allows firms to leverage their intellectual capital, enhance work unit performance, face ever-changing customer demands more fluidly, and gain competitive advantage in a dynamic marketplace. Research over the last decade, however, has provided mounting evidence that while global collaboration is a necessary strategic choice for an ever-increasing number of organizations, socio-demographic, contextual, and temporal barriers engender many interpersonal challenges for distant coworkers and are likely to adversely affect trust between and among workers across sites. In this paper that examines employee relations at a multinational organization, HBS professor Tsedal Beyene and MIT Sloan School of Management professor Mark Mortensen find that firsthand experience in global collaborations is a crucial means of engendering trust from shared knowledge among coworkers. Their findings reinforce the important role of others' perceptions in our own self-definition, and suggest a means of addressing some of the problems that arise in cross-cultural global collaborations.

Informed and Interconnected: A Manifesto for Smarter Cities

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.

Reputation and Competition: Evidence from the Credit Rating Industry

Credit ratings are a key aspect of the financial system. The quality of these ratings is certainly sustained in part by the reputational concerns of rating agencies, whose paying customers have no inherent interest in the quality of ratings. Competition in this industry has been increasing, and there have been calls for yet more competition. Whether competition will reduce quality or improve it is not yet clear. HBS professor Bo Becker and Washington University in St. Louis professor Todd Milbourn test these conflicting predictions in the ratings industry. Their evidence is more or less consistent with a reduction in credit rating quality as Fitch increased its market presence. Their empirical findings suggest that the system will work better when competition is not too severe. These results have potential policy implications.

Principles that Matter: Sustaining Software Innovation from the Client to the Web

Despite the current strength and promise of the Internet software market, the future pace of growth and innovation is not assured. The principles of choice, opportunity, and interoperability were important in the growth of PC software and in the overall health of the information technology ecosystem, and these same principles will shape competition in Internet software, according to HBS professor Marco Iansiti. Given the unprecedented speed at which this industry is developing, consumers and the industry should watch carefully as different companies compete. Choice, opportunity, and interoperability should serve as an important lens, particularly when focused on companies with especially large footprints in the new markets.

Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes

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.

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

Why do teams often fail to use their knowledge resources effectively even after they have correctly identified the experts among them? Project teams are a prominent feature of the knowledge-based economy, and member expertise has long been recognized as an important resource that can greatly affect team performance, but only to the extent that it is accurately recognized and used to accomplish the objective. The step between recognizing others' expertise and then actually applying it to achieve a collective outcome, however, is highly problematic: Even when individuals know who holds relevant task expertise, they are often unwilling or unable to give the experts appropriate influence over the group process and outcomes. HBS professor Heidi K. Gardner takes a multidisciplinary approach to develop theory explaining how interpersonal dynamics in teams affect members' use of each other's distinct knowledge, ultimately leading to differential performance outcomes.

Truth in Giving: Experimental Evidence on the Welfare Effects of Informed Giving to the Poor

It is often difficult for donors to predict the value of charitable giving because they know little about the persons who receive their help. While there is substantial evidence that individuals use information about recipients to decide how generous a donation to make, we know surprisingly little about how much donors care to help their preferred types. To start closing this gap, HBS professor Felix Oberholzer-Gee and Carnegie Mellon University coauthor Christina Fong study transfers of income to real-world poor people in the context of experimental games. Their findings have implications for governments and nongovernmental organizations that seek to increase the financial and political support for wealth transfer programs.

Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations

A central challenge to modern business cycle analysis is that standard macro models are unable to generate fluctuations in the stock market with the amplitude, persistence, and lead-lag pattern observed in the data. At the same time, standard macro models predict that good news about future, such as those received during 1994-1995 on the arrival of IT, lead to recessions rather than expansions. HBS professor Diego Comin and coauthors develop a model that overcomes these two problems by explicitly incorporating an endogenous speed of diffusion of technologies that is increasing in the resources spent in adoption. Revisions in beliefs about future profits generate fluctuations in the stock market with the amplitude and lead over output observed in the data. The firms' investment decisions in adoption leads to a shift in labor demand that increases hours worked and output.

File-Sharing and Copyright

The researchers argue that file-sharing technology has not undermined the incentives of artists and entertainment companies to create, market, and distribute new works. The advent of new technology has allowed consumers to copy music, books, video games, and other protected works on an unprecedented scale at minimal cost. Such technology has considerably weakened copyright protection, first of music and software and increasingly of movies, video games, and books. While policy discussion surrounding file-sharing has largely focused on the legality of the new technology and the question of whether declining sales in music are due to file-sharing, the debate has been overly narrow. Copyright protection exists to encourage innovation and the creation of new works—in other words, to promote social welfare. This essay analyzes the landscape and identifies areas for more research.

Why Do Countries Adopt International Financial Reporting Standards?

Why do some countries adopt the European Union (EU)-based International Financial Reporting Standards (IFRS) when others do not? To expand our understanding of the determinants and consequences of IFRS adoption on a global sample, HBS professor Karthik Ramanna and MIT Sloan School of Management coauthor Ewa Sletten studied variations over time in the decision to adopt these standards in more than a hundred non-EU countries. Understanding countries' adoption decisions can provide insights into the benefits and costs of IFRS adoption.

Don't Just Survive—Thrive: Leading Innovation in Good Times and Bad

The financial crisis provides a sobering reminder of what happens when innovation fails to drive productive economic growth. For over a decade, money from around the world poured into the United States seeking innovation. Despite these massive investments, when adjusted for inflation, U.S. GDP grew slowly with much of the growth coming from government, professional, and business services, including real estate and outsourcing. What's more, inflation adjusted wages stalled for many, even as consumer spending increased. This paper argues that innovation is not a side business to a real business: rather, innovation is the foundation of a successful business.

Elections and Discretionary Accruals: Evidence from 2004

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.

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

What makes sharing new ideas across cultural lines so difficult? Given that disclosing new ideas makes one person vulnerable to the other, innovation communication requires trust. The literature on workplace relationships distinguishes affect-based trust—feelings of socio-emotional bond with the other—and cognition-based trust—judgments of the other's reliability and competence. Recent organizational psychology research on capabilities needed to work across cultures has also identified affect-relevant strengths such as confidence and nonverbal communication. HBS professor Roy Y.J. Chua and Columbia Business School professor Michael W. Morris survey a sample of business executives with diverse professional networks, assessing their inter-cultural capability and measuring both kinds of trust as well as idea sharing in their working relationships.

Social Influence Given (Partially) Deliberate Matching: Career Imprints in the Creation of Academic Entrepreneurs

How do people select partners for relationships? Most relationships arise from a matching process in which individuals pair on a limited number of high-priority dimensions. Although people often match on just a few attributes, it may be that some set of additional characteristics, which was not considered when a choice was made to develop the relationship, results in the social transmission of attitudes and behaviors. For this reason, social matching is only "partially" deliberate. HBS professor Toby Stuart and coauthors observe this phenomenon in an analysis of the origins and consequences of the matching of postdoctoral biomedical scientists to their faculty advisers. This work shows the imprints of postdoctoral advisers on the subsequent choices of the scientists-in-training who travel through their laboratories. The researchers' findings contribute to a burgeoning literature on the interface between academic and commercial science.

Evidence from Goodwill Non-Impairments on the Effects of Using Unverifiable Estimates in Financial Reporting

SFAS 142 is an accounting rule that requires managers to use estimates of their firms' discounted future values to determine goodwill write-offs. Such estimates are different from the discretion historically afforded in financial reporting in that they are ex post unverifiable. For example, under the standard, a manager of a single-reporting-unit firm can avoid a goodwill write-off despite market indications to the contrary by generating a hypothetical firm value that exceeds the firm's liquid market value. Ex post, if the firm value used to justify non-impairment is not realized, the manager can claim it was due to factors outside his control (e.g., macroeconomic conditions), which is difficult to verify or falsify in a court of law. By promulgating SFAS 142, standard setters must implicitly assume that managers will, on average, use unverifiable discretion to convey private information on future cash flows. In contrast, agency theory predicts managers will, on average, use unverifiable discretion opportunistically. HBS professor Karthik Ramanna and MIT Sloan School professor Ross L. Watts investigate managers' implementation of the goodwill impairment test in SFAS 142 in a sample of firms with market indications of goodwill impairment.

Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?

The changeover from defined benefit to defined contributions retirement plans in the United States has created a vast group of individuals that faces (or will face) the difficult problem of using a lump sum of assets to provide consumption for a relatively long but uncertain number of years. Up to this point, however, consumers appear not to have embraced annuitization. HBS professor Julio J. Rotemberg suggests an alternative instrument that, like immediate annuities, provides longevity insurance and postpones income until old age. In the proposed Mutual Inheritance Fund (MIF), a pool is formed by having individuals of a particular age buy shares in a mutual fund. The income from the underlying assets in the mutual fund is reinvested in the fund so that the value of the shares in an individual's name (and possibly also the number of these shares) grows over time. The basic idea behind the MIF is that the shares of pool members who die are liquidated, and the proceeds are then distributed in cash to the remaining members in proportion to the number of mutual fund shares that are currently in their name.

It Is Okay for Artists to Make Money…No, Really, It's Okay

When art and commerce are mentioned in the same sentence, many people become bad tempered or think something needs fixing. This paper argues that more artists ought to make more money more often. HBS professor Robert Austin and theater dramaturg Lee Devin identify and undermine three fallacies about art and commerce, and suggest that it is necessary to carry on a more careful and less emotional conversation about the tensions between art and business and to overcome a general aversion to business common among artists and their patrons. They also stress the need to develop better theories about how art and commerce can achieve integration helpful to both.

Crafting Integrated Multichannel Retailing Strategies

The past fifteen years has been a period of rapid growth in the practice of multichannel retailing, mirroring the rise of the Internet as a nearly ubiquitous tool that firms use to interact with customers. More than 80 percent of a broad cross-section of U.S. retailers now report that they sell merchandise through multiple channels. This practice seems to be on the cusp of a new era in which firms start demanding even more from their investments, with particular emphasis being given to financial performance in light of the current economic crisis. These circumstances present a great opportunity both to firms that are looking to gain a competitive advantage through multichannel retailing and to researchers who are interested in helping them make more informed decisions. This article provides a broad discussion of these issues, synthesizes current knowledge, and suggests directions for future research.

Monopolistic Competition Between Differentiated Products With Demand For More Than One Variety

How and when is price competition most significant among firms? This paper develops a theoretical framework for studying price competition between multiple firms. Two examples of markets that fit the description for study are software applications and videogames: There are thousands of software applications as well as games, and different users are interested in different applications and/or games. A given software or game user's tastes may overlap with another's, yet they may have nothing in common with a third's. Thus, although there is a sense in which competition is localized (any given firm competes only with firms whose brands are similar to its own), it is not clear how the fact that consumers are generally interested in purchasing multiple products affects the type of competition waged among firms.

Do Friends Influence Purchases in a Social Network?

In spite of the cultural and social revolution in the rise of social networking sites such as Facebook and MySpace (and in South Korea, Cyworld), the business viability of these sites remains in question. While many sites are attempting to follow Google and generate revenues from advertising, will advertising be effective? If friends influence the purchases of a user in a social network, it could potentially be a significant source of revenue for the sites and their corporate sponsors. Using a unique data set from Cyworld, this study empirically assesses if friends indeed influence purchases. The answer: It depends. Findings are relevant for social networking sites and large advertisers.

On Good Scholarship, Goal Setting, and Scholars Gone Wild

When confronted by anecdotal evidence and some causal evidence, how should scholars—and indeed businesses and society—react? In this response to a critique in the journal Academy of Management Perspectives, the authors articulate the aims of their article "Goals Gone Wild: How Goals Systematically Harm Individuals and Organizations," describe points of disagreement with the critics, offer a definition of good scholarship, and suggest a program of research for future studies of goal setting.

Barriers to Household Risk Management: Evidence from India

Insurance markets are growing rapidly in developing countries. Despite the promise of these markets, however, adoption to date has been relatively slow. Yet households often remain exposed to movements in local weather; regional house prices; prices of commodities like rice, heating oil, and gasoline; and local, regional, and national income fluctuations. In many cases, financial contracts simply do not exist to hedge these exposures, and when contracts do exist their use is not widespread. Why don't financial markets develop to help households hedge these risks? Why don't more households participate when formal markets are available? HBS professor Shawn Cole and coauthors attempt to shed light on these questions by studying participation in rural India in a rainfall risk-management product that provides a payoff based on monsoon rainfall. The results suggest that it may take a significant amount of time—and substantial marketing efforts—to increase adoption of risk-management tools at the household level.

Money or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

Why is there apparently limited demand for financial services in emerging markets? On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs. On the other hand, limited financial literacy could be the barrier: If people are not familiar or comfortable with products, they will not demand them. These two views carry significantly different implications for the development of financial markets around the world, and would suggest quite different policy decisions by governments and international organizations seeking to promote "financial deepening." HBS professor Shawn Cole and coauthors found that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although it does significantly increase the probability among those with low initial levels of financial literacy and low levels of education. In contrast, modest financial subsidies significantly increase the share of households that open a bank savings account within the subsequent two months.

Quantity vs. Quality and Exclusion by Two-Sided Platforms

It is common for two-sided platforms to deny participation to some potential customers, who would otherwise be willing to pay the platforms' access and/or transaction fees. Videogame console manufacturers such as Microsoft, Sony, and Nintendo, for example, restrict access to a select set of game developers and exclude many others by including security chips in their consoles, even though the latter would also be willing to pay the per-game royalties levied by the manufacturers. Apple routinely excludes certain application developers from its highly popular iPhone store. Professor Andrei Hagiu builds a simple model formalizing profit-maximizing two-sided platforms' choice of exclusion policies, which is fundamentally determined by a tradeoff between quality and quantity.

Capitalizing On Innovation: The Case of Japan

How can Japan create a better business environment for innovation? Japan presents a unique case of industrial structures that have produced remarkable developments in certain sectors but seem increasingly inadequate to do the same in modern technology industries, which rely on ecosystems of firms producing complementary products. Robert Dujarric and HBS professor Andrei Hagiu present three case studies of software, animation, and mobile telephony to illustrate potential sources of inefficiencies. Like all advanced economies, Japan faces two interconnected challenges. The first challenge is rising competition from lower-cost countries with the capacity to manufacture midrange and in some cases advanced industrial products. At the same time, Japan confronts changes in the relative weights of manufacturing and services, including soft goods, which go against the country's long-standing competitive advantage and emphasis on manufacturing. If Japan is to continue to prosper in a world where its ability to rely principally on manufacturing will diminish, its policymakers will need to capitalize on its untapped innovative power.

Broadening Focus: Spillovers and the Benefits of Specialization in the Hospital Industry

What is the optimal scope of operations for firms? This question has particular relevance for the U.S. hospital industry, because understanding the effects of focus and spillovers might help hospitals determine how they should balance focusing in a single clinical area with building expertise in related areas. While some scholars argue that narrowing an organization's set of activities improves its operational efficiency, others have noted that seemingly unfocused operations perform at a high level and that a broader range of activities may in fact increase firm value. This study by HBS doctoral student Jonathan Clark and professor Robert Huckman highlights the potential role of spillovers—specifically complementary spillovers—in generating benefits from focus at the operating unit level.

An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System

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.

Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors

Although 99 percent of the companies operating in the United States are private, according to the American Institute of Certified Public Accountants, their accounting practices remain largely unknown due mainly to the lack of publicly available financial statements. In this study, HBS professor Sharon P. Katz used a unique database of firms with privately held equity and publicly held debt to examine how two different ownership structures-private equity sponsorship and non-private equity sponsorship-affect firms' financial reporting practices, financial performance, and stock returns in the years preceding and following the initial public offering (IPO).

Female Empowerment: Impact of a Commitment Savings Product in the Philippines

Does access to personal savings increase female decision-making power in the household? The answer could be important for policymakers looking to increase female empowerment. HBS professor Nava Ashraf and colleagues developed a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account with a small, rural bank in the Philippines. The SEED account requires that clients commit not to withdraw funds that are in the account until they reach a goal date or amount, but it does not explicitly commit the client to continue depositing funds after opening the account. This working paper examines the impact of the commitment savings product on both self-reported decision-making processes within the household and the subsequent household allocation of resources.

Corporate Social Entrepreneurship

Accelerated organizational transformation faces a host of obstacles well-documented in the change management literature. Because corporate social entrepreneurship (CSE) expands the core purpose of corporations and their organizational values, it constitutes fundamental change that can be particularly threatening and resisted. Furthermore, it pushes the corporation's actions more broadly and deeply into the area of social value creation where the firm's experiences and skill sets are less developed. The disruptive social innovations intrinsic to the CSE approach amplify this zone of discomfort. Fortunately, the experiences of innovative companies such as Timberland and Starbucks show how these challenges may be overcome.

Does Public Ownership of Equity Improve Earnings Quality?

The quality of accounting information is influenced by an array of factors, most of which stem from the demand for such information for use in contractual arrangements and from the incentives and opportunities of management to manage the reported numbers. Both the demand for quality accounting information for contractual purposes and management incentives to adjust the reported earnings are likely to be influenced by whether the equity of the company is privately held or publicly traded. This study examines the differential earnings quality of private equity and public equity firms in order to shed light on how public ownership of equity affects the quality of firms' earnings. The research highlights how the presence of public equity investors affects management's reporting behavior.

Where is the Pharmacy to the World? International Regulatory Variation and Pharmaceutical Industry Location

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

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 Investment Strategies of Sovereign Wealth Funds

The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance.

Phenomenological Assumptions and Knowledge Dissemination within Organizational Studies

Field-wide integration of knowledge generated by subfield specialists is critical for new discoveries and for a more comprehensive and accurate understanding of complex phenomena. In spite of the value of broadly disseminating knowledge within the social and physical sciences, scholarly discourse tends to be contained within subfields of research. Further constraining innovation and understanding, knowledge dissemination between academics and practitioners or clinicians is often limited and inaccurate. In this article, UCLA professor Corinne Bendersky and HBS professor Kathleen L. McGinn introduce "phenomenological assumptions"—revealed beliefs about the fundamental qualities of the phenomenon under investigation and its relationship to the environment in which it occurs—as barriers limiting the integration of knowledge generated within a subfield into the broader intellectual discourse of its field.

Gray Markets and Multinational Transfer Pricing

Gray market goods are brand-name products that are initially sold into a designated market but then resold through unofficial channels into a different market. Gray markets can arise when transaction and search costs are low enough to allow products to "leak" from one market segment back into another. Examples of industries with active gray markets include pharmaceuticals, automobiles, and electronics. Understandably, reactions to gray market encroachment are mixed. On the one hand, consumer advocates and governments have applauded the increasing role that gray markets have played in improving competition for domestic goods. On the other hand, multinationals have decried the increasing role of gray markets in the economy, with an estimated $40 billion in cannibalized sales resulting from gray markets in the information technology sector alone. This study investigates the optimal price of a multinational's internal transfers and the consequences of regulations mandating arm's-length transfer pricing.

The Economics of Structured Finance

This paper investigates the spectacular rise and fall of structured finance. HBS professor Joshua Coval, Princeton professor Jakub Jurek, and HBS professor Erik Stafford begin by examining how the structured finance machinery works. They construct simple examples of collateralized debt obligations (CDOs) that show how pooling and tranching a collection of assets permits credit enhancement of the senior claims. They then explore the challenge faced by rating agencies, examining, in particular, the parameter and modeling assumptions that are required to arrive at accurate ratings of structured finance products. They conclude with an assessment of what went wrong and the relative importance of rating agency errors, investor credulity, and perverse incentives and suspect behavior on the part of issuers, rating agencies, and borrowers.

Applying the Care Delivery Value Chain: HIV/AIDS Care in Resource Poor Settings

The prevention and treatment of a complex disease such as HIV/AIDS in resource‐poor settings presents enormous challenges. Many of the social and economic factors that make populations living in these settings vulnerable to HIV/AIDS such as poverty, malnutrition, and political instability conspire to create barriers to effective care delivery. Understanding how interventions are related to each other and how local socioeconomic factors influence them is critical to effective program design. The Care Delivery Value Chain (CDVC) looks at care as an overall system, not as a series of discrete interventions, and describes the activities required to deliver care, illustrating their sequence and organization. Government agencies, philanthropic organizations, and non‐governmental organizations can use the framework to improve HIV/AIDS care delivery.

The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization

Corporate hierarchies are becoming flatter: Spans of control have broadened, and the number of levels within firms has declined. But why? Maria Guadalupe of Columbia University and HBS professor Julie M. Wulf investigate how increased competition in product markets—and, in particular, product market competition resulting from trade liberalization—may be fundamentally altering how decisions are being made. Guadalupe and Wulf also shed light on the possible reasons behind certain organizational choices and on the importance of communication and decision-making processes inside firms.

The Contingent Nature of Public Policy and Growth Strategies in the Early Twentieth-Century U.S. Banking Industry

The effects of public policy on organizations and economic activities have been widely observed. This line of research has contributed to organizational theory by showing the importance of state action for constructing economic systems, as well as firm structures and strategies. But there are a number of reasons why this perspective may in fact overemphasize the importance of public policy. This working paper, forthcoming as an article in the Academy of Management Journal, more fully investigates the contingent nature of the effects of policy on organizations, with the orienting premise that policy is just one of the external conditions that organizations face, and policy effects are more or less powerful to the extent that they are interactive with other elements of the environment. Specifically, the authors focus on how policy that regulated bank branching and other environmental factors affected—independently as well as interactively—the emergence and growth of large-scale firms in U.S. commercial banking from 1896 to 1978.

The Bloody Millennium: Internal Conflict in South Asia

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.

Demographics, Career Concerns or Social Comparison: Who Games SSRN Download Counts?

Why do certain individuals commit fraudulent acts—in this case repeatedly downloading their own working papers from the Social Science Research Network (SSRN) repository to increase the papers' reported download counts? HBS professors Benjamin G. Edelman and Ian I. Larkin study the relative importance of demographic, economic, and psychological factors leading individuals to commit this kind of gaming. Authors engage in deceptive self-downloading to improve a paper's visibility on SSRN, to obtain more favorable assessments of paper quality, and to obtain possible benefits for promotion and tenure decisions at those schools that consider download counts in tenure decisions. Data indicates that authors are more likely to inflate their papers' download counts when a higher count greatly improves the visibility of a paper on the SSRN network. Authors are also more likely to inflate their papers' download counts when their peers recently had successful papers—suggesting an "envy" effect in download gaming. Download inflations are also affected somewhat by career concerns (e.g. just before changing jobs) and by demographic factors, though these effects are smaller. On the whole, analysis suggests a heightened risk of fraudulent acts not only where economic returns are high, but also where prestige, status, or reputation are important.

Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms

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.

Catering to Characteristics

Can patterns of corporate net stock issuance help identify times when particular characteristics, such as industry, size, or book-to-market ratio, are mispriced? The authors of this study argue that differences between the characteristics of issuers and repurchasers can shed light on characteristic related stock returns. Consider the case in which analysts were interested in forecasting the returns of Google. The standard approach would be to collect Google's characteristics (e.g., large, technology, non-dividend paying, etc) and associate these characteristics with an average return in the cross-section. The authors argue that if other stocks with these characteristics are issuing stock, this bodes poorly for Google's future returns, even if Google is itself not issuing. This research by HBS professor Robin Greenwood and Harvard doctoral student Samuel Hanson has implications for studying the stock market performance of seasoned equity offerings (SEOs), initial public offerings (IPOs), and recent acquirers.

Beyond Gender and Negotiation to Gendered Negotiations

How does gender affect negotiations within organizations or rather how do organizations affect gender relations? Deborah Kolb, a professor at Simmons College School of Management, and HBS professor Kathleen McGinn explore how definitions of work, specified roles in organizations, status hierarchies, and the politics and practices of organizational realities affect how gender plays out in organizations. Considering gender in organizations from a "negotiated order perspective"—that is, from the perspective that cultural patterns and work practices are the result of past interaction and negotiation—not only expands the range of issues that are potentially negotiable, it also turns attention to rethinking certain dimensions of the negotiation process itself.

Running Out of Numbers: Scarcity of IP Addresses and What To Do About It

Hidden from view of typical users, every Internet communication relies on an underlying system of numbers to identify data sources and destinations. Users typically specify online destinations by entering domain names (e.g. "congress.gov"). But the Internet's routers forward data according to numeric IP addresses (e.g. 140.147.249.9). To date, the Internet has enjoyed an ample supply of "IPv4" IP addresses, but demand is substantial and growing. Current allocation rates suggest IPv4 exhaustion by approximately 2011. A new numbering system, IPv6, would relieve scarcity, but incentives hinder transition: IPv4 works well for existing networks, and offers easier and simpler access to existing Internet content and services. As a result, to date few networks have begun to support v6. In principle regulators could order networks to implement v6, but the applicable Internet coordinating organizations lack authority or power to force such a transition. In the meantime, a market mechanism for v4 addresses offers important benefits, including allocating scarce v4 addresses to those who need them most, and putting a positive price on v4 space in order to encourage transition to v6. Thus, it seems v4 transfers can help both to mitigate the worst effects of v4 scarcity, and to build the incentives necessary for transition to v6.

Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

Are nominal government bonds risky investments that investors must be rewarded to hold? Or are they safe investments, whose price movements are either inconsequential or even beneficial to investors as hedges against other risks? U.S. Treasury bonds have performed well as hedges during the financial crisis of 2008, but the opposite was true in the late 1970's and early 1980's. John Y. Campbell, a Visiting Scholar at HBS, Harvard Ph.D. candidate Adi Sunderam, and HBS professor Luis M. Viceira explore such changes over time in the risks of nominal government bonds.

CPC/CPA Hybrid Bidding in a Second Price Auction

How should online advertisers measure and pay for advertising deliveries? Options include pay per impression (CPM), per click (CPC), per action (CPA), or in proportion of the dollar value of merchandise sold. The advertisers who choose to pay one way may differ, systematically, from those who choose to pay in some other way. HBS professor Benjamin Edelman and doctoral student Hoan Soo Lee present the problem in an algebraic model in anticipation of measurement to follow in future work.

Barriers to Acting in Time on Energy and Strategies for Overcoming Them

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.

Fear of Rejection? Tiered Certification and Transparency

The sub-prime crisis has thrown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. Certifiers such as rating agencies, journals, standard setting bodies, and providers of standardized tests play an increasingly important role in the market economies. Yet as scrutiny of rating agencies in the aftermath of the sub-prime crisis has shown, these organizations have complex incentive structures and may adopt problematic approaches. On an explicit level, all major rating agencies follow a well-defined process, whose end product is the publication of a rating based on an objective analysis. But firms have been historically able to get rating agencies not to disclose ratings that displease them. HBS professor Josh Lerner and colleagues examined when certifiers might adopt more complex rating schemes, rather than the simple pass-fail scheme, and highlight that such nuanced schemes are more likely when the costs of such ratings are lower. In addition, these schemes are more common when sellers are less averse to the revelation of information about their quality, and more impatient.

When Does Domestic Saving Matter for Economic Growth?

The researchers begin with a simply stated question: Can a country grow faster by saving more? Long-run growth theories imply that a country can grow faster by investing more in human or physical capital or in R&D, but that a country with access to international capital markets cannot grow faster by saving more. Domestic saving is therefore not considered an important ingredient in the growth process because investment can be financed by foreign saving. From the point of view of standard growth theory, the positive cross-country correlation between saving and growth that many commentators have noted appears puzzling. HBS professor Diego Comin and colleagues develop a theory of local saving and growth in an open economy with domestic and foreign investors.

Dishonest Deed, Clear Conscience: Self-Preservation through Moral Disengagement and Motivated Forgetting

Why do people engage in unethical behavior repeatedly over time? In Everybody Does It! (1994), Thomas Gabor documents the pervasive immorality of ordinary people. Challenging the stereotype that only criminals violate the law, Gabor describes the numerous transgressions of everyday life and suggests that the excuses people make for their dishonest behavior parallel the justifications criminals make for their crimes. This common tendency of people to justify and distance themselves from their unethical behavior has captured the attention of several psychologists, and a long stream of research has documented differences in the way people think about their own ethical behavior and that of others. Harvard Business School's Lisa Shu and Max Bazerman, with colleague Francesca Gino, show that seemingly innocuous aspects of the environment can promote the decision to act ethically or unethically.

Platform Competition, Compatibility, and Social Efficiency

The last three decades have witnessed unprecedented growth in network industries such as video games, computers, credit cards, media, and telecommunications. These industries are often organized around physical or virtual platforms that enable distinct groups of agents to interact with one another, and are commonly referred to as two-sided markets or markets with two-sided platforms. An operating systems developer such as Microsoft, for example, provides a software platform that makes possible the completion of value-creating transactions between independent software vendors and users. A key attribute of the market that determines the intensity and scope of network effects is whether or not competing platforms are compatible. The effects of platform (in)compatibility on market outcomes, however, have largely been ignored by the literature on markets with two-sided platforms. This paper develops an explanation of why markets with two-sided platforms are often characterized by incompatibility with one dominant player that may choose to subsidize access to one side of the market.

Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting

For decades, goal setting has been promoted as a halcyon pill for improving employee motivation and performance in organizations. Advocates of goal setting argue that for goals to be successful, they should be specific and challenging, and countless studies find that specific, challenging goals motivate performance far better than "do your best" exhortations. The authors of this article, however, argue that it is often these same characteristics of goals that cause them to "go wild."

Unravelling in Two-Sided Matching Markets and Similarity of Preferences

Hiring policy is one of the most important determinants of a firm's success. The hiring process calls for collecting information in order to choose the best individual from among the candidates. In certain markets, however, firms hire workers long before all the pertinent information is available. Those early matches often turn out to be inefficient when the job starts. This phenomenon of contracting long before the job begins, and before relevant information is available, is called unravelling. Unravelling has been recognized as a serious problem in numerous markets, and measures designed to preclude it (such as centralized clearinghouses and enforcement of uniform hiring) have not always been successful. In order to provide insights for designing better measures to prevent unravelling in markets prone to it, this paper examines a two-sided matching market populated by firms on one side and workers on the other.

An Exploration of the Japanese Slowdown during the 1990s

Why was the 1990s a lost decade for Japan? HBS professor Diego Comin argues that it was the combination of some shocks that lasted for about three years and the response of companies that drastically reduced their expenses in adopting new technologies and developing new ones. Though the severe shocks that hit the Japanese economy did not persist, the investments that Japanese companies and entrepreneurs did not undertake to improve technology and production methods during the 1990s propagated those shocks and made their effects very long-lasting.

Sweatshop Labor is Wrong Unless the Jeans are Cute: Motivated Moral Disengagement

Most consumers in America have purchased products made with sweatshop labor at one point or another. However, very little attention has been focused on the psychological mechanisms that enable consumers to propagate a system that implicates harm. Although many people say they care about ethical issues such as humane labor conditions, demand for products that guarantee it remains low. According to some estimates, there are hundreds of thousands of sweatshops still operating today. HBS doctoral student Neeru Paharia and professor Rohit Deshpandé examine whether people may be motivated to morally disengage in the presence of harmful attributes such as sweatshop labor when desire for a product is high. They found that research participants were significantly more likely to agree with statements such as: "The use of sweatshop labor is okay because companies must remain competitive," and "Sweatshops are the only realistic source of income for workers in poorer countries," when confronted with a hypothetical pair of shoes with a higher appeal, versus shoes with a lower appeal. The researchers also found that moral disengagement can drive people to like products they believe to be made with sweatshop labor even more. The authors suggest that since we are confronted with conflicts between our desires and our moral standards on nearly a daily basis, this research calls into question the foundation from which our moral judgments rest on. If our moral judgments are likely to vary based on our affective desires, any moral standards we may hold ourselves to are dubious at best.

The Decentering of the Global Firm

Firms such as Caterpillar are typically considered American companies by virtue of history while Honda, for example, is regarded as a Japanese company. However, the archetypal multinational firm with a particular national identity and a corporate headquarters fixed in one country is becoming obsolete as firms continue to maximize the opportunities created by global markets. The defining characteristics of what makes a firm belong to a country—where it is incorporated, where it is listed, the nationality of its investor base, the location of its headquarters functions—are no longer bound to one country. Why are these changes taking place, and what are their consequences? This paper places the increasing mobility of corporate identities within the broader setting of transformations to the "shape" of global firms over the last half century.

Turbulent Firms, Turbulent Wages?

Has more creative destruction among firms raised wage volatility in the United States? Most of the related research on the remarkable and well-documented widening of wage inequality in the U.S. over the past three decades focuses on permanent components of workers' earnings, particularly the rising returns to education and ability associated with technological change, trade, and de-unionization. Less is known, however, about the contribution of larger transitory fluctuations. HBS professor Comin and colleagues explore whether workers' average pay is more volatile in firms that have experienced higher turbulence in sales. Findings have important implications for theories of labor markets and optimal wage compensation schemes.

The Supply Side of Innovation: H-1B Visa Reforms and US Ethnic Invention

The H-1B visa program governs most admissions of temporary immigrants into the U.S. for employment in patenting-related fields. This program has become a point of significant controversy in the public debate over immigration, with proponents and detractors at odds over how important H-1B admission levels are for U.S. technology advancement and whether native U.S. workers are being displaced by immigrants. In this study, Kerr and Lincoln quantify the impact of changes in H-1B admission levels on the pace and character of U.S. invention over the 1995-2006 period.

Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation

(Previously titled "If You Are So Smart, Why Aren't You Rich? The Effects of Education, Financial Literacy and Cognitive Ability on Financial Market Participation.") Individuals face an increasingly complex menu of financial product choices. The shift from defined benefit to defined contribution pension plans, and the growing importance of private retirement accounts, require individuals to choose the amount they save, as well as the mix of assets in which they invest. Yet, participation in financial markets is far from universal in the United States. Moreover, researchers have only a limited understanding of what factors cause participation. Cole and Shastry use a very large dataset new to the literature in order to study the important determinants of financial market participation. They find that higher levels of education and cognitive ability cause increased participation—however, financial literacy education does not.

Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality

How concentrated is the U.S. advertising and marketing services industry? Over the past several decades, the effects of deregulation, globalization, and technological innovation have reshaped the advertising and marketing services industry as they worked their way through the economy. Estimates from the existing literature are typically based on data from trade sources and present a picture that emphasizes rising concentration over time and domination by a handful of holding companies. These estimates are suspect as they suffer from a number of conceptual and measurement limitations. This paper analyzes changes in concentration levels in the U.S. advertising and marketing services industry, using data that have been largely ignored in past discussions of the economic organization of the industry.

Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers

Nearly 900,000 organizations in 170 countries have adopted the ISO 9001 Quality Management System standard. This is a remarkable figure given the lack of rigorous evidence regarding how the standard actually affects organizational practices and performance. Proponents claim that quality programs such as ISO 9001 improve both management practices and production processes, and that these improvements, in turn, will increase both sales and employment. Documenting and training proper work practices can also reduce potentially dangerous "work arounds," and thus could reduce the risk of workplace accidents and injuries. Some critics, on the other hand, point to the potential for quality programs such as ISO 9001 to be detrimental to employees by documenting work practices, resulting in routinization that may reduce skill requirements and increase repetitive motion injuries. This paper reports the first large-scale evaluation of how ISO 9001 affects workers, focusing in particular on employment, total payroll, average annual earnings, and workplace health and safety.

Market Reaction to the Adoption of IFRS in Europe

How do investors in European firms react to a change in financial reporting? Prior to 2005, most European firms applied domestic accounting standards. The adoption of International Financial Reporting Standards (IFRS) would result in the application of a common set of financial reporting standards within Europe, and between Europe and the many other countries that require or permit application of IFRS. However, modification of IFRS by European regulators would result in European standards differing from those used in other countries, thereby eliminating some potential convergence benefits. This study investigates the equity market reaction to 16 events associated with the adoption of IFRS in Europe. Overall, the researchers' findings are consistent with investors expecting the benefits associated with IFRS adoption in Europe to exceed the expected costs.

Local Industrial Conditions and Entrepreneurship: How Much of the Spatial Distribution Can We Explain?

Some places, like Silicon Valley, seem almost magically entrepreneurial with a new start-up on every street corner. Other areas, like declining cities of the Rust Belt, appear equally starved of whatever local attributes make entrepreneurship more likely. Many academics, policymakers, and business leaders stress the importance of local conditions for explaining spatial differences in entrepreneurship and economic development. This paper uses data from the U.S. Census Bureau to characterize these entry relationships more precisely within the manufacturing sector.

Performance Persistence in Entrepreneurship

All else equal, a venture-capital-backed entrepreneur who starts a company that goes public has a 30 percent chance of succeeding in his or her next venture. First-time entrepreneurs, on the other hand, have only an 18 percent chance of succeeding, and entrepreneurs who previously failed have a 20 percent chance of succeeding. But why do these contrasts exist? Such performance persistence, as in the first example, is usually taken as evidence of skill. However, in the context of entrepreneurship, the belief that successful entrepreneurs are more skilled than unsuccessful ones can induce real performance persistence. In this way, success breeds success even if successful entrepreneurs were just lucky. Success breeds even more success if entrepreneurs have some skill.

The Sciences of Design: Observations on an Emerging Field

This paper examines the sciences of design as an emerging field of study that cuts across disciplinary boundaries. The paper summarizes and synthesizes the positions, reflections, opportunities, and challenges expressed at the first doctoral consortium to explore the topic, held in 2008. It thus provides a useful agenda for clarifying and articulating important strands of this nascent field.

Spanning the Institutional Abyss: The Intergovernmental Network and the Governance of Foreign Direct Investment

Economic globalization presents severe governance challenges. The insufficiency of states as a source of surety for transactions that transcend national borders creates an opportunity for an increased role for organizations in the global institutional framework. The authors of this paper applied a network methodology to show how one type of organization, the intergovernmental organization (IGO), facilitates the cross-border investments of another type, the multinational corporation (MNC). They further document the interdependence between domestic institutions, and international institutions represented by IGOs. The results help to understand and explain which countries attract FDI, and from which senders. Results also point to an emerging rivalry between states and organizations as sources of governance in the global economy.

Applicant and Examiner Citations in U.S. Patents: An Overview and Analysis

The ready availability of patent citation data has been a tremendous boon to applied research on knowledge and innovation. The role of examiners in the generation of patent citations has been thought to potentially complicate these analyses, but has been difficult to study. Taking advantage of a change in the way patent citation data has been reported starting in 2001, this paper summarizes basic facts on examiner citations, and provides a descriptive analysis of factors associated with citations in a patent.

Was the Wealth of Nations Determined in 1000 B.C.?

To the extent that history is discussed at all in economic development, it is usually either the divergence associated with the Industrial Revolution or the effects of colonial regimes. Is it possible that precolonial, preindustrial history also matters significantly for today's national economic development? The authors find that technology adoption circa 1500 A.D., prior to the era of colonization and extensive European contacts, predicts approximately 50 percent of cross-country differences in both current per capita income and technology in a large cross-section of countries. When exploring the causes of this extreme persistence in technology, they find evidence in favor of the importance of the effect of current adoption on subsequent adoption as the main driver. This leaves a limited role to country-specific factors such as institutions, geography, or genes to explain the persistence of technology.

Parallel Search, Incentives and Problem Type: Revisiting the Competition and Innovation Link

The innovation process is fraught with uncertainty. Managers often do not know ahead of time the ideal mix of individuals and skills needed to solve innovation-related problems. One way around this uncertainty is to have multiple paths, approaches, or designs explored at once. The "parallel search" principle can be used inside the firm just as it may be used more generally by pursuing "open innovation". However, having too many searchers attempting to solve the same problem can undercut the benefits if it leads to less effort and investment. The authors study the outcomes of 645 software development contests, conducted by a software outsourcing vendor, involving over 9,000 coders, to understand the relationship between parallel search and increasing competition and innovation.

The Effect of Labor on Profitability: The Role of Quality

Determining staffing levels is an important decision in retail operations. In 2006, retailers spent $393 billion on employee wages, more than 10 percent of their revenue that year and more than their inventory holding costs. Hence, staffing levels have a major impact on retailers' costs. But at the same time, staffing levels affect conformance quality—how well employees execute prescribed processes—and service quality—the extent to which customers have a positive service experience at the stores. While there is overwhelming evidence that conformance quality and service quality improve sales, both generally and in retail settings, their effect on profitability is not clear. To examine how the amount of labor at a store affects profitability through its impact on conformance quality and service quality, Zeynep Ton analyzed extensive data from stores of a large retailer.

Extending Producer Responsibility: An Evaluation Framework for Product Take-Back Policies

Managing products at the end of life (EOL) is of growing concern for durable goods manufacturers. While some manufacturers engage in voluntary "take back" of EOL products for a variety of competitive reasons, the past 10 years have seen the rapid proliferation of government regulations and policies requiring manufacturers to collect and recycle their products, or pay others to do so on their behalf. Toffel, Stein, and Lee develop a framework for evaluating the extent to which these product take-back regulations offer the potential to reduce the environmental impacts of these products in an effective and cost-efficient manner, while also providing adequate occupational health and safety protection. The evaluation framework is illustrated with examples drawn from take-back regulations in Europe, Japan, and the United States.

The Litigation of Financial Innovations

The past 10 years have seen a profound change in the conditions under which financial innovations are pursued. Because patents fundamentally alter the way in which innovations can be used, assessing the impact of patenting is critical to understanding the future of financial innovation. Litigation is crucial to delineating the boundaries of patent awards, and this paper examines the litigation of such financial patents to gain insights into the future of financial innovation. This paper seeks to understand the litigation of financial innovations, an area where patents have only recently been granted.

Technology, Identity, and Inertia through the Lens of 'The Digital Photography Company'

Why do established firms find some technological change so challenging? While existing research has identified numerous sources of inertia in established firms exploring new technological domains, identity is a critical piece of the puzzle. As the core essence of an organization, identity directs and constrains action. The routines, procedures, capabilities, knowledge base, and beliefs of an organization all reflect its identity. So when a technology is identity-challenging to an organization—when pursuing it would violate the core beliefs of both insiders and outsides about what the firm represents—organizations face significant obstacles to adopting it. This study by Tripsas highlights the importance of recognizing and evaluating the tradeoffs associated with technological opportunity and organizational identity.

Do Voters Appreciate Responsive Governments? Evidence from Indian Disaster Relief

In a functioning democracy, politicians' ability to win reelection declines when they perform poorly. This idea fits well with models of political accountability. Recent evidence suggests, however, that voters may punish politicians even for events outside their control. This behavior may violate standard models of democratic accountability, and has been advanced as evidence of voter irrationality. This paper uses detailed weather, electoral, and relief data to identify the relationship between government responsiveness to an emergency and electoral decisions. Specifically, the authors look at the decisions that Indian voters made in provincial elections, using the intensity of the monsoon rains as an exogenous shock to welfare. They find that voters, on average, punish incumbent politicians for being in office during weather events beyond their control. However, the degree of voter punishment is reduced somewhat when the government responds more vigorously to the crisis.

Platform Rules: Multi-Sided Platforms as Regulators

Using case studies of Facebook, Tokyo's Roppongi Hills "mini-city," Harvard Business School, and TopCoder, a vendor of outsourced software products, Boudreau and Hagiu explore how multi-sided platforms (MSPs) regulate an industry ecosystem. An MSP is a platform that enables interactions between multiple groups of surrounding consumers and complementors. As the authors demonstrate, the regulatory role played in these cases by MSPs was pervasive and at the core of their business models. That regulatory role goes beyond price-setting and includes imposing rules and constraints, creating inducements, and generally shaping behaviors. These various non-price instruments essentially solve problems that could otherwise lead to market failure. The authors' analytical framework suggests a two-step approach for a platform owner: (1) maximize value created for the entire ecosystem, and (2) maximize the value extracted. "Platform Rules" is a chapter in the forthcoming book Platforms, Markets and Innovation, Gawer, A. (ed) (2009), Cheltenham, UK and Northampton, MA, U.S.: Edward Elgar.

Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items

Do managers' presentation decisions within their financial statements reflect informational motivations (that is, revealing the underlying economics of the firm) or opportunistic motivations (that is, attempts to bias perceptions of firm performance)? The authors examine managers' choices to present special items (such as write-offs and restructuring charges) separately on the income statement rather than aggregated in other line items with disclosure only in the footnotes. Prior research suggests that managers engage in opportunistic reporting in other presentation decisions, and that managers' presentation decisions on the financial statement affects users' judgments. The distinction also matters because current changes in reporting standards are likely to increase the occurrence of "nonrecurring" type charges similar to special items, such as fair value changes.

Economic Impacts of Immigration: A Survey

International migration is a mighty force globally. According to United Nations statistics, over 175 million people, accounting for 3 percent of the world's population, live permanently outside their countries of birth. This paper surveys the economic impacts of immigration for host countries, mostly emphasizing the recent experiences of Northern Europe and Scandinavia. The paper documents how migrant flows to some countries within this region are now of similar magnitude to the United States. The authors discuss the impact of immigration on national labor markets in terms of both immigrant assimilation and possible native displacement. Their survey concludes with the impact of immigration on the public finances of host countries, which is of particular policy importance within Europe today given ageing populations and fiscal imbalances.

Variation in Experience and Team Familiarity: Addressing the Knowledge Acquisition-Application Problem

Team familiarity helps team members successfully locate knowledge within a group, share the knowledge they possess, and respond to the knowledge of others. While team familiarity may help all teams to better coordinate their actions, it may play a particularly important role for teams with individuals looking to apply knowledge from their varied experience. This possibility leads to the question that provides the foundation for this paper: Does team familiarity moderate the relationship between variation in experience and performance? Prior research attempting to link variation in experience and performance has found effects ranging from positive to neutral to negative. Huckman and Staats explain these differential results by drawing on related work from learning, knowledge management, and social networking.

Consequences of Voluntary and Mandatory Fair Value Accounting: Evidence Surrounding IFRS Adoption in the EU Real Estate Industry

The required adoption of International Financial Reporting Standards (IFRS) in the European Union, effective January 1, 2005, resulted in a number of significant changes in how firms report their financial results. Mandatory IFRS adoption has been criticized for both the flexibility afforded under the standards and the encroachment of the fair value paradigm. Specifically, common accounting standards alone may not be sufficient to provide the benefits of common accounting practices. This paper examines the causes and consequences of different forms of fair value disclosures for tangible long-lived assets. Insights may assist standard setters and users in understanding the factors influencing firms' current and future accounting choices, and may also interest U.S. standard setters and managers of the almost 250 publicly traded U.S. real estate firms.

Making the Gambler's Fallacy Disappear: The Role of Experience

The Gambler's Fallacy refers to the belief that chance is a self correcting process. The longer the random run of one outcome, the stronger the belief that the opposite outcome is due to appear. This paper asks whether the way we acquire information, by sequential experience or by simultaneous description, plays a critical role in the emergence of the bias in a binary prediction task (betting on red or black roulette outcomes, for example). The results show that the fallacy only occurs when decision makers experience outcomes over time and not when past outcomes are revealed all at once. The question is interesting since several recent papers on decisions from experience and descriptions suggest that the way people acquire information can have a significant effect on behavior.

Opening Platforms: How, When and Why?

It is crucial for firms that create and maintain platforms to select optimal levels of openness. Decisions to open a platform entail tradeoffs between adoption and appropriability, and opening a platform can spur adoption by harnessing network effects, reducing users' concerns about lock-in, and stimulating production of differentiated goods that meet the needs of user segments. At the same time, opening a platform typically reduces users' switching costs and increases competition among platform providers, making it more difficult for them to appropriate rents from the platform. This paper describes research on factors that motivate managers to open or close mature platforms.

Conversational Blindness: Answering the Wrong Question the Right Way

Individuals frequently attempt to avoid questions they do not want to answer, from politicians dodging reporters' requests to clarify their position on when life begins, to employees sidestepping their bosses' questions as to why they are late for the third straight day. Rogers, a recent PhD grad from HBS, and Norton, an assistant professor in the Marketing unit, suggest that when faced with unwanted queries, question-dodgers sometimes exploit conversational blindness—a phenomenon whereby listeners fail to notice when speakers respond to a different question than the one they are asked—by responding with answers that seem to address the question asked, but which in fact address an entirely different question. In the context of political debates, two studies demonstrate conversational blindness, exploring both the conditions that impact the likelihood of such dodges going unnoticed, and how speakers' successful—and failed—attempts to capitalize on conversational blindness impact listeners' opinions of them.

The Architecture of Platforms: A Unified View

Product and system designers have long exploited opportunities to create families of complex artifacts by developing and recombining modular components. An especially common design pattern is associated with the concept of a platform, which Baldwin and Woodard define as a set of stable components that supports variety and evolvability in a system by constraining linkages among the other components. In this paper, the authors shed light on the relationships between platforms and the systems in which they are embedded to better understand and explain firms and industries where platforms play an important role.

Dirty Work, Clean Hands: The Moral Psychology of Indirect Agency

When powerful people do morally questionable things, they rarely interact directly with their putative victims. Mobsters have hit men. CEOs have vice presidents, lawyers, and accountants. More specifically, the powerful are likely to carry out their intentions through the actions of other agents, with varying degrees of explicit direction and control. This working paper describes four studies that explore the effects of such "indirect agency" on moral judgment.

Securing Online Advertising: Rustlers and Sheriffs in the New Wild West

Online advertising remains a "Wild West" where users are faced with ads they ought not believe and where firms overpay for ads without getting the results they were promised. But it doesn't have to be this way. Enforcement by public agencies is starting to remind advertisers and ad networks that long-standing consumer protection rules still apply online. And as advertisers become more sophisticated, they're less likely to tolerate opaque charges for services they can't confirm they received. During the past five years, Edelman has uncovered hundreds of online advertising scams defrauding thousands of users, including all the Web's top merchants. This chapter summarizes some of what he has found and what users and advertisers can do to protect themselves.

Nameless + Harmless = Blameless: When Seemingly Irrelevant Factors Influence Judgment of (Un)ethical Behavior

Most of us regularly make ethical judgments about others' behavior and make decisions regarding whether or not to punish others' unethical behavior. Although many of us know how we would rationally like to behave in these situations, little prior research has explored the systematic errors we commit in the process of evaluating others' unethical behavior and acting upon it. The present research by Gino, Shu, and Bazerman focuses on the effects of both the outcome of unethical acts and the identifiability of the victim of wrongdoing on ethical judgments and decisions to punish unethical behavior.

Responding to Public and Private Politics: Corporate Disclosure of Climate Change Strategies

Social activists are increasingly attempting to directly influence corporation behavior, using tactics such as shareholder resolutions and product boycotts to encourage companies to improve their environmental performance, increase their transparency about operations and governance, and more stringently monitor their suppliers' labor practices. This paper examines how companies are responding to these pressures, in the context of requests for greater transparency about the risks climate change poses to their business—and the strategies these companies have developed to address these risks. This paper reveals that a company is more likely to comply with social activists' requests for greater transparency about climate change when the company itself, or others companies in its industry, has been targeted by formal shareholder resolutions on environmental topics—and when the company is facing potential regulations restricting greenhouse gas emissions. These findings demonstrate that changes in corporate practices may be sparked by both social activists and by the mere threat of government regulations, and that challenges mounted against a specific firm may inspire broader changes within its industry.

The Cost of Property Rights: Establishing Institutions on the Philippine Frontier Under American Rule, 1898-1918

Economists generally agree that a system of transparent and secure property rights is beneficial for growth and development. A large literature emphasizes the role of property rights in spurring long-term investments, improving productivity, changing labor allocations, and increasing access to formal sources of credit. This paper describes U.S. attempts to implement property rights reforms in the Philippines in the early twentieth century. Iyer and Maurer document that, two decades after the arrival of the Americans, property rights in the Philippines had become unambiguously less secure, and that political and budgetary constraints played a large role in inhibiting the progress of reforms.

CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts

(Previous title: "CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks.") This paper investigates whether the failure to meet quarterly earnings benchmarks such as the analysts' consensus forecast matters to CEO and CFO careers, after controlling for both operating and stock return performance and the magnitude of the earnings "surprise" revealed at the earnings announcement. In particular, it evaluates a comprehensive set of career consequences such as the impact on compensation, in the form of bonus and equity grants, and the dismissal of both the CEO and the CFO, conditioned on the failure to meet quarterly earnings benchmarks.

New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability

This paper proposes a set of leading indicators of macrofinancial distress that can be helpful to policymakers and regulators in preparing for, mitigating, and maybe even preventing a credit crisis. These early-warning indicators of crisis are based on modern contingent claims analysis (CCA), which are successfully used today at the level of individual banks by managers, investors, and regulators. The authors' ultimate objective is to provide new tools to help governments and central banks manage financial sector risks.

The Internalization of Advertising Services: An Inter-Industry Analysis

When are advertisers more likely to establish and maintain their own in-house agencies? Despite occasional indications to the contrary, such self-sufficiency has long been viewed by industry observers and scholars as more the exception than the rule in the U.S. advertising and marketing services business. With the background that vertical integration in this industry is a neglected domain of research, analysis by HBS professor emeritus Alvin J. Silk and colleagues suggests that while most large U.S. advertisers rely primarily on independent agencies for advertising services, many other advertisers operate in-house advertising units.

Secrets of the Academy: The Drivers of University Endowment Success

University endowments are important and interesting institutions both in the investing community and society at large. They play a role in maintaining the academic excellence of many universities that rely heavily on income from their endowments. In contrast, poor finances can undermine a school's ability to provide academic services altogether. Endowments have also received much attention recently for their superior investment returns compared with other institutional investors. In this study, the authors document the trends in college and university endowment returns and investments in the United States between 1992 and 2005.

Competing Complements

Over the last two decades, an increasing number of industries have evolved from vertical integration to more horizontal structures where firms design and manufacture components that are later assembled by third parties for the final customer. In these horizontal industries, firms may be "complementors," rather than customers, suppliers, or competitors. Classic examples of complementors include Intel and Microsoft. Similar complementor relationships arise in industries such as communications, consumer electronics, automobiles, and health care. In these industries, complementor analysis may be as important as competitor analysis. The authors of this paper introduce competition into one side of complementor analysis, and suggest implications for managers, public policy, and the development of theory.

Wellsprings of Creation: Perturbation and the Paradox of the Highly Disciplined Organization

Many organizations struggle to balance the conflicting demands of efficiency and innovation. Organizations can become more efficient in the short run by replacing costly, unpredictable problem solving activity with consistent, streamlined routines. However, this efficiency often comes at the cost of long-run adaptability. The more organizational activity is dominated by stable routines, the less the organization learns, and the more rigid and inflexible it becomes. To escape this fate, the authors of this working paper theorize that highly disciplined organizations must actively engage in strategic and selective perturbation of established routines. A perturbation interrupts an established routine and creates an opportunity to innovate and learn. Using illustrations from Toyota, the authors investigate the conditions under which perturbations can sustain exploration in highly disciplined organizations.

Unraveling Yields Inefficient Matchings: Evidence from Post-Season College Football Bowls

Many market institutions have evolved to coordinate the timing of transactions and to prevent them from taking place too early or at uncoordinated times. In the case of post-season college football games, called "bowls," during the early 1990s the determination of which teams would play in which bowls was often made with several games still remaining to be played in the regular season. Practically speaking, this meant that the teams with the best end-of-season records might not play one another, because at the time the matchings were determined it wasn't yet known which teams these would be. Over the last decade, however, this market has undergone a number of reorganizations that have delayed this matching decision until the end of the regular season. For this working paper, the authors used Nielsen rating data on television viewership and the AP sportswriters' poll of team rankings to show that, by matching later, the chance of matching the best teams has increased, and the result is an increase in television viewership.

How Can Decision Making Be Improved?

While scholars can describe how people make decisions, and can envision how much better decision-making could be, they still have little understanding of how to help people overcome blind spots and behave optimally. Chugh, Milkman, and Bazerman organize the scattered knowledge that judgment and decision-making scholars have amassed over several decades about how to reduce biased decision-making. Their analysis of the existing literature on improvement strategies is designed to highlight the most promising avenues for future research.

Traveling Agents: Political Change and Bureaucratic Turnover in India

Politicians and bureaucrats are two important pillars of governance, but while politicians are motivated by short-term electoral pressures, bureaucrats are driven by long-term career concerns. This difference in the nature of their incentives is, in most cases, deliberate and constitutionally provided for. Iyer and Mani address two key questions in this paper: How do politicians facing short-term electoral pressures control bureaucrats with low-powered incentives? In turn, how do bureaucrats respond to these incentives? The authors develop a simple framework and provide empirical evidence on both the politicians' and the bureaucrats' strategies, using a detailed data set on the entire career histories of officers in the Indian Administrative Service, the top layer of government bureaucracy in India.

The Agglomeration of U.S. Ethnic Inventors

The higher concentration of immigrants in certain cities and occupations has long been noted. There has been very little theoretical or empirical work to date, however, on the particular agglomeration of U.S. immigrant scientists and engineers. This scarcity is disappointing given the scale of these ethnic contributions and the importance of innovation to regional economic growth. William R. Kerr's study contributes to our empirical understanding of agglomeration and innovation by documenting patterns in the city-level agglomeration of ethnic inventors (e.g., Chinese, Indian) within the United States from 1975 through 2007. It is hoped that the empirical platform developed in this study provides a foothold for furthering such analyses.

Fixing Market Failures or Fixing Elections? Agricultural Credit in India

There are strong theoretical reasons to believe that politicians manipulate resources under their control to achieve electoral success. Yet, compelling examples of this manipulation are heretofore rarely documented in scholarly literature. Cole's paper presents evidence that government-owned banks in India serve the electoral interests of politicians. It also analyzes how resources are strategically distributed.

Communication (and Coordination?) in a Modern, Complex Organization

Coordination, and the communication it implies, is central to the very existence of organizations. Despite their fundamental role in the purpose of organizations, scholars have little understanding of actual interaction patterns in modern, complex, multiunit firms. To open the proverbial "black box" and begin to reveal the internal wiring of the firm, this paper presents a detailed, descriptive analysis of the network of communications among members of a large, structurally, functionally, geographically, and strategically diverse firm. The full data set comprises more than 100 million electronic mail messages and over 60 million electronic calendar entries for a sample of more 30,000 employees over a three-month period in 2006.

Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?

Government ownership of banks, a common phenomenon, is among the most important policy tools used to influence financial development. But what is the actual effect of such ownership on the financial development of a country? This paper uses a policy experiment in India to evaluate the effect of government ownership of banks on development.

A Replication Study of Alan Blinder's "How Many U.S. Jobs Might Be Offshorable?"

The movement of business activity from developed economies to developing economies—commonly called offshoring—has become the focus of heated debates. Behind these debates lies a pivotal question of scale: How much business activity and how many jobs are at stake? Official statistics are nearly silent, and private-sector researchers vary widely in their estimates of the number of U.S. jobs that have moved offshore, will move offshore, or could move offshore. In an effort to address this gap in prior literature, Princeton economist Alan Blinder released an innovative working paper in 2007 in which he personally reviewed more than 800 occupations in the United States, assessed the "offshorability" of each, and used the evaluations to estimate the total number of U.S. jobs that might be offshorable. Here, HBS research associate Troy Smith and Professor Jan W. Rivkin describe an online exercise that allowed 152 teams of HBS MBA students, collectively, to recreate Blinder's study and to develop insights about the future of offshoring.

The Future of Social Enterprise

This paper considers the confluence of forces that is shaping the field of social enterprise, changing the way that funders, practitioners, scholars, and organizations measure performance. The authors trace a growing pool of potential funding sources to solve social problems, much of it stemming from an intergenerational transfer of wealth and new wealth from financial and high-tech entrepreneurs. They further examine how these organizations can best access the untapped resources by demonstrating mission performance, and then propose three potential scenarios, outlined below, for how this sector might evolve.

Bank Structure and the Terms of Lending to Small Businesses

Access to "soft information" and the greater sensitivity of decentralized banks to the local institutional environment can have both positive and negative consequences for small firms. Hence there may be a dark side to decentralized bank lending in certain instances. This paper argues that the same ability of decentralized banks to act on soft information also makes them more responsive to the local environment when setting terms of their loans. While this can be beneficial for small businesses in competitive markets, it also implies that the organizational structure of decentralized banks might allow them to better exploit their market power in concentrated banking markets by restricting credit or charging higher interest rates from small businesses.

Using Financial Innovation to Support Savers: From Coercion to Excitement

This paper acknowledges the wide range of solutions to the problem of low family savings. Families, and of particular interest to the authors, low-income families, save for a wide variety of purposes, including identifiable reasons such as education and retirement and others that are more broad, like rainy days or emergencies. Given societal pressures to consume, and given the diversity among people, it is unlikely that there is a single solution to the savings problem. Yet a number of programs described by Tufano and Schneider have great promise in supporting household savings. Tufano and Schneider discuss each program from the perspectives of would-be savers as well as from that of other key stakeholders.

Accounting Information as Political Currency

The study of accounting and the political process has long been viewed through the political cost hypothesis, the basic premise of which is that firms manage earnings in order to extract first-order benefits (or avoid first-order costs) from regulators. This paper develops and tests a distinct, yet likely, complementary hypothesis: Firms manage reported earnings in order to supply first-order benefits to regulators. Focusing on Democratic and Republican candidates in congressional races in 2004, Ramanna and Roychowdhury test whether the management of accounting information is in some circumstances akin to a political contribution from firms to politicians: in other words, whether accounting information can be used as political currency. The authors predict and find that identified corporate donors to candidates in closely watched races in 2004 managed information related to outsourcing, a hot-button issue in those races.

Evaluating the Impact of SA 8000 Certification

The Social Accountability 8000 Standard (SA 8000), along with other types of certification standards and corporate codes of conduct, represents a new form of voluntary "private-governance" of working conditions in the private sector, initiated and implemented by companies, labor unions, and nongovernmental activist groups cooperating together. There is an ongoing debate about whether this type of governance represents real and substantial progress or mere symbolism. This paper reviews prior evaluations of private codes of conduct governing workplace conditions, including Ethical Trading Initiative's Base Code, Nike's Code of Conduct, and Fair Trade certification. The authors then discuss several best practices that should be employed in future evaluations of such codes of conduct.

Agency and Institutions: A Review of Institutional Entrepreneurship

Researchers' understanding of institutional entrepreneurship has evolved since the publication of Paul DiMaggio's seminal text "Interest and Agency in Institutional Theory" 20 years ago. In particular, researchers have begun to establish foundations for a theory of institutional entrepreneurship. They have also taken initial steps to capture the process of institutional entrepreneurship. This paper analyzes existing work, and proposes an ambitious research agenda that calls for a more systematic investigation of institutional entrepreneurship.

Gender in Job Negotiations: A Two-Level Game

The traditional division of labor between the sexes—women managing the private realm and men the public—continues to have an indirect influence on job negotiation outcomes through links between private realm and public realm negotiations. Women's negotiations at work are often constrained by agreements in negotiations at home. There still remains a significant "unexplained" difference in male and female compensation that, according to research in the past several years, cannot be accounted for by gender differences in work commitment, education, and experience, or other considerations such as unionization. The literature on gender in negotiation may offer insights with regard to how negotiation contributes to or could help diminish gender differences in compensation. Bowles and McGinn review two bodies of literature on gender in negotiation—one from psychology and organizational behavior on candidate-employer negotiations, and another from economics and sociology on household bargaining over chores and child care.

Accountability and Inequality in Single-Party Regimes: A Comparative Analysis of Vietnam and China

While both China and Vietnam have experienced rapid annual growth over the past two decades, income inequality has risen more rapidly in China than in Vietnam during the same period. Structural and socio-cultural determinants fail to account for these divergent paths, as nearly every variable predicts higher inequality in Vietnam. This paper by Regina Abrami and colleagues focuses on differences in political institutions to explain these divergent paths. In so doing, it contributes to a growing body of literature describing variation in authoritarian regimes, but focuses on variation within one authoritarian regime type.

Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?

This paper demonstrates some of the benefits and limitations of industry self-policing programs. Many self-regulation programs are operated exclusively by the private sector, often in the hope of garnering goodwill with consumers or staving off more stringent government regulation. Less well known are voluntary self-regulation programs operated by government regulators seeking innovative approaches to further regulatory objectives and to stretch shrinking agency budgets. Little is known about the effects of these programs, or how they might contribute to the overall effectiveness of a regulatory regime. Michael Toffel and Jodi Short seek to determine whether the self-policing required under the U.S. Environmental Protection Agency's Audit Policy affects the behavior of regulators and participating facilities and the relationship between them. Specifically, the researchers examine whether self-policing is associated with improved environmental performance at these facilities and whether regulators reduce their scrutiny over self-policing facilities.

Some Neglected Axioms in Fair Division

This paper considers allocation and bargaining problems, and introduces conditions that one might expect fair procedures to satisfy. However, not all conditions one might hope for can be satisfied simultaneously. Furthermore, some apparently plausible and widely proposed axioms and procedures have consequences whose undesirability clearly goes far beyond what can be excused in this way. Thus pitfalls lurk in the field of fair division.

Testing Strategy with Multiple Performance Measures Evidence from a Balanced Scorecard at Store24

To what extent do balanced scorecards provide useful information for testing and validating an organization's strategy? Numerous case studies of balanced scorecard implementations document their use in translating organizational strategies to objectives and measures, communicating strategic objectives to employees, evaluating the performance of business units, and aligning the incentives of employees across business units and functions. There has been comparatively little research, however, on the potential learning and feedback role of balanced scorecards. Analyzing balanced scorecard data from Store24—a privately held convenience store retailer in New England—during the implementation of an innovative but ultimately unsuccessful strategy, this study investigates whether, when, and how information about problems with the firm's strategy was captured in the multiple performance measures of its balanced scorecard.

Organizational Design and Control across Multiple Markets: The Case of Franchising in the Convenience Store Industry

Chain organizations operate units that are typically dispersed across different types of markets, and thus serve significantly different customer bases. Such "market-type dispersion" is likely to compromise the headquarters' ability to control its stores for two reasons: Relative differences in local conditions make it difficult to monitor a store manager's behavior, and a chain with wide-ranging customer bases will have a harder time serving its customers and will need to rely more heavily on store managers' ability to adapt to local needs. This study identifies market-type dispersion as a factor that is systematically related to firms' organizational design choices. The results may help managers and consultants who deal with control challenges related to a chain's geographic expansion into different markets.

Bank Accounting Standards in Mexico: A Layman's Guide to Changes 10 Years after the 1995 Bank Crisis

Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation.

An Exploration of Technology Diffusion

How long are technology adoption lags? Can cross-country differences in technology adoption lags account for a significant fraction of cross-country GDP disparities? Diego Comin of Harvard Business School and Bart Hobijn of the Federal Reserve Bank of New York develop a new benchmark to understand the diffusion process of individual technologies and the consequences that this has for aggregate growth. This benchmark provides a rationale for the evolution of diffusion measures that include how many units of technology each adopter has adopted in addition to the traditional extensive margin. The model is estimated to obtain measures of adoption lags for 15 technologies in 166 countries.

Diffusing Management Practices within the Firm: The Role of Information Provision

Managers face a range of options to diffuse innovative practices within their organizations. This paper focuses on one such technique: providing practice-specific information through mechanisms such as internal seminars, demonstrations, knowledge management systems, and promotional brochures. In contrast to corporate mandates, this "information provision" approach empowers facility managers to decide which practices to actually implement. The authors examine how corporate managers diffused advanced environmental management practices within technology manufacturing firms in the United States. The study identifies several factors that encourage corporate managers to employ information provision, including subsidiaries' related expertise, the extent to which the subsidiaries were diversified or concentrated in similar businesses, and the geographic dispersion of their employees.

Where Does it Go? Spending by the Financially Constrained

Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates.

Bridge Building in Venture Capital-Backed Acquisitions

The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network.

No Harm, No Foul: The Outcome Bias in Ethical Judgments

Too often, workers are evaluated based on results rather than on the quality of the decision. Given that most consequential business decisions involve some uncertainty, the upshot is that organizations wind up rewarding luck rather than wisdom. From a rational decision-making perspective, people's decisions should be evaluated based on the information the decision maker had available to him or her at the time, and not based on the ultimate results. This paper tests predictions about this effect, known as the outcome bias, in two studies in which participants were asked to consider various ethically questionable behaviors. Participants were also given information about the outcome of such behaviors and were asked to rate the ethicality of the described actions with or without the outcome information. The findings extend prior research in psychology and ethics.

Exploring the Duality between Product and Organizational Architectures: A Test of the Mirroring Hypothesis

Products are often said to "mirror" the architectures of the organization from which they come. Is there really a link between a product's architecture and the characteristics of the organization behind it? The coauthors of this working paper chose to analyze software products because of a unique opportunity to examine two different organizational modes for development, comparing open-source with proprietary "closed-source" software. The results have important implications for development organizations given the recent trend toward "open" approaches to innovation and the increased use of partnering in research and development projects.

Incompatible Assumptions: Barriers to Producing Multidisciplinary Knowledge in Communities of Scholarship

Just as flows of knowledge within and across communities of practice improve the quality of new products, knowledge sharing among knowledge workers within interdisciplinary communities may be critical for new discoveries and for a more comprehensive and accurate understanding of phenomena. In spite of this, biologists tend to talk to biologists, economists tend to talk to economists, and lawyers tend to talk to lawyers. This paper argues that producing and disseminating knowledge within a multidisciplinary community of practice is enhanced when knowledge workers hold compatible assumptions, even when the form and content of knowledge generation across those workers varies.

Optimal Deterrence when Judgment-Proof Agents Are Paid In Arrears—With an Application to Online Advertising Fraud

It is commonplace for large entities (both advertisers and ad networks) to enter into relationships with numerous small agents such as Web sites, blogs, search syndicators, and other marketing partners. For example, one well-known affiliate network boasts more than a million affiliates promoting offers from the network's hundreds of merchants, and Google contracts with numerous independent Web sites to show Google's "AdSense" ads. Although these advertising agents are often small, they can take advantage of technology to claim payments they have not earned. In practice, the legal system cannot offer meaningful redress to an aggrieved advertiser or ad network. This paper argues that delayed payment offers a more expedient alternative—a sensible stopgap strategy for use when primary enforcement systems prove inadequate.

Sell Side School Ties

Certain agents play key roles in revealing information into securities markets. In the equities market, security analysts are among the most important. A large part of an analyst's job (perhaps the majority) is to research, produce, and disclose reports forecasting aspects of companies' future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is important. Do analysts gain comparative information advantages through their social networks—specifically, their educational ties with senior officers and board members of firms that they cover? This paper investigates ties between sell-side analysts and management of public firms, and the subsequent performance of their stock recommendations.

Modeling Expert Opinions on Food Healthiness: A Nutrition Metric

Despite an increased standard of living in the United States and other developed countries, health problems attributable to poor nutrition persist in part due to consumers' inability to translate the dietary advice of nutrition experts into anything actionable. Citing the improvement of public health as a primary objective, numerous studies have highlighted the need for a nutritional scoring system that is both comprehensive in its coverage of food products and easily understood by consumers. In this paper the researchers advance this objective by proposing a nutrition metric that is based on the current views of leading experts in the field. The metric can be used to score any food or beverage for which several component nutrient quantities are known.

An Investigation of Earnings Management through Marketing Actions

Earnings management behavior may be divided into two categories: 1) the opportunistic exercise of accounting discretion; and 2) the opportunistic structuring of real transactions. This paper focuses on the latter by providing evidence that managers use retail-level marketing actions (price discounts, feature advertisements, and aisle displays) to influence the timing of consumers' purchases in relation to their firms' fiscal calendars and financial performance. The results will be of interest to practitioners negotiating with suppliers as well as those responsible for setting price and promotion strategy in response to competitor actions, and practitioners responsible for designing incentive-based compensation as well as regulators monitoring reporting of fiscal period-ending promotion.

Allocating Marketing Resources

Deciding how to allocate marketing resources is particularly difficult because decisions need to be made at many different levels—across countries, products, marketing mix elements, and different vehicles within elements of the mix (e.g., television versus the Internet for advertising). With the increasing availability of data and sophistication in methods, it is now possible to more judiciously allocate marketing resources. In this paper, HBS professors Gupta and Steenburgh discuss a two-stage process where a model of demand is estimated in stage-one and its estimates are used as inputs in an optimization model in stage-two. The researchers propose a matrix with three approaches for each of these two stages, and discuss the pros and cons of these methods. They highlight each method with applications and case studies to present rigorous yet practical approaches to making marketing resource allocation decisions.

Finding Missing Markets (and a disturbing epilogue): Evidence from an Export Crop Adoption and Marketing Intervention in Kenya

Why do farmers continue to grow crops for local markets when crops for export markets are thought to be much more profitable? Answers may include missing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets, lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets. Ashraf and colleagues conducted an experimental trial with DrumNet, a social enterprise of Pride Africa, a nongovernmental organization, to evaluate whether a package of services can help farmers adopt, finance, and market export crops, and thus earn more income. This experiment was motivated by a recent push in development to build sustainable interventions that help complete missing markets.

Board of Directors' Responsiveness to Shareholders: Evidence from Shareholder Proposals

How well do boards of directors respond to shareholder concerns? The recent wave of corporate scandals has raised questions about the effectiveness of boards in their monitoring role. The subsequent reform debate focused on enhancing boards' independence from management, increasing their accountability to shareholders through a different board election system, and improving boards' internal processes and practices. One direct example of this alleged lack of responsiveness to shareholder concerns is the historically low frequency of adoption of non-binding shareholder proposals receiving a majority vote, even when the vote is overwhelmingly in favor of the proposal and has been repeated for a number of years. Ignoring majority-vote shareholder proposals may be increasingly expensive, however, both for the targeted firms and for the individual directors. HBS professor Ferri and coauthors analyze the frequency of implementation of non-binding, majority-vote shareholder proposals and examine the determinants and consequences of the boards' implementation decisions.

Testing a Purportedly More Learnable Auction Mechanism

Each year, auctions are used to determine how billions of dollars of goods and services will be allocated across the globe. On eBay alone, $52.5 billion in merchandise was exchanged in 2.4 billion auctions conducted during fiscal year 2006. Considerable attention has been paid in the academic literature to the question of how to design auctions with efficient allocation and revenue-maximizing properties. However, in part because auction rules are typically published and standard theory assumes economic agents are capable of computing optimal strategies from published rules, little attention has been paid to the question of how to design auctions whose optimal strategies are easy to learn. Evidence suggests that even when auction rules are published and dominant strategies exist, people nonetheless struggle and sometimes fail to learn to play their optimal strategy. As a result, the authors argue that the question of how to design a learnable, strategy-proof auction mechanism is an important one.

Colonial Land Tenure, Electoral Competition and Public Goods in India

How is the impact of historical institutions felt today? This comparative analysis by Banerjee and Iyer highlights the impact of a specific historical institution on long-term development, specifically the land tenure systems instituted during British colonial rule. The paper compares the long-term development outcomes between areas where controls rights in land were historically given to a few landlords and areas where such rights were more broadly distributed. The paper also documents the impact of these differing historical institutions on political participation and electoral competition in the post-colonial period.

Long-Run Stockholder Consumption Risk and Asset Returns

The long-run consumption risk of households that hold financial assets is particularly relevant for asset pricing. The fact that stockholders are more sensitive to aggregate consumption movements helps explain why the consumption risk of stockholders delivers lower risk aversion estimates. Understanding further why consumption growth, particularly that of stockholders, responds slowly to news in asset returns will improve finance scholars' understanding of what drives these long-run relations. HBS professor Malloy and his coauthors examine more disaggregated measures of long-run consumption risks across stockholders and non-stockholders, and provide new evidence on the long-run properties of consumption growth and its importance for asset pricing.

Consumer Demand for Prize-Linked Savings: A Preliminary Analysis

Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States.

Do Legal Origins Have Persistent Effects Over Time? A Look at Law and Finance around the World c. 1900

A significant number of recent papers find legal origins to be strongly correlated with current indices of rule of law, financial development, the regulation of entry and labor, and the concentration of ownership, among other things. Few studies, however, have explored whether correlations between institutions and economic and financial outcomes hold in the past. For this reason, we cannot be certain that the alleged persistence of the effects of these institutions passes the scrutiny of history. This paper examines specifically the relationship between legal origins and financial development by analyzing countries' legal traditions and the extent of investor protections and financial development over time.

Embracing Commitment and Performance: CEOs and Practices Used to Manage Paradox

How do chief executives establish strategic practices around their visions and intents? How do such practices make it possible to create both high commitment and high performance? The central puzzle for HBS professor emeritus Michael Beer and colleagues is not the creation of high commitment per se, but the kind of commitment that is useful for the implementation of strategy and sustainable performance. Beer et al. sought out major companies in North America and Europe that had a history of sustainable, above-average financial performance, and where there were indications of the companies being high-commitment organizations. They then conducted in-depth interviews with 26 CEOs of such companies, asking about activities and practices that help create commitment and performance.

Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950

The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. The case of Brazil is particularly interesting because, in Latin America before World War I, it boasted the second-largest equity market and largest number of traded companies. As HBS professor Aldo Musacchio shows, the considerable variation of investor protections over time at the country level, and even at the company level, urges cautions against notions about the persistency of institutions, especially of legal traditions.

Unconventional Insights for Managing Stakeholder Trust

Most organizations understand the need to manage stakeholder trust. The bad news: Most organizations don't really understand how to manage the difficult job effectively. However, for those companies wishing to reap the benefits of improved cooperation with suppliers, increased motivation and productivity among employees, enhanced loyalty among customers, and higher levels of support from investors, managing stakeholder trust is a prudent, if not critical investment. Trust management may require an appreciation for some unconventional insights regarding the appropriate investment of resources. Stakeholders differ in regard to the kinds and degrees of vulnerability they face; what they need to believe before they will trust also differs. Would-be trust managers will be wise to consider these varying needs and to anticipate the tradeoffs that exist in strengthening relationships with specific stakeholders.

The Small World of Investing: Board Connections and Mutual Fund Returns

How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks.

Psychological Influence in Negotiation: An Introduction Long Overdue

This paper attempts to encourage a better dialogue between research on social influence and on negotiation. It provides an overview of the literature on both areas, and identifies opportunities for creating more effective and useful research. First, HBS professors Deepak Malhotra and Max Bazerman identify those elements of psychological influence that do not require the influencer to change the economic or structural aspects of the bargaining situation in order to persuade the target. Second, they review prior research on behavioral decision-making in negotiation to identify those ideas that may be relevant to influence in negotiation. Third, they provide a framework for thinking about how to leverage behavioral decision research to wield influence in negotiation. Fourth, they consider how targets of influence might defend against these tactics. Fifth, because psychological influence is, by definition, aimed at achieving one's own ends through the strategic manipulation of another's judgment, they consider the ethical issues surrounding its application in negotiation.

Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice

Retirement assets make up a large and growing percentage of the mutual fund universe. In 2004, nearly 40 percent of all mutual fund assets were held by defined contribution plans and individual retirement accounts. This percentage is steadily increasing largely because these retirement accounts represent the majority of new flows into non-money market mutual funds. With such a large and growing percentage of their assets coming from retirement accounts, mutual funds are likely to be interested in securing these big clients. This paper examines a new channel through which mutual fund families can attract assets: by becoming a 401(k) plan's trustee. HBS professor Lauren Cohen and colleague Breno Schmidt provide evidence consistent with the trustee relationship affecting families' portfolio choice decisions. These portfolio decisions, however, have the potential to be in conflict with the fiduciary responsibility mutual funds have for their investors, and can impose potentially large costs.

On Best-Response Bidding in GSP Auctions

Keyword auctions have become a critical source of revenue for Google and Yahoo!, among others. This new form of advertising has provided a new way for advertisers to reach customers. But advertisers also face the complex task of optimizing bids to increase their exposure while avoiding unnecessary costs. HBS professor Benjamin Edelman and colleagues analyzed a class of bidding strategies that attempt to increase advertiser utility under limited assumptions about other players' behavior. Under a strategy they call Balanced Bidding (BB), advertisers converge to the advertiser-preferred equilibrium—achieving stability of bids and reducing advertisers' costs relative to other possible outcomes.

Peer Effects and Entrepreneurship

How do your coworkers affect your decision to become an entrepreneur? The vast majority of entrepreneurs launch their new ventures following a period of employment in established organizations. To date, factors such as the degree of bureaucracy that individuals have experienced have been shown to shape their likelihood to go into business for themselves. But socialization matters, too. Nanda and Sørensen show that the career experiences of coworkers shape both the information and the resources available to prospective entrepreneurs, as well as the value that individuals attach to entrepreneurial activity as a career choice.

Cost of External Finance and Selection into Entrepreneurship

Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. Research shows that entrepreneurs comprise fewer than 9 percent of households in the United States but they hold 38 percent of household assets and 39 percent of the total net worth. This relationship between personal wealth and entrepreneurship has long been seen as evidence of market failure, meaning that talented but less wealthy individuals are precluded from entrepreneurship because they don't have sufficient wealth to finance their new ventures. Nanda studied how changes in the cost of external finance affected the characteristics and likelihood of individuals becoming entrepreneurs. He finds that market failure accounts for only a small fraction of the relationship between personal wealth and entrepreneurship in advanced economies such as the U.S.

What Do Non-Governmental Organizations Do?

Non-governmental organizations play an increasingly important role in international development. They serve as a funnel for development funds both from individual donors in wealthy countries and from bilateral aid agencies. At the same time, NGOs are frequently idealized as organizations committed to "doing good" while setting aside profit or politics—a romantic view that is too starry-eyed. Development-oriented NGOs, which have existed for centuries, have played a growing role in development since the end of World War II; there are currently 20,000 international NGOs. This paper argues that the strengths of NGOs and their weaknesses easily fit into economists' conceptualization of not-for-profit contractors.

The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry

What factors should influence the design of a complex system? And what is the impact of choices on both product and organizational performance? These issues are of particular importance in the field of software given how software is developed: Rarely do software projects start from scratch. The authors analyzed the evolution of a commercial software product from first release to its current design, looking specifically at 6 major versions released at varying periods over a 15-year period. These results have important implications for managers, highlighting the impact of design decisions made today on both the evolution and the maintainability of a design in subsequent years.

Competition in Modular Clusters

The last 20 years have witnessed the rise of disaggregated "clusters," "networks," or "ecosystems" of firms in a number of industries, including computers, telecommunications, and pharmaceuticals. In these clusters, different firms design and produce the various components of a complex artifact (such as the processor, peripherals, and software of a computer system), and different firms specialize in the various stages of a complex production process. This paper considers the pricing behavior and profitability of these so-called modular clusters. Baldwin and Woodard isolate the offsetting price effects in a model, and show how they might operate in large as well as in small clusters.

The Political Economy of "Natural" Disasters

With the onset of global warming, it is likely that the incidence of natural shocks will only increase in the years ahead. In addition, rising inequality between rich and poor countries combined with a commitment on the part of developed countries to increase foreign aid disbursements indicates that international relief in natural disasters will grow. Disaster relief is one of the most basic and important transfers of wealth between developed and developing countries. This paper argues that the relief enters and affects a highly political situation. It also argues that the political economy of natural disasters is understandable and predictable, and may be mitigated.

See No Evil: When We Overlook Other People's Unethical Behavior

Even good people sometimes act unethically without their own awareness. This paper explores psychological processes as they affect the ethical perception of others' behavior, and concludes with implications for organizations. First, there is a tendency for people to overlook unethical behavior in others when recognizing such behavior would harm them. Second, people might readily ignore unethical behavior when others have an agent do their dirty work for them. Third, gradual moral decay leads people to grow comfortable with behavior to which they would otherwise object. Fourth, the tendency to value outcomes over processes can lead us to accept unethical processes for far too long.

A Resource Belief-Curse: Oil and Individualism

Capitalism is not as widespread as economists would hope. Data from surveys of public opinion, as well as on the distribution of political parties, confirm the idea that capitalism doesn't flow to poor countries. In some countries, anti-market sentiment has increased in recent years, a period where the price of oil and other primary commodities have soared. This combination of anti-market sentiment and high oil prices has led to renegotiations of oil contracts and even nationalizations in some countries such as Bolivia and Venezuela. It is tempting for economists trained in the theory of political capture to argue that this is just another instance where special interests exploit the circumstances to make an extra dollar. Given that these nationalizations are often popular with the majority of voters, however, the researchers resist this temptation and ask if there are explanations where a positive correlation emerges between voter anti-market sentiment and dependence on oil.

Acting Globally but Thinking Locally? The Influence of Local Communities on Organizations

It is a paradox that in a globalizing and "boundaryless" economy, factors associated with local communities—such as interpersonal networks, laws, and tax rates, among others—remain important for understanding organizational behavior. As Marquis and Battilana argue, communities influence organizational behavior not only as local markets and resource environments, but also through a number of institutional pressures. Focusing on communities as institutional environments provides fresh theoretical insights into organizational behavior, in addition to offering a more unified perspective to the diverse set of research that is emerging on local communities.

Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations

What factors drive platform success, long-run market structure, and market efficiency? Conventional wisdom suggests that for a new platform to be successful, either it must make its technology compatible with the incumbent, or its technical advantage must offer so much value to consumers that it exceeds the combination of functionality, installed base, and complementary goods value offered by the incumbent. Zhu and Iansiti develop a dynamic model to examine the evolution of platform-based markets. They find that a huge quality advantage may not be necessary for an entrant to be successful. Using data from the video game industry, they find support for their theoretical predications.

The "Fees → Savings" Link, or Purchasing Fifty Pounds of Pasta

Discount membership clubs have a large and growing presence in retail—one recent survey reported that Costco sells to 1 in every 11 people in the United States and Canada, and warehouse clubs are estimated to be a $120 billion industry today in the United States alone. As a result, many people have had the experience of entering one of these popular clubs and leaving hours later with more goods than can fit in their car. One rational reason for such behavior is that membership clubs do offer lower prices than other retailers. However, Norton and Lee offer a counterintuitive explanation for such buying behavior. They propose that the presence of membership fees alone—independent of the actual savings on any given product—can lead consumers to infer a "fees → savings" link, leading them to spend more than they otherwise would to capitalize on these perceived "great deals." Norton and Lee explore this phenomenon by setting up their own "membership clubs" and comparing profits across stores with varying membership fees.

The Dynamic Interplay of Inequality and Trust: An Experimental Study

Trust makes economic agents more willing to engage in interactions involving the risk of being deceived. Like a lubricant, trust may positively influence efficiency and economic growth, and at the same time affect the distribution of wealth within an economy. However, trust is difficult to measure on both the microeconomic and the macroeconomic level. Survey data frequently discover individual attitudes toward trust, but cannot easily identify to what extent such self-reported attitudes reflect economic behavior, and how trust interacts with the dynamics of efficiency and distribution. This paper complements empirical and survey literature on the relationship between inequality and trust with the help of experimental games, which systematically investigate the dynamic interplay of trust, efficiency, and distribution.

Accountability in Complex Organizations: World Bank Responses to Civil Society

What difference has civil society activism made to the World Bank? More specifically, how and to what extent have civil society actors furthered the accountability of the World Bank to its constituents? The case of the World Bank is important for 2 main reasons: The Bank has not only been a major target of civil society activism, but it has also been comparatively responsive in developing various forms of engagement with civil society, possibly more than any other multilateral institution. This paper describes key accountability challenges facing the institution and reviews accountability mechanisms currently in place at 4 different organizational levels. It then explores efforts from civil society groups to increase accountability, and notes the successes and failures of these reform efforts.

Recognizing the New: A Multi-Agent Model of Analogy in Strategic Decision-Making

Firms must discover and pursue viable strategic positions particularly during times of change, in the early phases of a new industry, or after a discontinuity of some sort. At these times, the context of choice is typically hard to interpret: Among other reasons, knowledge of cause-and-effect relationships is unavailable or difficult to obtain, the nature of industry participants is ambiguous, and opportunities are ill-defined. What underlies the intelligence of strategic choice in these settings? This paper argues that recognition is essential to such choices for both individuals and groups. Recognition refers to a class of cognitive processes through which a problem or situation is interpreted associatively in terms of something that has been experienced before. The paper models recognition processes in groups of decision-makers and shows how a few select group-level characteristics might improve recognition outcomes.

Mental Accounting and Small Windfalls: Evidence from an Online Grocer

In the course of daily life, people occasionally receive small windfalls. Every so often we are handed a gift certificate for $5 off a meal, find a $10 bill on the street, or win $20 in an impromptu game of poker. According to standard economic theory, these types of small windfalls should have no noticeable effect on spending decisions because such windfalls constitute meaningless changes to lifetime wealth. However, if you have ever been the recipient of a small windfall, you may remember thinking about ways to spend this unexpected cash, buying items you might not have otherwise purchased. This kind of behavior can be interpreted as an example of "mental accounting" as theorized by economists Richard H. Thaler and Hersh M. Shefrin. This paper presents evidence supporting some of the implications of a theory of mental accounting in the domain of online grocery shopping.

How Firms Respond to Being Rated

(Previously titled "Shamed and Able: How Firms Respond to Information Disclosure.") As national governments lose the ability to regulate business activities, interest groups and concerned citizens are turning to private governance to monitor global supply chains, ensure product safety, and provide incentives for improved corporate environmental performance. Proponents hope that private governance incentives will encourage firms to act responsibly, but critics worry that these developments will merely forestall necessary government regulation. Social ratings provide one way to benchmark and compare firms' social performance. But are such ratings schemes effective? This paper investigates the effects of third-party environmental ratings, and finds that firms are particularly likely to respond to such ratings by improving their environmental performance when two circumstances arise simultaneously: (1) when the ratings threaten their legitimacy, and (2) when they face relatively low cost improvement opportunities.

Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making

Many of the most important problems facing the world today are exacerbated by myopic decision-making. Examples include climate change, under-saving for retirement, deficit spending, and obesity. As observed by Freud, contemporary psychologists and researchers, and entertainers, people everywhere struggle to choose between doing what they want to do and what they should do. This paper synthesizes 15 years of empirical explorations of this "want/should" conflict and discusses the most important applications of this work. The results of recent studies have the potential to help individuals and policymakers by arming them with insights about how to increase the chances that they and their constituents, respectively, will favor options that are in their best interest.

Fair (and Not So Fair) Division

"Fair" could be defined as what people of good will would want to be. This does not constitute an operational definition, however. This paper provides a specific procedure to calculate what could be considered fair and reasonable for various situations that require a fair division. A simple example would be a family that has inherited objects of artistic and/or sentimental value and wants to divide them up fairly while taking into account differences in taste. Laymen, mathematicians, and economists all have their own proposals for creating a fair division. Pratt suggests a procedure that, when put to the test of a range of examples, produces outcomes that accord with our intuitive sense of what is fair and desirable while previously proposed procedures do not.

The Causes and Consequences of Industry Self-Policing

The corporate confession is a paradox, as described in this paper aimed at managers, policymakers, and citizens. Why would a firm that identifies regulatory compliance violations within its own operations turn itself in to regulators, rather than quietly fix the problem? Economic intuition suggests that firms will self-disclose violations only when the cost of doing so is less than the expected cost of hiding violations. However, while the cost of doing so can be increased regulatory scrutiny, there is often almost no expected cost of hiding violations. To explore the complex behavior of corporate self-disclosure, Short and Toffel conducted a large-scale analysis in the context of the U.S. Environmental Protection Agency's Audit Policy. They investigated what factors lead organizations to self-disclose violations that went undiscovered by regulators, and asked whether these self-disclosing organizations were obtaining any unofficial regulatory benefits above and beyond formal penalty mitigation. They also evaluated whether self-policing promotes the regulatory objective of improving compliance records.

Team Familiarity, Role Experience, and Performance:Evidence from Indian Software Services

In contexts ranging from product development to service delivery, a significant amount of an organization's work is conducted by "fluid teams" that strive for innovative output. Fluid project teams exist only for the duration of a single project, and are comprised of members who may join or leave a team during the course of a project. In such settings, simple measures of cumulative output may not accurately capture team experience, particularly when changes in team composition are substantial over time. This study of an Indian software services firm, Wipro Technologies, considers an approach for capturing the experience held by fluid teams. It extends the concept of team fluidity in a way that allows for greater granularity in the measurement of team experience and a finer understanding of the determinants of team performance.

Digital Interactivity: Unanticipated Consequences for Markets, Marketing, and Consumers

For digital marketing practice and theory, the last decade has brought two related surprises: the rise of social media and the rise of search media. Marketing has struggled to find its place on these new communication pathways. Old paradigms have been slow to die. This paper reviews early beliefs about interactive marketing, then identifies 5 discrete roles for interactive technology in contemporary life and 5 ways that firms respond. It concludes that the new media are rewarding more participatory, more sincere, and less directive marketing styles than the old broadcast media rewarded.

Intra-Industry Foreign Direct Investment

One of the enduring puzzles for researchers on FDI has been the role and importance of "horizontal" and "vertical" FDI. Horizontal FDI tends to mean locating production closer to customers and avoiding trade costs. Vertical FDI, on the other hand, represents firms' attempts to take advantage of cross-border factor cost differences. A central challenge for study has been the absence of firm-level data to distinguish properly among the types of and motivations for FDI. Alfaro and Charlton analyzed a new dataset, and in this paper present the first detailed characterization of the location, ownership, and activity of global multinational subsidiaries.

Strategic Interactions in Two-Sided Market Oligopolies

Strategic interactions and the logic of competitive advantage in 2-sided markets are fundamentally different than in traditional, 1-sided markets. For instance, an investment that decreases a firm's costs may increase the profits of its competitors and decrease the profits of the firm undertaking the investment. Such surprising effects arise because of the possibility that 2-sided platforms may end up subsidizing the participation of 1 side. There are also important implications for antitrust scholars: tying and other practices that may appear as harming competition in 1-sided markets can in fact benefit competitors in 2-sided markets.

Modularity, Transactions, and the Boundaries of Firms: A Synthesis

For the last 30 years economists have used the concepts of "transaction," "transaction cost," and "contract" to illuminate a wide range of phenomena, including vertical integration; the design of employment, debt, and equity contracts; and the structure of industries. These concepts are now deeply embedded in the fields of economics, sociology, business, and law. Theories explain how to choose between different forms of transactional governance. But why does a transaction occur where it does? Without this answer, the forces driving the location of transactions in a system of production remain largely unexplored. This paper explains the location of transactions (and contracts) in a system of production. It also presents a theory of technological change that predicts changes in the location of transactions and therefore in the structure of industries.

Evidence on the Effects of Unverifiable Fair-Value Accounting

Since the late 1990s, the Financial Accounting Standards Board (FASB) has pressed for the use of fair values in accounting. When such fair values are based on verifiable market prices, they are less likely to be managed. However, in some FASB standards, fair values are based on managers' or appraisers' unverifiable subjective estimates. Agency theory suggests that managers will take advantage of this unverifiability to manage financial reports in order to extract rents. This paper considers a recent FASB standard known as SFAS 142, which relies on unverifiable fair-value estimates when accounting for acquired goodwill. The goal of the research is to see whether firms are using this standard to manage their financial reports.

The Ethnic Composition of U.S. Inventors

The contributions of immigrants to U.S. technology formation are staggering. While the foreign-born account for just over 10 percent of the U.S. working population, they represent 25 percent of the U.S. science and engineering workforce and nearly 50 percent of those with doctorates. Even looking within the Ph.D. level, ethnic researchers make an exceptional contribution to science as measured by Nobel Prizes, election to the National Academy of Sciences, patent citation counts, and so on. The magnitude of these ethnic contributions raises many research and policy questions: 4 examples are debates regarding the appropriate quota for H1-B temporary visas, the possible crowding out of native students from the science and engineering fields, the brain-drain or brain-circulation effect on sending countries, and the future prospects for U.S. technology leadership. This paper describes a new approach for quantifying the ethnic composition of U.S. inventors with previously unavailable detail.

Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates

This paper documents the existence of considerable variation over time in the covariance or correlation of Treasury bond returns with stock returns and with consumption growth. There are times in which bonds appear to be safe assets, while at other times they appear to be highly risky assets. The paper finds that time variation in bond risk is systematic and positively related to the level and the slope of the yield curve. These are factors that proxy for inflation and general economic uncertainty, inflation risk, and the risk premium on bonds.

Diversification of Chinese Companies: An International Comparison

Many observers have argued that Chinese managers are particularly quick to diversify their enterprises. Fueled by robust economic growth and the scant enforcement of intellectual property rights that could serve as barriers to entry, Chinese companies appear to be aggressively expanding into new industries whenever economic opportunities appear to beckon. There is much anecdotal evidence to support this view. But because the Chinese economy is extraordinarily large and dynamic, it is difficult to know whether anecdotes reflect an underlying trend toward greater diversification. This paper provides systematic evidence about the scope of Chinese companies, and compares the data with the evolution of firm scope in 8 other large economies.

Why We Aren't as Ethical as We Think We Are: A Temporal Explanation

People commonly predict that they will behave more ethically in the future than they actually do. When evaluating past (un)ethical behavior, they also believe they behaved more ethically than they actually did. These misperceptions, both of prediction and of recollection, have important ramifications for the distinction between how ethical we think we are and how ethical we really are, as well as understanding how such misperceptions are perpetuated over time. This paper draws on recent research in psychology and decision-making to gain insight into these forces. It also provides recommendations for reducing them.

The Excess Burden of Government Indecision

Virtually all U.S. policymakers, budget analysts, and academic experts agree that the United States faces a very serious, if not a grave, long-term fiscal problem. Yet few policymakers will publicly say how or when they would fix it, perhaps because they fear being the bearer of bad news and getting voted out of office. Delaying the resolution of fiscal imbalances incurs two costs, however. First, it leaves a larger bill for a smaller number of people to pay. Second, and of primary interest to this research, it perpetuates uncertainty, leading economic agents to make suboptimal saving, investment, and other decisions, and reducing welfare. This research identifies and measures this "excess burden" of government indecision and finds that it is economically significant.

Global Currency Hedging

This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures.

Why Do Intermediaries Divert Search?

(Previously titled "Designing a Two-Sided Platform: When to Increase Search Costs?") Conventional wisdom holds that at the most fundamental level, market intermediaries exist in order to reduce search and transaction costs among the parties they serve and that they are more valuable the larger the cost savings they generate. This would seem to be true of both traditional, brick-and-mortar intermediaries (retailers, shopping malls, brokers, magazines, market exchanges) and "new economy" ones (Amazon, eBay, iTunes, Yahoo), all of which connect buyers and sellers of goods or services. However, many intermediaries, while providing the relevant information, seem at some stage of the process to do the opposite of reducing search costs—and by purposeful design rather than by accident. Retail stores, for instance, stack the products they carry so that the most sought-after items are hard to find and thereby induce consumers to walk along aisles carrying other products. This paper challenges the conventional wisdom that intermediaries create value by reducing search and transaction costs. It proposes a model that sheds light on the economic motivations that in some contexts may lead intermediaries to make it harder for the parties they serve—consumers and third-party sellers—to find each other.

Exclusivity and Control

Music, television shows, movies, Internet and mobile content, computer software, and other forms of media often require a consumer to join a platform in order to access or utilize the media. This affiliation may take the form of a subscription to a distribution channel or purchase of a hardware device. One of the primary means of differentiation and competition between platforms for consumer adoption is the acquisition of premium or quality content. However, whether or not certain content is exclusive to one platform or is present on multiple platforms varies significantly from industry to industry. One can even view Apple's exclusive U.S. provision of the iPhone to AT&T as even more variation in the degree of exclusivity across industries. Why is it that some forms of content are available only on one platform, while others are distributed through several or all platforms available—that is, they "multihome"? This paper analyzes industry propensity for exclusivity and presents a model of platform competition. The key driving force is the nature of the relationship between the content and the platforms: outright sale (all control rights, particularly over content pricing, are transferred from the content provider to the platform) or affiliation (the content provider maintains control rights over pricing).

Innovation through Global Collaboration: A New Source of Competitive Advantage

Collaboration is becoming a new and important source of competitive advantage. No longer is the creation and pursuit of new ideas the bastion of large, central R&D departments within vertically integrated organizations. Instead, innovations are increasingly brought to the market by networks of firms, selected according to their comparative advantages, and operating in a coordinated manner. This paper reports on a study of the strategies and practices used by firms that achieve greater success in terms of business value in their collaborative innovation efforts.

Hedge Fund Investor Activism and Takeovers

Are hedge funds better than large institutional investors at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover? Are they best equipped to monitor management? While blockholding by large institutional investors—pension funds and mutual fund investment companies—is widespread, there is virtually no evidence that these institutional shareholders are effective monitors of management or that their presence in the capital structure increases firm value. When institutional blockholders make formal demands on management, there is no evidence of their success. This working paper outlines the advantages and limits of hedge funds to manage these tasks. Greenwood and Schor's characterization differs markedly from previous work on investor activism, which tends to attribute high announcement returns to improvements in operational performance.

Improving Patient Outcomes: The Effects of Staff Participation and Collaboration in Healthcare Delivery

Health-care organizations have a well-documented, industry-wide need to improve their processes. To that aim, the Institute of Medicine has made at least 2 recommendations that focus on front-line staff—physicians, nurses, and respiratory therapists. The first recommendation states that front-line staff should be involved in unit decision-making and the design of work processes and workflow (participation). The second emphasizes respectful interactions among front-line staff, including information-sharing and coordinating activities to achieve organizational goals (collaboration). This study provides preliminary supporting evidence for the Institute of Medicine's recommendations to use a dual, front-line strategy of participation and collaboration to improve patient outcomes.

Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry

Several recent studies have highlighted the important role that cross-border ethnic networks might play in facilitating entrepreneurship in developing countries. Little is known, however, about the extent to which domestic entrepreneurs rely on the diaspora and whether this varies systematically by the characteristics of the entrepreneurs or their local business environment. The Indian diaspora is estimated at over 18 million people spanning 130 countries. Given that formal institutions in India remain weak and hence the informal barriers to trade are higher, do diaspora networks serve as substitutes to the functioning of the local business environment? Do they help entrepreneurs to circumvent the barriers to trade arising from imperfect institutions? This study examines the extent to which software entrepreneurs within India vary in their reliance on expatriate networks.

Economic Catastrophe Bonds

Pooling economic assets into large portfolios and tranching them into sequential cash-flow claims has become a big business, generating record profits for both the Wall Street originators and the agencies that rate these securities. This paper by business economics doctoral student Jakub Jurek and HBS professors Joshua Coval and Erik Stafford investigates the pricing and risks of instruments created as a result of recent structured finance activities. It demonstrates that senior collateralized debt obligation (CDO) tranches have significantly different systematic risk exposures than their credit rating-matched, single-name counterparts, and should therefore command different risk premia.

Toward a Theory of Behavioral Operations

Research in psychology over the past several decades teaches us that behavioral biases and cognitive limits are not just "noise"; they systematically affect (and often distort) people's judgment and decision making. Despite such advances, however, most scholarly research in operations management still assumes that agents—be they decision makers, problem solvers, implementers, workers, or customers—either are fully rational or can be induced to behave rationally, usually with economic incentives. This paper builds on earlier studies to explore the theoretical and practical implications of incorporating behavioral and cognitive factors into operations management models. It then points to fruitful areas for future research.

Managing Proprietary and Shared Platforms: A Life-Cycle View

The challenges facing platform managers vary systematically depending on (1) whether the platform is proprietary or shared and (2) the stage of platform development. This article summarizes the results of a multiyear research project on platform strategies, including interviews with 30 companies. It describes 3 stages of the platform life cycle—platform design, network mobilization, and platform maturity—and reviews in depth the strategic decisions and management issues for each stage.

The Persuasive Appeal of Stigma

Are minority groups more persuasive when their conversations with majority groups are conducted face-to-face? Interracial interactions are among the most perilous social occasions in contemporary America, full of opportunities for things to go awry. People in stigmatized groups, for instance, may worry that members of majority groups hold prejudiced attitudes that can lead to discriminatory or offensive behavior. Members of majority groups, for their part, may fear coming across as biased or racist. While psychology has traditionally explored the damaging effects of such interactions on social exchange, new findings contribute to the growing recognition that stigma may be a two-sided construct, marked with a host of costs but occasional benefits. This study demonstrates the persuasive power of stigmatized individuals and shows how self-presentational concerns may change attitudes.

Platform Envelopment

Established platform providers can be difficult to displace. This paper explores a path to platform leadership change that does not rely on breakthrough innovation or Schumpeterian creative destruction: a phenomenon the authors call "platform envelopment." In practical terms, envelopment entails one platform provider adding another platform's functionality to its own, and then offering a multiplatform bundle. Eisenmann and his colleagues describe a variety of envelopment attacks based on the relationship between the attacker's platform and its target's, and then discuss the economic and strategic motivations for each attack type.

Film Rentals and Procrastination: A Study of Intertemporal Reversals in Preferences and Intrapersonal Conflict

Throughout our lives, we face many choices between activities we know we should do and those we want to do. Examples of such choices include whether or not to visit the gym, to smoke, to order a greasy pizza or a healthy salad for lunch, and to watch an action-packed blockbuster or a history documentary on Saturday night. Using data on consumption decisions over time from an Australian online DVD rental company, this paper investigates how and why individuals make systematically different decisions when their choices will take effect in the present versus the future.

Alignment in Cross-Functional and Cross-Firm Supply Chain Planning

Organizational behavior has become an increasingly important aspect of operations management. In this paper, alignment refers to an organization's sales and manufacturing groups working toward the same target for the sales of a particular product. What are the best conditions in supply chain planning for alignment across functions and across the firm? Kraiselburd and Watson push the frontier of theory with their use of mathematical modeling and game theory. They show that seemingly behavioral and psychological effects may still occur if both parties are rational profit maximizers in an economic sense.

Contracting in the Self-reporting Economy

Intellectual property can be used by its owner directly, licensed to a third party for a fixed royalty, or licensed to a third party for a variable royalty. The variable royalty arrangement depends on self-reporting by the licensee, which in turn induces demand for auditing by the licensor. This research studies a setting with the following features: a production cost advantage on the part of the outside party that creates gains from licensing; a limited liability constraint that prevents the licensee from owing more royalties than the gross profits of licensing the intellectual property and prevents the licensor from capturing all of the economic surplus via a fixed royalty agreement; and accounting and auditing costs that reduce the benefits of a variable royalty agreement.

Proprietary vs. Open Two-Sided Platforms and Social Efficiency

The rising popularity of the open-source software movement has prompted many governments around the world to enact policies promoting open-source software systems at the expense of proprietary systems. Oftentimes, these policies seem to stem from a presumption (shared by some economists) that open software platforms are inherently more efficient than their proprietary counterparts. But is that so? This paper provides a simple model of two-sided platforms that clearly shows how this common intuition breaks down in two-sided markets.

Multi-Sided Platforms: From Microfoundations to Design and Expansion Strategies

The term "platform" is increasingly popular among executives today. Platforms, and multi-sided platforms (MSPs) in particular, serve the needs of interdependent constituents. Although MSPs have existed for centuries in the form of matchmakers and village markets, information technology has increased tremendously the opportunities for building larger, more powerful, and more valuable platforms. At the same time, by expanding the potential scope of platforms, information technology has also increased the number and complexity of factors, both economic and technical, that drive the strategic design of MSPs. Surprisingly, few companies rigorously analyze the underlying drivers of their MSPs, and the emerging business and economics literature on two-sided markets has not been very helpful in this direction, either. This article provides a general framework to help organize managerial thinking about MSPs.

Merchant or Two-Sided Platform?

With ever more sophisticated logistics and the rise of information technologies, intermediaries and market platforms have become increasingly ubiquitous and important agents in the digital economy. While market intermediation is not a new phenomenon, the digital economy has revealed that there can be two polar types of intermediaries: "merchants," which acquire goods from sellers and resell them to buyers, and "two-sided platforms," which allow affiliated sellers to sell directly to affiliated buyers. As examples, retailers like Walmart.com and Amazon.com are (mostly) merchants; eBay is a pure two-sided platform; and Apple's iTunes digital music store exhibits both merchant and platform features. This research is a first pass at delineating the economic tradeoffs between the merchant and two-sided platform modes.

Evolution Analysis of Large-Scale Software Systems Using Design Structure Matrices and Design Rule Theory

Designers have long recognized the value of modularity. But because design principles are informal, successful application depends on the designers' intuition and experience. Intuition and experience, however, do not prevent a company such as Microsoft from constantly grappling with unanticipated challenges and delays in bringing software to market. Clearly, designers need a formal theory and models of modularity and software evolution that capture the essence of important but informal design principles and offer ways to describe, predict, and resolve issues. This paper evaluates the applicability of model and theory to real-world, large-scale software designs by studying the evolution of two complex software platforms through the lens of design structure matrices (DSMs) and the design rule theory advanced by Kim Clark and Carliss Baldwin.

Public Action for Public Goods

In poor rural communities, public goods such as health and education services, clean water, electricity, and transport facilities are remarkably scarce. Within this picture of overall inadequacy there is considerable variation both across countries and inside national boundaries. How can these variations in public goods be explained? This paper surveys theoretical and empirical research on the characteristics of groups and the ability of members to act collectively to promote group interests. There remain many missing pieces in the public goods puzzle and there are important policy implications as a result.

Poverty, Social Divisions and Conflict in Nepal

More than 70 civil wars have occurred around the world since 1945. Understanding what causes such violent conflicts to begin and then fester is a topic of increasing research interest to economists. In Nepal the conflict known as "the People's War" began in 1996 and spread to all parts of the country, resulting in the deaths of more than 13,000 people. Do and Iyer considered a wide range of economic and social factors that they hypothesized could affect the likelihood of violent conflict, and econometrically examined their relationship with conflict intensity. These factors include geographic conditions (mountains and forests), economic development, social diversity including linguistic diversity, and government investment in infrastructure. Do and Iyer's nuanced approach allowed them to examine the spread of a single conflict across different parts of the country and over time.

Leading and Creating Collaboration in Decentralized Organizations

No matter how a multi-divisional organization is designed, it will need to find effective ways for its units to spontaneously and responsively cross boundaries. This paper discusses 3 key barriers to collaboration and information-sharing within an organization, and offers 3 strategies to overcome them.

Firm-Size Distribution and Cross-Country Income Differences

Country-to-country differences in per-worker income are known to be enormous. Per capita income in the richest countries exceeds that in the poorest countries by more than a factor of 50. The consensus view in scholarly literature on development accounting is that two-thirds of these variations can be attributed to differences in efficiency or total factor productivity (TFP). Emerging research, however, suggests other possibilities. Alfaro and coauthors, applied a monopolistic competitive firm model to a new dataset of more than 20 million firms in nearly 80 developing and industrialized countries. They then calculated the extent to which differences in the misallocation of resources (as well as differences in the amount of physical and human capital resources) explain dispersion in income per worker. Their results suggest that misallocation of resources is a crucial determinant of income dispersion.

Extremeness Seeking: When and Why Consumers Prefer the Extremes

When can variety be helpful and when can it be harmful? Conventional wisdom suggests that a product provider enhances the overall attractiveness of a set of options by adding more alternatives to the mix. By contrast, Gourville and Soman's research indicates that in certain, predictable cases, adding more alternatives to an assortment leads consumers to choose either the most basic or the most "fully loaded" product or service, be it a camera, car, cable TV service, laptop, or vacation package in Italy.

Organizational Designs and Innovation Streams

Ambidextrous organizational designs are those that sustain current success while simultaneously building new products, services, or processes. This research looks at a sample of 13 business units and describes the relations between alternative organizational designs and innovation streams. These business units used 4 distinct organizational designs in service of innovating and improving existing products: functional, cross-functional, spinouts, and ambidextrous. The researchers also used longitudinal data in order to explore how designs evolve over time and how design transitions affect innovation success.

Ambidexterity as a Dynamic Capability: Resolving the Innovator's Dilemma

Can organizations adapt and change—and if so, how does this occur? There are two major camps in the research on organizational change: those that argue for adaptation, and those that argue that as environments shift, inert organizations are replaced by new forms that better fit the changed context. There are data to support both arguments. This paper discusses the idea and practicality of ambidexterity and shows how the ability to simultaneously pursue emerging and mature strategies is a key element of long-term success.

Self-Regulatory Institutions for Solving Environmental Problems: Perspectives and Contributions from the Management Literature

What role can business managers play in protecting the natural environment? Academic research on when it might "pay to be green" has advanced understanding of how and when firms achieve sustained competitive advantage. The focus of such research, however, has begun to change in light of limits to available "win-win" opportunities and to gaps in regulation. This paper, intended as a book chapter, reviews current literature and explores the potential of self-regulatory institutions to solve environmental problems.

Repugnance as a Constraint on Markets

While some kinds of transactions are repugnant at certain times and places, they are considered perfectly acceptable in other situations. This essay examines a wide range of examples, including the buying and selling of kidneys for transplantation. Repugnance has important consequences for the transactions and markets we see.

What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns

Most industries exhibit some degree of geographic concentration. Although many theories attempt to explain this agglomeration, empirical tests of these theories are difficult as they all predict similar outcomes within individual industries. This study considers how industries coagglomerate—that is, which industry pairs locate together—to form a tractable analysis. The authors specifically study the relative importance of proximity to suppliers and customers, to firms using similar labor, and the sharing of ideas for explaining agglomeration.

Strategy-Proofness versus Efficiency in Matching with Indifferences: Redesigning the NYC High School Match

One of the goals of school matching systems is to limit the extent to which students and parents feel it necessary to "game the system" to be accepted at a favored school. Several years ago, the authors of this paper assisted the New York City Department of Education in redesigning the way it matched over 90,000 students entering public high schools each year. The situation in New York City is a hybrid: Some schools actively rank potential students, others have no preferences, and still others fall in between. This paper concentrates on the welfare considerations and incentives that arise in school choice due to the fact that many students are regarded by schools as equivalent. The research develops and expands on economic theory demanded by the design of school choice mechanisms.

The Speed of New Ideas: Trust, Institutions and the Diffusion of New Products

Does trust confer competitive advantage in terms of time, money, and productivity? Previous research indicates that it does. This study shifts perspective slightly and asks whether trust can also act as a barrier to entry. In other words, are trusted suppliers protected from competition if buyers are reluctant to try new products and services offered by other suppliers? Oberholzer-Gee and Calanog explored the link between levels of trust and the decision to adopt a new product using a field experiment on the diffusion of an innovative floor drain for the plumbing market.

An Empirical Approach to Understanding Privacy Valuation

What do consumers value and why? Researchers on privacy remain stumped by a "privacy paradox." Consumers declare that they value privacy highly, yet do not take steps to guard it during transactions. At the same time, consumers feel unable to enact their preferences on privacy. Clearly, scholars need a more nuanced understanding of how consumers treat information privacy in complex situations. To test the hypothesis that there is a homo economicus behind privacy concerns, not just primal fear, Wathieu and Friedman conducted an experiment based on a real-world situation about the transmission of personal information in the context of car insurance. Their experiment was based on a previous case study about marketing processes that use membership databases of trusted associations (such as alumni associations) to channel targeted deals to members through a blend of direct mail and telemarketing.

Media Markets and Localism: Does Local News en Español Boost Hispanic Voter Turnout?

The increased integration of markets for news and entertainment means that more viewers can watch shows that better match their preferences, whether that means American football, Japanese anime, or Mexican soap operas. But is there an attendant risk to civic society, as some scholars claim? Do locally engaged citizens turn into passive viewers? The explosion in the U.S. of local television news in Spanish provides an ideal stage for probing these questions. This paper tests whether the presence of local television news affects local civic engagement in the form of voter turnout.

The Price of Capital: Evidence from Trade Data

Is the price of capital higher across different countries? Motivated by the fact that most countries import the bulk of machinery and equipment, Alfaro and Ahmed used an alternative trade data to capture differences in the price of capital goods across countries. On this basis they found evidence that capital goods are more expensive in poor countries.

On The General Relativity of Fiscal Language

The failure to distinguish economics from linguistics is distressingly common in fiscal policy and theoretical research. Like measures of time and distance, standard fiscal measures such as deficits, taxes, and transfer payments depend on one's reference point, reporting procedure, language, and labels. Green and Kotlikoff's paper provides a general proof that such standard fiscal measures are economically ill-defined and instead reflect the arbitrary labeling of underlying fiscal conditions.

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

Understanding the effect of foreign direct investment is important for two main reasons: It informs foreign investment policy, and it has implications for the effect of rapidly growing investment flows on the process of economic development. While academics tend to treat foreign direct investment as a homogenous capital flow, policymakers maintain that some FDI projects are better than others. In fact, national policies toward FDI seek to attract some types of FDI while regulating other types, reflecting a belief among policymakers that FDI projects differ greatly in terms of the national benefits to be derived from them. Policymakers from Dublin to Beijing, for instance, have implemented complex FDI regimes in order to influence the nature of FDI projects attracted to their shores. Using a dataset on 29 countries, Alfaro and Charlton distinguished different qualities of FDI in order to examine the various links between types of FDI and growth.

How is Foreign Aid Spent? Evidence from a Compelling Natural Experiment

Foreign aid is viewed as a transfer of resources that can be used to generate meaningful growth in the recipient country's economy. How this aid is ultimately spent, therefore, determines how effective it is in achieving its purposes. Yet economists to date possess little understanding of how foreign aid trickles through a country's economy. This paper examines a foreign aid windfall that poorer Muslim countries have systematically received from rich, oil-producing Arab states. When the price of oil skyrocketed during the 1973-1986 oil crisis (and again after 2001), OPEC nations took a substantial portion of the money they received and gave it away as foreign aid, mostly to Muslim nations. When the price of oil crashed and income plunged in the oil-producing countries, the aid dried up. Werker, Ahmed, and Cohen examined the short-term effect of foreign aid on aggregate demand, the components of gross domestic product, and the balance of payments.

I'll Have the Ice Cream Soon and the Vegetables Later: Decreasing Impatience over Time in Online Grocery Orders

How do people's preferences differ when they make choices for the near term versus the more distant future? Providing evidence from a field study of an online grocer, this research shows that people act as if they will be increasingly virtuous the further into the future they project. Researchers examined how the length of delay between when an online grocery order is completed and when it is delivered affects what consumers order. They find that consumers purchase more "should" (healthy) groceries such as vegetables and less "want" (unhealthy) groceries such as ice cream the greater the delay between order completion and order delivery. The results have implications for public policy, supply chain managers, and models of time discounting.

Incorporating Price and Inventory Endogeneity in Firm-Level Sales Forecasting

Benchmarking and forecasting firm level performance are key activities for both managers and investors. Retailer performance can be tracked using a number of metrics including sales, inventory, and gross margin. For operational reasons, the sales, inventory, and gross margin for a retailer are interrelated. Retailers often use inventory and margin to increase sales; and sales, conversely, provide input to the retailer's decisions on inventory and margins. Inventory and margin also influence each other. This research uses firm-level annual and quarterly data for a large cross-section of U.S. retailers listed on NYSE, AMEX, or NASDAQ to construct a model that examines the interrelationships among sales per store, inventory per store, and margin.

From Manufacturing to Design: An Essay on the Work of Kim B. Clark

The interdisciplinary research of economist Kim Clark, former dean of Harvard Business School and now President of Brigham Young University-Idaho, occupies a unique place in management scholarship for three reasons. First, he tended to focus on little known and under-appreciated management groups such as manufacturing managers, product development managers, and product and process architects. Thus, he directly positioned himself outside the "traditional" management disciplines of strategy, finance, marketing, and organizational behavior. Second, he swam against the academic tide by recognizing the power of comparative and longitudinal field studies. Third, he sought frameworks beyond his own field in design theory, the engineering sciences, and finance. This paper reviews his research contributions over almost thirty years.

Initiating Divergent Organizational Change: The Enabling Role of Actors' Social Position

Does social position influence the ability to launch groundbreaking organizational projects? This study investigates that question as well as whether workers' social position in their professional field affects their ability to begin such projects. Using data based on more than ninety clinical managers in the United Kingdom's National Health Service, Battilana studied initiatives such as the development of an alternative to hospitalization for older people and another that would shift role division by transferring decision-making power from physicians to nurses. Her results indicate that social position is an important condition at the heart of organizational change.

Electronic Hierarchies and Electronic Heterarchies: Relationship-Specific Assets and the Governance of Interfirm IT

Scholars have long been interested in the impact of information technology on the organization of work. As Andrew McAfee and colleagues argue in this study, the appropriate governance mechanism for an IT-facilitated collaboration depends on the type of IT being deployed: When an enterprise technology is required, so is an electronic hierarchy. The paper explores the issue of relationship specificity of IT assets, proposes a categorization of information technologies based on their levels of relationship specificity, and uses data from more than forty Italian industrial districts to test three hypotheses around governance of interfirm IT. These districts typically have close ties, both horizontal and vertical, and have historically worked in close collaboration with each other.

Adding Bricks to Clicks: The Effects of Store Openings on Sales through Direct Channels

Consider a retailer who operates both brick-and-mortar stores and direct channels such as direct mail catalogs and an Internet Web site. What effect does the opening of a new retail store have on direct channel sales in the retail trading area surrounding the store? Does the existence of more opportunities for consumer contact with the brand increase the retailer's direct sales, or does intra-brand, inter-channel competition erode the retailer's direct sales? Does consumer response to the retailer's brand evolve over time, perhaps as consumers go through some process of trial-and-error learning about the relative merits of stores and direct channels, or is the impact of the new store relatively discrete? Does the answer depend on whether consumers in the retail trading area have had the opportunity for previous experience with the brand's stores? This research used a proprietary longitudinal dataset from a multichannel retailer to understand what happens and to probe the implications for channel management strategy.

Do Corporate Social Responsibility Ratings Predict Corporate Social Performance?

Ratings of corporations' environmental activities and capabilities influence billions of dollars of "socially responsible" investments as well as consumers, activists, and potential employees. But how well do these ratings predict socially responsible outcomes such as superior environmental performance? Companies can enhance their environmental image in one of two ways: by reducing or minimizing their impact on the environment, or by merely appearing to do so via marketing efforts or "greenwashing." This study evaluates the predictive validity of environmental ratings produced by Kinder, Lydenberg, Domini Research & Analytics (KLD), and tests whether companies that score high on KLD ratings generate superior environmental performance or whether highly rated firms are simply superior marketers of the factors that these rating agencies purport to measure. The data analysis examines all 588 large, publicly-owned companies in the United States that were both regulated by the U.S. Environmental Protection Agency and whose social performance was rated by KLD at least once during 1991-2003. This paper may be the first to examine the predictive validity of social or environmental ratings.

Managing Know-How

For many firms, the ability to create, organize, and disseminate know-how is a key factor in their ability to succeed. But should all companies engage in formal knowledge management? If not, which companies derive most value from a formal knowledge system? Conditional on implementing such a system, should the company focus more on learning from successes or learning from failures? Should such knowledge systems simply capture all experience, or should they be more selective? This paper develops and applies an economic framework to examine these questions.

The Value of Openness in Scientific Problem Solving

Scientists are generally rewarded for discoveries they make as individuals or in small teams. While the sharing of information in science is an ideal, it is seldom practiced. In this research, Lakhani et al. used an approach common to open source software communities—which rely intensely on collaboration—and opened up a set of 166 scientific problems from the research laboratories of twenty-six firms to over 80,000 independent scientists. The outside scientists were able to solve one-third of the problems that the research laboratories were unable to solve internally.

Do Employment Protections Reduce Productivity? Evidence from U.S. States

Business leaders and policymakers often claim labor market rigidities reduce productivity and competitiveness by altering production choices from their unconstrained best. These theories are tested using the adoption of employment protection regulations by U.S. state courts over the last three decades. Consistent evidence is found following the introduction of the employment regulations that 1) firm production choices are altered, 2) firm employment turnover declines, and 3) firm productivity declines. Entrepreneurship rates also decline in the states after the court decisions. The interpretation of the results, however, is somewhat clouded by very large employment growth that follows the regulations too.

Noncompetes and Inventor Mobility: Specialists, Stars, and the Michigan Experiment

Two years ago, Microsoft and Google wrangled publicly when Google hired away a star Microsoft employee who had signed an agreement not to compete against Microsoft for one year after leaving the company. Managers enjoy a love/hate relationship with such "noncompete" covenants depending on whether they are gaining or losing talent. This study, which looks at Michigan's inadvertent reversal of its enforcement policy in the mid-1980s, is the first to apply longitudinal analysis to the question of noncompete enforcement. Given the importance of mobility for knowledge spillovers and entrepreneurship, the evidence has implications for day-to-day behavior, careers, business, and policy.

Behavioral Decision Research, Legislation, and Society: Three Cases

Insights about how people make decisions have enormous importance for society and public policy, yet often behavioral decision findings are overlooked or dismissed in favor of arguments based on sometimes-simplistic economic theory. This is particularly true in Washington, D.C., where Bazerman provided expert testimony in government cases on auditor bias, pharmaceutical company collusion, and big tobacco, respectively. His experiences highlight the barriers to the use of the most appropriate social science under the existing legal and legislative frameworks. In this article that is based on analysis and opinion, he tells what happened and reflects on the need for social sciences, in addition to economics, to be brought to the legal and policy-making domains.

"Don'ts" and "Do's": Insights from Experience in Mitigating Risks of Western Investors in Post-Communist Countries

Cultural and other misunderstandings between westerners and locals in post-communist countries are very costly, and western investors grossly underestimate how damaging ineffective interaction really is. This article shows that such interaction constitutes a major stumbling block to effective risk management and stands in the way of the enterprise fully taking advantage of opportunities for profit in these product-hungry, fast-expanding, and dynamic economies. Ultimately, effective communication between westerners and locals is the necessary condition for the success of western investments in transition countries.

A Perceptions Framework for Categorizing Inventory Policies in Single-stage Inventory Systems

In research surrounding inventory policies, there is a prevailing assumption of completely rational agents. In practice, however, deviations from the optimal policy abound, and analytical models to understand the effects of inventory dynamics on practice may require ways to model these deviations. Modeling deviations from the optimal policy is also important for better understanding inventory systems and supply chains. The term "perceptions" in Watson's research is not meant in its conventional sense, as in the perceptions of individual managers, but rather forms the basis for a framework for modeling and categorizing a range of inventory policies, including optimal inventory policy. This paper, which is a technical article meant more for an academic audience, explores the usefulness of his framework for categorizing the range of inventory policies that can be employed in a single-stage supply chain.

Banking Deregulation, Financing Constraints and Entrepreneurship

What effect does an increase in banking competition have on the entry of start-ups? In particular, does an increase in banking competition have a differential effect on the entry of start-ups relative to the opening of new establishments by existing firms? The U.S. branch banking deregulations provide a useful laboratory for studying how banking competition affects small businesses. Prior to 1970, all but twelve states had stringent restrictions on the ability of banks to open new branches or to acquire the branches of other banks within the state; beginning in the 1970s and until 1994, all but two states removed these restrictions. In this research, Kerr and Nanda studied the entry of newly incorporated businesses between 1976 and 1999 using detailed data collected by the U.S. Census Bureau. Their findings matter for understanding how reforms that affect the financing environment may improve the real economy through the reallocation of resources in the non-financial sectors.

Future Lock-in: Or, I'll Agree to Do the Right Thing...Next Week

Most of us believe that we should make certain choices—save more money or reduce gas consumption, for example—but we do not want to carry out these choices. In psychology this tension has been referred to as a "want/should" conflict. Rogers and Bazerman show through four experiments that people are more likely to choose what they believe they should choose when the choice will be implemented in the future rather than in the present, a tendency they call "future lock-in." They also discuss directions for future research and applications for public policy, an arena in which citizens are often asked to consider binding policies that trade short-term interests for long-term benefits.

The Demise of Cost and Profit Centers

The Balanced Scorecard has proven to be a general and powerful performance management framework for units previously treated as profit and investment centers. The management control literature, however, identifies other organizational forms for decentralized units, including standard cost centers, revenue centers, and support units treated as discretionary expense centers. Starting from the example of a classic teaching case, Empire Glass Company, Kaplan explains how strategy maps and the Balanced Scorecard transform cost, revenue, and discretionary expense centers into strategic business units in their own right.

The Political Economy of Capitalism

Capitalism is often defined as an economic system where private actors are allowed to own and control the use of property according to their own interests, and where the invisible hand of the pricing mechanism coordinates supply and demand in markets in a way that is automatically in the best interests of society. Government, in this perspective, is often described as responsible for peace, justice, and tolerable taxes. Bruce Scott argues in this chapter that for a capitalist system to evolve in an effective developmental sense through time, it must have two hands, not one: an invisible hand that is implicit in the pricing mechanism, and a visible hand that is explicitly managed by government through a legislature and a bureaucracy. Inevitably the actions of the visible hand imply a strategy, no matter how implicit, shortsighted, or incoherent that strategy may be.

The Business of Free Software: Enterprise Incentives, Investment, and Motivation in the Open Source Community

IBM has contributed more than $1 billion to the development and promotion of the Linux operating system, and other vendors such as Sun are ramping up open source software efforts and investment. Why do information technology vendors that have traditionally sold proprietary software invest millions of dollars in OSS? Where have they chosen to invest, and what are the characteristics of the OSS projects to which they contribute? This study grouped OSS projects into clusters and identified IT vendors' motives in each cluster.

Three Perspectives on Team Learning: Outcome Improvement, Task Mastery, and Group Process

Organizations increasingly rely on teams to carry out critical strategies and operational tasks. How do teams learn, and what factors are most important to team learning? This paper reports on current perspectives and findings that address these questions, looking at empirical studies on team learning from three areas of research: outcome improvement, task mastery, and group process. Overall, Edmondson and coauthors characterize the nature of research to date and assemble what is known and unknown about the theoretically and practically important topic of team learning.

The Industry R&D Survey: Patent Database Link Project

The development and diffusion of new innovations are central to economic growth, and understanding the firm-level underpinnings of technology progress is important to academics, policymakers, and business managers. While many researchers have examined (either separately or together) corporate research and development and technology diffusion, they run into two significant data constraints. William R. Kerr and Shihe Fu describe how they developed a new dataset for studying corporate innovation that encompasses three important existing datasets. This paper summarizes the Industry R&D Survey for researchers who want to study innovation through the Census Bureau's data.

When Learning and Performance are at Odds: Confronting the Tension

While most people agree that learning leads to improved performance, there are several ways in which learning and performance in organizations can be at odds. First, when organizations take on a new learning challenge, performance often suffers in the short term, because new behaviors or practices are not yet highly skilled. Second, by revealing and analyzing their failures and mistakes—a critical aspect of learning—individuals or work groups may appear to be performing less well than they would otherwise. This paper reviews research that describes the challenges of learning from failure in organizations, and argues that these challenges can be at least partly addressed by leadership that creates a climate of psychological safety and that promotes inquiry.

A New Framework for Analyzing and Managing Macrofinancial Risks of An Economy

The vulnerability of a national economy to volatility in the global markets for credit, currencies, commodities, and other assets has become a central concern of policymakers, credit analysts, and investors everywhere. This paper describes a new framework for analyzing a country's exposure to macroeconomic risks based on the theory and practice of contingent claims analysis. (A contingent claim is any financial asset for which future payoff depends on the value of another asset.) In this framework, the sectors of a national economy are viewed as interconnected portfolios of assets, liabilities, and guarantees that can be analyzed like puts and calls. The framework makes it transparent how risks are transferred across sectors, and how they can accumulate in the balance sheet of the public sector and ultimately lead to a default by the government.

Managing Functional Biases in Organizational Forecasts: A Case Study of Consensus Forecasting in Supply Chain Planning

By their very nature, consensus forecasts contain subjective elements that can compromise forecast accuracy. In this case study of the implementation of a sales and operations planning process in a consumer electronics company, Oliva and Watson studied the organizational and political dimensions of forecast generation and improvement. Ultimately, consensus forecasting constructively managed the influence of biases (such as overconfidence) on forecasts.

Resolving Information Asymmetries in Markets: The Role of Certified Management Programs

Hundreds of thousands of firms rely on voluntary management programs to signal superior management practices to interested buyers, regulators, and local communities. Such programs typically address difficult-to-observe management attributes such as quality practices, environmental management, and human rights issues. The absence of performance standards and, in most cases, verification requirements has led critics to dismiss voluntary management programs as marketing gimmicks or "greenwash." Toffel examines whether a voluntary environmental management program with a robust verification mechanism attracts participants with superior environmental performance, and whether the program elicits improved environmental performance. His study focuses on the ISO 14001 Environmental Management System Standard, but the results have implications for voluntary management programs that govern many other difficult-to-observe management issues.

Organizational Response to Environmental Demands: Opening the Black Box

How and why do organizations respond differently to pressures from different stakeholders? This question is central to organizational theory and feeds into strategic management research as well. Delmas and Toffel develop and test a model that describes why organizations respond differently to similar stakeholder pressures. They suggest that differences in how organizations distribute power across their internal corporate departments lead their facilities to prioritize different institutional pressures and thus adopt different management practices.

Male Circumcision and AIDS: The Macroeconomic Impact of a Health Crisis

The AIDS epidemic is a humanitarian disaster that has struck sub-Saharan Africa with particular severity, but its macroeconomic impact is much less certain. Though conflicting theories abound, empirically-based studies on the link between HIV prevalence rates and economic growth have shown no consensus. Given the significant medical evidence that male circumcision can reduce the risk of contracting HIV in Africa, tribal circumcision practices provide an "experimental" setting to test the impact of the AIDS epidemic on the overall economy.

Racial Diversity Initiatives in Professional Service Firms: What Factors Differentiate Successful from Unsuccessful Initiatives?

What organizational factors are needed for racial diversity initiatives to succeed? While diversity continues to grow in importance in organizations, very little research has focused on the processes that underlie diversity management. Modupe Akinola and David A. Thomas propose a study intended to explore management initiatives that focus on racial diversity in professional service firms. Given that such firms rely on the high level of skills, expertise, and diverse perspectives offered by their professional staff, these firms may be ideal laboratories for examining diversity initiatives.

Coerced Confessions: Self-Policing in the Shadow of the Regulator

Are regulators necessary? In industry, self-regulation and self-policing have been touted as a new paradigm of regulation that trades outmoded "command-and-control" strategies for industry-directed, market-based solutions. Short and Toffel's work, one of the first empirical studies to address self-policing behavior, examined a rich data set of companies' voluntary disclosures of regulatory violations under the U.S. Environmental Protection Agency's Audit Policy. The goal: to learn how violators behave when offered the option of voluntarily self-disclosing. The results show that even as corporations are given an expanding role in their own governance, the success of "voluntary" self-policing depends on the continued involvement of regulators with coercive powers.

Pricing Liquidity: The Quantity Structure of Immediacy Prices

Researchers and participants in the market for securities have long been interested in the costs of transacting and the notion of liquidity as a performance measure of market structure. In real world capital markets, investors and corporations generally do not expect to transact at fundamental value. Rather, market participants face some degree of illiquidity, where they must sacrifice price, trade size, or speed of execution, forcing them to transact at prices away from fundamental value. The exact price of liquidity, however, is unknown. This paper develops an option-based model of the price of liquidity via the pricing of limit orders.

Cartels and Competition: Neither Markets nor Hierarchies

Before 1945, many thinkers believed cartels brought widespread benefits. But following the spread of antitrust ideas after 1945, Adam Smith's verdict on cartels as "conspiracies against the public" prevailed. The cartel question highlights important issues about the benefits and risks of competition. This working paper maintains that, for better or worse, cartels have shaped economic and business history since the late nineteenth century. Big business must recognize how, up until the 1980s, the activities and influence of cartels affected technological development, corporate strategy, and organizational change.

Architectural Innovation and Dynamic Competition: The Smaller "Footprint" Strategy

To study dynamic competition, Baldwin and Clark build upon a design principle in computer architecture known as Amdahl's Law. The authors show that firms can study the underlying cause-and-effect relationships in a complex architecture in order to identify "bottlenecks." Firms may then redesign the interfaces of key components to make them more modular. They can then outsource more activities without sacrificing performance or cost. As a result, firms can offer competitive products or services, while investing less, and so enjoy an "invested capital advantage" over competitors. Baldwin and Clark explain how the strategy works and then model its impact on competition through successive stages of industry evolution.

Scale without Mass: Business Process Replication and Industry Dynamics

Over the past ten years there's been a clear link between IT investment and productivity growth in the U.S. economy. But what impact has IT had on competition? This paper identifies several recent changes in the competitive dynamics of U.S. industries and shows that they are associated with IT intensity; the more IT and industry has, the greater the changes. Using case studies, previous research, and a simple model, the authors offer a theory that explains these patterns in the data. They argue that IT allows the rapid spread of business process innovations, which in turn leads to more turbulent and concentrated industries.

How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages

Does FDI help developing countries as much as we think? While theoretical models imply that FDI is beneficial for a host country's development—a belief widely shared among policymakers—the empirical evidence does not support this view. This paper bridges the gap between theoretical and empirical literature with a model and calibration exercises that examine the role of local financial markets. Ultimately, Alfaro and colleagues contribute to existing research that emphasizes how local policies and institutions may actually limit the potential benefits that FDI could provide to a host country.

Optimal Value and Growth Tilts in Long-Horizon Portfolios

Long-term investors look for portfolio strategies that optimally trade off risk and reward, not in the immediate future, but over the long term. It is unrealistic to expect long-term investors to adopt an "invest and forget" strategy, but creating a portfolio strategy that adjusts asset allocations in response to changing risk premia, interest rates, and expected inflation remains a challenge in finance. Jurek and Viceira have devised a solution method that aims at a practical implementation of dynamic portfolio choice models with realistically complex investment opportunity sets. They have applied their method to study the role of value stocks and growth stocks in the portfolios of long-term investors, and have found that long-term investors might want to tilt their portfolios away from value stocks despite the fact that the average return on value stocks is larger than the average return on growth stocks (the so-called "value premium"). Their findings provide support for the idea that the superior performance of value stocks might reflect simply that they are riskier than growth stocks at long horizons.

Cross Functional Alignment in Supply Chain Planning: A Case Study of Sales & Operations Planning

Why do companies have such a hard time getting various functions to coordinate? Leitax, the pseudonym for a consumer electronics company studied by the authors, was suffering major supply-chain planning problems in 2002. The chief reason was typical to organizations: poor integration among the various functions. In response, the company introduced a system (rather than just a set of mechanisms) to better coordinate all processes and functions. The new system led to better collaboration from all participants, improved information-sharing, accurate and validated plans, and alignment in the execution of those plans.

Optimal Reserve Management and Sovereign Debt

One of the puzzles in the study of emerging markets is understanding why developing countries accumulate reserves as a means to avoid a financial crisis, rather than work to reduce their sovereign debt. In 2005, for example, reserve accumulation totaled 20 percent of gross domestic product in low- and middle-income countries but only about 5 percent in high-income countries. The costs and benefits of reserve accumulation still aren't clear, nor do economists agree on the optimal level of foreign reserves that sovereign countries should hold. By testing a model of a small, open economy with non-contingent debt and reserve assets, Alfaro and Kanczuk explored the issue in depth.

International Financial Integration and Entrepreneurship

Why does entrepreneurship flourish in some countries and struggle in others? Economists and policymakers are divided on whether the rapid rate of global financial integration, specifically the explosive growth of foreign direct investment, helps or hurts local entrepreneurs and domestic economies. To see the differential effects of restrictions on capital mobility on entrepreneurship, Alfaro of HBS and Charlton of the London School of Economics analyzed data on 24 million firms—listed and unlisted—in nearly 100 countries in 1999 and 2004.

Capturing Benefits from Tomorrow's Technology in Today's Products: The Effect of Absorptive Capacity

It seems clear that firms with an existing R&D function are better able to use related outside research than firms without an R&D function. But can specific products also "absorb" a firm's knowledge of related technologies? Using patent data and the example of automobile carburetors, Daniel Snow studied how companies may adapt a component of a "radical innovation" technology for their own current-technology products. He also poses a far-reaching question for companies: Can they capture the returns of these inventive activities?

Corporate Governance and Networks: Bankers in the Corporate Networks of Brazil, Mexico, and the United States circa 1910

Brazil today looks like a typical case in which business groups and close relations between companies and banks play an important role to overcome information and monitoring problems. This was not always the case. To study how the development of financial markets can change the interaction between banks and corporations, Musacchio compared the importance of interlocking boards of directors between corporations and banks in Brazil, Mexico, and the United States at the turn of the twentieth century. This paper and previous research support Musacchio's hypothesis that financial markets in Brazil were sustained by an institutional framework that protected investors, enforced credit contracts, and promoted regular financial disclosure of company accounts. The development of bond and stock markets, and the relatively good corporate governance practices in Brazil before 1930, made connections with bankers less necessary.

Unfinished Business: The Impact of Race on Understanding Mentoring Relationships

Race is a critical component of relationships in organizations, particularly in the United States and, due to shifting demographics, particularly for the future. As a socially embedded phenomenon, race also provides a lens for research on mentoring. This paper discusses why race and mentoring are important, how race has been studied or omitted in research to date, and what is known about the intersection of mentoring and race in organizations. The authors then discuss their own model, which aims to guide future research.

Managing Governments: Unilever in India and Turkey, 1950–1980

During the postwar decades, consumer-products giant Unilever survived and even thrived in developing countries such as India and Turkey even as business conditions discouraged or drove away peer companies. Why? At least five factors explain Unilever's ability and willingness to persist in such developing countries. These factors may also explain why foreign direct investment shrank to low levels in these countries, and has remained low.

Entrepreneurship and Business History: Renewing the Research Agenda

This paper identifies major opportunities to raise entrepreneurship as a central research issue in business history and to build on the strong roots that are already in place in that discipline. Historical research on entrepreneurship began in the 1940s and 1950s, much of it at Harvard Business School, but then lost momentum. Nevertheless the paper shows the major achievements in exploring how context shaped the structure of entrepreneurship, and identifying the wide variation in organizational form and entrepreneurial behavior. It concludes with the main contributions of business history to the study of entrepreneurship, and proposes a renewed research agenda.

A Gentler Capitalism: Black Business Leadership in the New South Africa

What role should business play in ameliorating poverty and addressing inequality? Linda A. Hill and Maria Farkas, a doctoral student, examine this question against the backdrop of post-apartheid South Africa. Focusing on the efforts of one successful black executive to recruit and develop other minority managers and integrate blacks into the mainstream economy, Hill and Farkas explore fundamental ethical and business issues affecting companies and society at large.

Globalizing the Beauty Business Before 1980

Even six-month-old infants may understand what makes faces "attractive," regardless of ethnicity, but adults vary considerably in how they present themselves through clothes, hairstyles, and physical appearance. Studying the period from 1945 to 1980, this paper examines the drivers of the globalization of beauty; the strategies that firms employed to overcome challenges to globalization; and the outcomes, including the level to which globalization has brought about a homogenization of beauty ideals and practices.

Nationality and Multinationals in Historical Perspective

Many people believe that globalization has caused companies to lose their national identity. This study traces the history of corporations and nationality and finds that multinational companies have always had ambiguities, particularly before World War I. National subsidiaries became stronger in the twentieth century, and companies like Ford, for example, would feel very American in the United States, but have a more local identity in another part of the world. In the twenty-first century, globalization has caused a reemergence of issues concerning corporate nationality. However, this research shows that in many ways corporate affiliation with a country may matter more than ever.

What Roosevelt Took: The Economic Impact of the Panama Canal, 1903-29

The Panama Canal was expected to bring great economic benefits to the people of Panama. Instead, the United States received most of the benefits. This was a deliberate act on the part of the U.S. The U.S. didn't allow Panamanian businesses to sell goods or services in the Canal Zone, it avoided the employment of Panamanian workers, and it used its military leverage to force Panama into accepting a low payment for the Canal territory.

The Framing Effect of Price Format

How do consumers evaluate different pricing scenarios? This study looks at different pricing models to see which is more likely to result in positive customer perception. Specifically, the authors look at all-inclusive pricing (e.g., the price of a chair is $85.95 including shipping) versus partitioned pricing (e.g., the price of a chair is $81 and shipping is $4.95). When consumers are presented with a partitioned price, they place an exaggerated weight on their evaluation of each individual component.

What's Law Got to Do with It: A Systems Approach to Management

Mainstream management theory often ignores the influence of law on the competitive environment and on the resources of the firm. The author attempts to spark greater academic interest in the legal aspects of management by proposing a systems approach to law and management "that explains how law affects the competitive environment, the firm's resources, and the activities in the value chain."

Implementing New Practices: An Empirical Study of Organizational Learning in Hospital Intensive Care Units

How do hospital units, as complex service organizations, successfully implement best practices? Practices involve people and knowledge; people must apply knowledge to particular situations, so changing practices requires changing behavior. This study is a starting point for healthcare organizations to improve work practices.

The researchers drew from literature on best practice transfer, team learning, and process change and developed four hypotheses to test at highly specialized hospital units that care for premature infants and critically ill newborns.

Deep Links: Business School Students' Perceptions of the Role of Law and Ethics in Business

The researchers spent more than a year eliciting twelve MBA students' thoughts and feelings about the role of law in starting and running a U.S. business. This research offers new insights into the ongoing debate about how best to educate the business leaders of tomorrow. More than a standalone course in business law or ethics, it would be wise for educators to use an approach that treats the role of law and business in the broader context of societal needs and norms.

Bankers, Industrialists, and Their Cliques: Elite Networks in Mexico and Brazil During Early Industrialization

Mexico and Brazil had different institutional structures in the early 20th century. Did entrepreneurs in these two countries organize their business networks differently to deal with the different institutional settings? And, how can we compare the impact of the institutional structure of Mexico and Brazil on the networks of entrepreneurial finance and entrepreneurship in general? In this research, Musacchio and Read look at the networks of interlocking boards of directors of major joint stock companies in two large Latin American societies in 1909.

Economic and Technical Drivers of Technology Choice: Browsers

Did Microsoft defeat Netscape in the browser war because its technology was better, or because MS created a better business strategy? The authors draw on the 1996-1999 browser battles to examine technical progress versus economic forces in driving diffusion on new technologies.

A Survey-Based Procedure for Measuring Uncertainty or Heterogeneous Preferences in Markets

People who buy retail prescription drugs, invest funds, or participate in auctions rarely have complete information about the product they are buying. Often the only auction information participants have is the number of bidders, observed bids, and product characteristics. If data from an auction, for instance, is a function of bidder behavior, then external survey data may help in testing hypotheses about bidding behavior. Researchers often avoid using surveys because they consume time and effort, but Yin presents a survey design technique and econometric tool to deal with a general population of survey respondents. Her application tested eBay online auctions selling personal computers.

Schumpeter's Plea: Rediscovering History and Relevance in the Study of Entrepreneurship

Academic studies of entrepreneurship have focused on people and firms but ignored the context of history. The result is an over-reliance in the experiences of high-tech start-ups in the U.S., leading to generalizations using empirical evidence from an exceptional and atypical industry and location. Economist Joseph Schumpeter believed the study of entrepreneurial behavior made little sense without the equal study of the broader industrial, social, and economic setting in which they operated. An exchange between historical and social scientific approaches will yield far richer understanding.

Information Technology Ecosystem Health and Performance

An IT ecosystem is "the network of organizations that drives the creation and delivery of information technology products and services." To understand the health and well being of the IT industry in the context of an ecosystem, the authors looked at three crucial IT ecosystem metrics: productivity, robustness, and innovation.

Information Dispersion and Auction Prices

How can auctions be used most effectively? Government and industry traditionally use auctions to price and allocate assets and contracts with high but unknown value. Millions of people use Internet auctions for goods that are often of unknown value (e.g., used goods, unknown brands). This paper asks: Do bidders behave in the way auction theory predicts they should? And, what are the effects of different types of information on prices? To answer these questions, Yin combined theory, econometric modeling, and survey data.

Empirical Tests of Information Aggregation

While neither buyers nor sellers may be certain of the worth of used goods, both may possess private information about the value. Do prices become more informative as the number of bidders grows? Using data from a sample of eBay auctions for computers, Yin looked at how and under what conditions auction prices converge to the common value of a given item.

Behavioral Operations

Organizations often commit to more product development projects than they can handle. And while people do not always behave rationally, most research on operations management still assumes they do. This paper explores theoretical and practical ways to study the effects of behavior and cognition on operations.

Maximizing Joint Gains: Transaction Utility Within and Between Groups

Win-win deals are more easily described than carried out. Earlier studies have shown that when people don't know the gender or social category of their negotiating partner, they are happy to make a profit even if their partner earns a greater profit. Four new studies looked at how gender or other social contexts influence the way people cut a deal.

Effects of Task Difficulty on Use of Advice

We make most of our choices by weighing other people's advice counter to our own opinions. People generally underweight advice from others, though the practice is not universal. In two studies, it is determined that people overweight advice on difficult tasks but underweight it on the easy ones.

Advertising and Expectations: The Effectiveness of Pre-Release Advertising for Motion Pictures

This research examines how advertising affects market-wide sales expectations for pre-release movies. The authors use data on advertising expenditures and an online stock market simulation, The Hollywood Stock Exchange (HSX), to track more than 280 movies released between 2001 and 2003. Their findings show that advertising affects the updating of market-wide expectations prior to release, and that this effect is stronger the higher the product quality.

Reinventing Savings Bonds

At one point in American history, savings bonds were an important tool families used to build assets and get ahead. While times have changed, this function of savings bonds may be even more important now, especially for the 41 million low- and moderate-income American households. Tufano and Schneider lay out a case for why savings bonds should be reimagined to help millions of Americans build assets now.

Promoting a Management Revolution in Public Education

Public school districts are difficult to lead and manage, and the idea of applying business principles to school reform is popular. But is it practical? This paper describes the work of Harvard's Public Education Leadership Program as it helps school districts grapple with performance challenges, including student achievement that compares unfavorably with other countries, and a significant performance gap between white and minority students. Complicating the picture: The concept of managing for accountability is new in education. The authors studied the effects of improved management on public school student performance by comparing fifteen large urban school districts with similar peer districts.

Why IT Matters in Midsized Firms

What does IT actually contribute to a business? Is IT a commodity like electricity or is it a crucial element of competitive advantage? In a study of over 600 medium-sized global firms to analyze the business benefits that IT can enable, the authors found that IT capability was key to profitable business growth. This was true in both the U.S. product and services sectors as well as in Germany and Brazil.

Wintel: Cooperation or Conflict

Industries are becoming more horizontal. Products that used to be designed and manufactured by a single firm are now produced by different companies that must coordinate activities. Here, the authors detail the relationship between Intel and Microsoft (both integral to PCs) and, using a mixed-duopoly model, analyze the dynamics of cooperation verses competition. They find that costs associated with complementary R&D, conflicts of interest in pricing, and the possibility of competitors all factor in the decision of when to cooperate or compete.

The Power of Stars: Do Stars Drive Success in Creative Industries?

The importance of star power is evident in creative industries from music and film to fashion and architecture. Star actors are paid millions of dollars, but is star talent critical to product success? What determines the value of stars? In the context of the movie business, Elberse calculated the returns in a study comparing 1,200 casting announcements on trading behavior in a simulated and real stock market setting. In a separate study, she also looked at the stars' impact on expected revenues.

Float Manipulation and Stock Prices

When a firm reduces the number of shares available to trade, so-called float manipulation, the price of the stock is often driven up. The author uses a series of 2,000 stock split events in Japan as an experiment to understand the consequences of float manipulation for stock prices. The conclusion: Stock prices are raised significantly when there are differing opinions about the value of shares, investors are unable to sell short, and the number of outstanding shares is reduced.

Measuring Consumer and Competitive Impact with Elasticity Decompositions

Do marketing actions expand the market or steal business from rival firms? One research method suggests that all of the demand created by an incremental advertising investment would be generated by market expansion; another suggests that the same increase would be stolen from rival firms. Steenburgh explains why these seemingly contradictory results actually are complementary and provide a more comprehensive understanding of the investment's impact.

A Cross-Sectional Analysis of the Excess Comovement of Stock Returns

This paper develops cross-sectional predictions from a model in which the excess comovement of stock returns comes from correlated demand shocks. The model is tested on 298 Nikkei index stocks and 1,458 non-index stocks for the years 1993 through 2003. The study finds that controlling for index membership, index overweighting is a significant determinant of the comovement of returns with index returns.

Creating the Office of Strategy Management

Organizations often fail to execute their strategy—failure rates may range as high as 60 to 90 percent. Successful companies align their key management processes for effective strategy execution. Creating a new corporate-unit level, the Office of Strategy Management (OSM), may help align management processes to strategy. The authors explain, among other topics, OSM core processes, desirable OSM processes, integrative processes, and positioning the OSM.

The Motion Picture Industry: Critical Issues in Practice, Current Research & New Research Directions

This paper reviews research and trends in three key areas of movie making: production, distribution, and exhibition. In the production process, the authors recommend risk management and portfolio management for studios, and explore talent compensation issues. Distribution trends show that box-office performance will increasingly depend on a small number of blockbusters, advertising spending will rise (but will cross different types of media), and the timing of releases (and DVDs) will become a bigger issue. As for exhibiting movies, trends show that more sophisticated exhibitors will emerge, contractual changes between distributor and exhibitors will change, and strategies for tickets prices may be reevaluated.

Governance and CEO Turnover: Do Something or Do the Right Thing?

CEOs who become "entrenched" by the board of directors can gain an extra buffer between themselves and angry shareholders. Entrenchment has potential costs (a poorly performing CEO hangs on to the job) but also benefits (the board can deflect shareholder cries for dismissal of a CEO who was merely unlucky). The authors hope to shift the emphasis of the debate on entrenchment to a consideration of these tradeoffs and to shift the focus of the entrenchment-performance discussion toward the decisions, such as CEO dismissal, that are directly tied to the actions of the board.

The Cycles of Theory Building in Management Research

How do business academics know they are categorizing or measuring the best things to help us understand interesting phenomena? Scholars waste a lot of time and energy disparaging and defending various research methods. Yet the stakes are high for business academics to create theory that is intellectually rigorous, practically useful, and able to stand the tests of time. The authors describe a three-stage process for building theory; discuss the role of anomalies for building better theory; and suggest how scholars can refine research questions, carry out projects, and design student coursework.

Learning Tradeoffs in Organizations: Measuring Multiple Dimensions of Improvement to Investigate Learning-Curve Heterogeneity

How and why experience leads to performance improvement has made the learning curve an important management topic for sites ranging from nuclear power plants to cardiac surgical units. This new research looks deeper at learning curves by focusing on learning rates in technology adoption in similar organizations along multiple, potentially competing dimensions. Using longitudinal data from sixteen hospitals that are adopting a new technology for cardiac surgery, it specifically studies two dimensions: efficiency and application innovation and the potential tradeoff between efficiency and application innovation. It also asks how such tradeoffs are influenced.

Do Managers' Heuristics Affect R&D Performance Volatility? A Simulation Informed by the Pharmaceutical Industry

Can the R&D process be managed to provide more certainty and success? The authors explore R&D performance volatility using the pharmaceutical industry as the model. The study looks at two types of heuristics that are commonly used to manage R&D project portfolios: (1) which products to start, and whether to continue or kill a product in development; (2) how resources should be allocated at each phase of development. By changing the heuristics used to make decisions at each stage of development, managers can decrease the amount of uncertainty and failure in the R&D process.

Bringing History into International Business

International Business scholars often talk about history, but rarely take it seriously. The first generation of International Business scholars placed a high priority on evolutionary and historical perspectives and methodology, but little work these days grapples with the history of International Business or uses historical data to explore an issue. Jones and Khanna discuss new avenues for researching business groups in history and in contemporary emerging markets, resource-based and path-dependent theories of the firm, and foreign direct investment and development over time.

Exploring the Structure of Complex Software Designs: An Empirical Study of Open Source and Proprietary Code

How does a product's design mirror the organization that develops it, and how does such a dynamic occur? To track the evolution of one design over time, this exploratory study compared software designs developed via different modes of organization-open source versus proprietary development. As it turned out, the architecture of the product developed by a highly distributed team of developers (Linux) was more modular than another product of similar size developed by a co-located team of developers (Mozilla). The study helped reveal potential performance tradeoffs from architectures with different characteristics.

Do We Listen to Advice Just Because We Paid for It? The Impact of Cost of Advice on Its Use

People make decisions every day by weighing their own opinions with advice from other sources. But do we know whether people use advice in a way that is helpful to them? In two experiments performed under controlled, laboratory conditions, Gino found that all else being equal, people weigh advice differently according to the amount of money they pay for it. Also, the cost of advice affects the degree to which people use it.

The IPS Property

This paper is about discrete-choice and econometric models. The "invariant proportion of substitution," or IPS, property comes into play when, for example, a consumer faces a choice among three laptop computers with slightly different attributes. How will improvements to one laptop's attributes affect how the consumer chooses to substitute one alternative for another? Steenburgh looked at probabilities based on assumptions about consumers' utility-maximizing behavior.

Analyst Disagreement, Forecast Bias and Stock Returns

It is well documented that financial analysts' opinions are reflected in stock prices. The problem: Analysts often operate under incentives that are inconsistent with telling the truth. Retail investors, who tend to be less sophisticated, may fail to make proper adjustments for the more nuanced of the resulting biases, some of which might be reflected in market prices. To study the scope of market efficiency, Scherbina studied analysts' incentives, resulting forecast biases, and their potential impact on market prices.

The Presentation of Self in the Information Age

In the past, we knew a lot about the seller of a product (through ads, marketing, or reputation) but little about the individual buyer. Times have changed. From the Internet to store loyalty cards, technology has made the marketplace into an interactive exchange where the buyer is no longer anonymous. The future market will likely be one in which personal information is shared and leveraged. Consumers who are willing to share their information will be more attractive to sellers and more sought-after than those who have bad reputations or refuse to participate.

Failing to Learn and Learning to Fail (Intelligently): How Great Organizations Put Failure to Work to Improve and Innovate

Successful companies see failure as a part of the innovative process, but there are social (organizational) and technical (skill-based) reasons why it is difficult to turn failures into learning opportunities. First, executives need to develop the skills to probe failures and analyze the root causes. Then improve management's technical skills in problem diagnosis, statistical process design, and qualitative and quantitative analysis. Organizationally, executives should create an environment where people are encouraged to identify failures, rather than encourage a "shoot the messenger" mindset.

Improving Corporate Governance with the Balanced Scorecard

The authors review the key roles of corporate boards and recommend a Balanced Scorecard approach to help boards work smarter, not harder. Kaplan and Nagel recommend a three-part Balanced Scorecard program: Part 1: An Enterprise Scorecard that includes enterprise-wide strategic objectives, performance measures, targets, and initiatives; Part 2: A Board Scorecard that defines and clarifies the strategic contributions and requirements of the board, and provides a tool to manage the board's performance; Part 3: Executive Scorecards, which define strategic contributions of top management and are used to select, evaluate, and reward senior executives.

Time-Driven Activity-Based Costing

Activity-based costing (ABC) has become popular in business writing and management circles. (An example of an activity would be process customer complaints.) However, calculating baselines for activities, developing the model, and retesting the model once it is implemented is time-consuming and costly. Kaplan and Anderson developed improvements in the process through what they call time-driven ABC. Time-driven ABC decreases the amount of data needed, and only requires estimates of two things: (1) the practical capacity of committed resources and their cost, and (2) unit times for performing transactional activities.

Geographically-Colocated Subgroups in Globally Dispersed Teams: A Test of the Faultline Hypothesis

Team diversity can harness strengths or drive a team apart. Troublesome faultlines appear when team members identify with a subgroup more strongly than with the larger team. Previous research, conducted on teams who worked face-to-face, has shown that these faultlines can be based on demographic factors (such as differences in nationality). The authors of this paper conducted a study on faultlines that arise between subgroups in different geographic locations. They found that faultline dynamics did indeed occur in teams with subgroups in different locations, and that their geographic diversity caused disruptive group relations, diminished trust, and increased conflict between subgroups.