Working Papers

A large number of Harvard Business School faculty write working papers that summarize original research in a narrow segment of a field of study, and that are intended for publication within a period of one to three years. Descriptions and papers are posted on the HBS Faculty and Research Web site. Our archive focuses on those working papers that are publicly accessible for download. We add an executive summary to the author's own abstract. For the most recent work, see our First Look section.

769 Results

 

Patent Trolls

Clearly defined property rights are essential for well-functioning markets. In the case of intellectual property (IP), however, property rights are complex to define; unlike ownership of physical assets, the space of ideas is difficult to clearly delineate. A solution employed by the United States and many other countries is the patent-a property right allowing an idea's owner sole commercialization rights for a period of time. A new organizational form, the non-practicing entity (NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to prosecute infringement on their patent portfolios. In this paper the authors provide the first large-sample evidence on the litigation behavior of NPEs. They show precisely which corporations NPEs target, when NPEs litigate, and how NPE litigation impacts the innovative activity of targeted firms. NPEs behave, on average, as patent trolls. This means that NPEs target firms that are flush with cash or that have just had positive cash shocks. NPEs even target conglomerate firms that earn their cash from segments having nothing to do with their allegedly infringing patents. The stakes of how to organize intellectual property disputes are massive. If the United States becomes a less desirable place to innovate because NPEs are left unchecked, innovation and human capital, and the returns to that innovation and human capital, will likely flee overseas. But innovators will also leave if they feel they are not are protected from large, well-funded interests that might infringe on innovative capital without recourse. Read More

Agglomeration and Innovation

It is well known that population and economic activity are spatially concentrated or clustered. But why does innovative activity tend to occur in clusters? What is the best way to measure this concentration? And what is the economic impact of this concentration? The authors take up these and related questions in this paper, a chapter of the forthcoming Handbook of Regional and Urban Economics. They summarize recent literature on agglomeration and innovation and explore how it relates to economic performance and growth. They also discuss the difference between invention vs. innovation and how these forces are measured; review patterns of innovation and agglomeration; and describe formal theories linking agglomeration and innovation. The authors also discuss research on other factors that work to sustain agglomeration clusters, link global clusters together, promote large vs. small company innovation, and similar phenomena. Throughout, they highlight important areas for future research. Read More

The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game

Small businesses are core to US economic competitiveness. Not only do they employ half of the nation's private sector workforce--about 120 million people--but also since 1995 they have created approximately two‐thirds of the net new jobs in the country. Yet in recent years, small businesses have been slow to recover from the recession and credit crisis that hit them especially hard. This lag has prompted the question, "Is there a credit gap in small business lending?" In this paper the authors compile and analyze the current state of access to bank capital for small business from the best available sources. The authors explore both the cyclical impact of the recession on small business and access to credit, and several structural issues that impede the full recovery of bank credit markets for smaller loans. They argue that the online banking market is likely to continue to grow, disrupting traditional ways of lending to small businesses. This will create both opportunities and risks for policymakers and regulators. Read More

Decision Making Under Information Asymmetry: Experimental Evidence on Belief Refinements

Managers often have to make decisions in settings where they (1) know more about the prospects of their firm than other parties and (2) care about how the less-informed party responds to their decisions. For instance, a manager may care about how the stock market responds to the firm's expansion plans. In such situations, the manager's decision may signal the firm's prospects to the less-informed party. This phenomenon has been researched in a variety of situations, including new product and service introductions, competitive entry, supplier contracts, and capacity investments. A common assumption in researching such issues is that managers will make decisions that perfectly reveal the firm's prospects to the less-informed party, even if it is costly to do so. For example, a firm facing a big market opportunity will open more stores than is optimal in order to signal its favorable prospects. The number of stores the firm opens must be so high that a firm facing a small opportunity will find it too expensive to mimic the number of store openings. While such predicted outcomes underpin much of the operations theory developed in these settings, they have not been reconciled against the decisions made by actual decision makers. In a laboratory experiment involving more than 200 participants, the researchers conduct such an analysis. Their findings offer the first evidence that decision makers choose not to make decisions that reveal the firm's market opportunity and instead make the same decision regardless of the firm's prospects. The researchers go on to demonstrate that the discrepant predictions change the theoretical implications of prior research. Read More

Learning from the Kursk Submarine Rescue Failure: The Case for Pluralistic Risk Management

During a military exercise in August 2000, a state-of-the-art Russian nuclear submarine, the Kursk, sank in the Barents Sea, triggering global media attention and an international rescue effort. In addition to Russia's Northern Fleet, two other organizations got involved in the rescue operation: the UK Submarine Rescue Service and a Norwegian offshore-diving company. Between them, these three parties seemingly had all that was needed to rescue the trapped sailors, yet the entire crew was lost. How did this happen? In this paper, focusing on the multiparty "virtual organization" formed by Russian, British, and Norwegian forces during the Kursk rescue mission, the authors explore the organizational, cultural, and structural origins of coordination failure. Then, reflecting on the limited ability of traditional, diagnostic risk management controls to address the demands of situations such as this, they call for the inclusion of pluralistic control principles into the risk-management practices of complex, multiparty organizations. Read More

Banks as Patient Fixed-Income Investors

What is the business of banking? Do banks primarily create value on the liability side of the balance sheet as suggested in theories of banking emphasizing liquidity creation? Does the essence of banking reside on the asset side, as in theories emphasizing banks' ability to monitor borrowers? Or does the special nature of banks derive from some synergy between their assets and liabilities? This paper argues that the specialness of traditional banks comes from combining stable money creation on the liability side with assets that have relatively safe long-run cash flows but possibly volatile market values and limited liquidity. To make this business model work, banks rely on deposit insurance, and bear the associated costs of capital regulation. Some preliminary evidence supports the authors' argument. For traditional banks there is a critical synergy between the asset and liability sides of the balance sheet. Read More

Activist Directors: Determinants and Consequences

Hedge fund activism has become a significant phenomenon in recent years. Compared to traditional shareholder activists, for instance, hedge fund activists have been making a broader range of demands and adopting a wider range of tactics to have those demands met. Given the importance that the demand for board positions has in the activist game plan, the authors of this paper examine hedge fund activism through cases where candidates sponsored by the activists become directors of the target companies. Findings show that activist directors appear to be associated with significant strategic and operational changes in target firms. The study also shows evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. The estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand. Read More

Creating Reciprocal Value Through Operational Transparency

Our labor is a part of a constant social process in which we work reciprocally on each other's behalf. Yet despite this interconnectivity, labor is becoming less and less interactive. We rarely observe the beneficiaries of our own efforts, nor do we observe and appreciate the people and processes that create the products and services we enjoy. In this paper, the authors argue and demonstrate through experiments that operational transparency between customers and employees essentially positions both parties as actor and observer, each with the potential to benefit from the other, and in ways that create perceived and objective value. The gains in performance can also be economically meaningful. The results therefore cast transparency as one additional lever that service managers may consider to improve the efficiency of their processes and the quality of outcomes they deliver. Furthermore, by making operational processes transparent, the authors suggest that companies can imbue the processes with substantive meaning for customers and employees alike, in ways that could potentially benefit the company. Read More

Positive and Normative Judgments Implicit in US Tax Policy and the Costs of Unequal Growth and Recessions

What does United States tax policy reveal about Americans' values and beliefs, and about how those values and beliefs have changed over time? In this paper, the researchers use theory and data to back out the implicit priorities and judgments in US tax policy over the last several decades. They find a dramatic shift in the mid-1980s that persisted, and even continued, over the next 25 years and that cannot be reconciled with conventional assumptions about these values and beliefs. They explore evidence on a number of possible explanations for this shift, including a link between economic and political inequality. They also attempt to use their results to estimate the welfare costs of two key phenomena—rising inequality and recessions—and find that these estimates are highly sensitive to the explanation one adopts for the evolution of US policy. Overall, the researchers argue, uncovering the judgments implicit in policy provides a promising path toward both a better understanding of policy priorities and more objective comparisons for policy evaluation. Read More

Does ‘Could’ Lead to Good? Toward a Theory of Moral Insight

When people encounter difficult ethical challenges, research has shown, they generally ask themselves the question, "What should I do?" Organizations, too, frame the principles to guide managerial conduct in terms of "should." Despite the pervasiveness of having a "should" mindset when confronting moral dilemmas, however, the authors of this paper argue that a significant class of ethical challenges, often overlooked in efforts to understand misconduct, benefit from the application of unconventional thinking. When encountering ethical dilemmas, shifting one's mindset from "What should I do?" to "What could I do?" generates moral insight, defined as the realization that ostensibly competing values are not entirely incompatible. Moral insight allows for exploration of more possible solutions beyond the apparent constraints of the problem provided, and for the formulation of creative solutions that satisfy multiple moral imperatives. Although our natural inclination is to contemplate dilemmas with a "should" mindset, the authors argue that adopting a "could" mindset opens a broader range of possibilities and brings us one step closer to moral insight. Read More

Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts

In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant-making bodies. Despite the growing role of crowds in making decisions once left to experts, however, we know little about how crowds and experts may differ in their ability to judge projects, or even whether crowd decision-making is based on any rational criteria at all. Drawing on a panel of national experts and data from the crowd funding platform Kickstarter, this study offers the first detailed comparison of crowd and expert judgment. There are three main findings. First, on average, there is a remarkable degree of congruence between the realized funding decisions by crowds and the evaluation of those same projects by experts. Second, there seems to be an "art" to raising money from crowds, one that may be systematically different from that of raising money from experts. Third, crowd funded projects are equally likely to have delivered on budget, result in organizations that continue to operate, and be successful in other ways. Overall, crowd funding appears to allow projects the option to receive multiple evaluations and reach out to receptive communities that may not otherwise be represented by experts. Read More

Handshaking Promotes Cooperative Dealmaking

A simple handshake can have large consequences for a negotiation. In this paper the authors suggest that handshakes before negotiations—or the lack thereof—serve as subtle but critical indicators of negotiators' social motives. In particular, handshakes signal willingness to act cooperatively during negotiations. The authors propose and show through experiments that handshakes increase cooperative behaviors at the bargaining table and, as a result, influence outcomes in both integrative and distributive negotiations. Integrative negotiations are those in which parties' interests are neither completely opposed nor completely compatible, allowing negotiators to mutually benefit by making efficient trades. In contrast, distributive or "zero-sum" negotiations—in which the parties' interests are completely opposed—are characterized by a different set of strategies such as appearing firm and even lying about one's interests. Overall, these results contribute to research and scholarship on social motives. The work also has practical implications for the importance of building rapport in negotiation and conflicts more generally. Read More

The Triumph of the Humble Chief Risk Officer

How do senior risk officers strike a balance between the twin roles of "compliance champion" and "business partner"? Understanding what role risk officers may play in organizational life is especially important in the wake of the 2007-2009 financial crisis, continuing corporate debacles, and ongoing corporate governance calls for the appointment of chief risk officers (CROs) and risk-management committees. This paper tracked the evolution of the role of two highly acclaimed chief risk officers (CROs), and the tools and processes they implemented in their respective organizations. While the companies are from very different industries (one is a power company, the other is a toy manufacturer), they both embraced the concepts and tools of Enterprise Risk Management. Over a number of years, at both firms, risk management transformed from a collection of "off-the-shelf," acquired tools and practices into a seemingly inevitable and tailored control process. The paper investigated the role of the CRO in making these transformations happen and discusses implications for managers. Read More

Cohort Turnover and Productivity: The July Phenomenon in Teaching Hospitals

Nearly all managers must deal with the consequences of employee turnover within their organizations. Despite the importance of this issue, several authors have observed that academic attention has been disproportionately focused on the causes rather than consequences of turnover. To investigate consequences more closely, the authors of this paper focus on the effects of turnover in a particularly high-stakes setting: teaching hospitals. Specifically, the authors examine the effects on productivity of cohort turnover-the planned simultaneous exit of a large number of experienced employees-in this case, medical residents and fellows-and a similarly sized entry of new residents and fellows. Typically, at (or slightly before) the beginning of every July, the most senior residents at teaching hospitals move on to permanent medical positions or fellowships at other hospitals, and recent medical school graduates arrive as first-year residents. The authors examine the impact of the July turnover on hospital productivity using data on all patient admissions from a large, multi-state sample of American hospitals over a 16-year period. By comparing trends in teaching hospitals to those for non-teaching hospitals over the course of the year, they find significant negative effects of the residency turnover on hospital efficiency as measured by risk-adjusted, average length of stay. Overall, the cohort turnover of resident physicians in teaching hospitals reduces medical productivity by increasing resource utilization and, to a lesser degree, decreasing quality. The authors discuss implications for labor turnover in other types of organizations. Read More

Eliciting Taxpayer Preferences Increases Tax Compliance

Most citizens dislike paying taxes. In the United States, for example, tax noncompliance is estimated to amount to some $385 billion annually. Many other governments also suffer from a "tax gap" in their national accounts. A meaningful portion of tax aversion can be understood and addressed by considering psychological characteristics of the tax process. To explore this possibility the authors design and carry out a set of experiments that allow taxpayers to express advisory preferences regarding the use of their tax dollars. They then assess the effects of this taxpayer agency treatment on tax compliance as well as satisfaction with tax payment and attitudes towards taxation. Findings show that providing taxpayers with such "taxpayer agency"—giving them a sense of influence over tax spending—significantly increases tax compliance. The authors also observe that agency operates, in part, by bringing together payment and benefit. In addition, agency creates no decrease in tax satisfaction or change in fear of audit, and it may reduce general antitax sentiment among taxpayers. Overall, giving taxpayers a voice may act as a two-way nudge, changing tax payment from a passive experience to a channel of communication between taxpayers and government. Read More

Leveraging Market Power Through Tying and Bundling: Does Google Behave Anti-Competitively?

This paper presents a series of incidents in which Google used tying and bundling to expand its dominance in a number of online markets and into additional markets. The author assesses whether these incidents raise concerns under antitrust law, and concludes that they do. Based on case law of technology companies that have engaged in tying and/or bundling and subsequently been subject to antitrust scrutiny, most notably Microsoft, it appears that Google's tying and bundling practices could face strong criticism for foreclosing competition. Such scrutiny is particularly important in light of Google's dominance in a number of online markets. The author also examines both current ties as well as ties Google used historically. The author concludes that Google's use of tying portends a future of reduced choice, slower innovation, lower quality, and higher prices. Read More

The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research

Neoclassical economics and several management theories assert that the corporation's sole objective is maximizing shareholder wealth. Despite these theoretical approaches, however, actual corporate conduct in some cases is inconsistent with shareholder value maximization as the sole objective of the corporation. In fact, corporations are now engaging in environmental and social causes with multiple stakeholders in mind and this is especially true for the world's largest corporations. Overall, the author presents an alternative view of the role of the corporation in society where the objective of the corporation is a function of its size. Specifically, the largest corporations are forced to balance different stakeholders' interests instead of simply maximizing shareholder wealth. The author attributes this change in the role of the corporation to the increasing concentration of economic activity and power in a few corporations which has resulted in 1) a few companies having a very large impact on society, 2) corporations and influential actors which are easier to locate, and 3) increasing separation of ownership and control. These events have led to what scholars Berle and Means (1932) predicted more than 80 years ago: both owners and "the control" accepting public interest as the objective of the corporation. Further research on the topics outlined in this paper may increase our understanding of corporate behavior and the role of these corporations in society. Read More

Morality Rebooted: Exploring Simple Fixes to Our Moral Bugs

Although scholars know far more now than they used to about the conditions under which individuals are likely to behave, current understandings are still primarily descriptive. This paper responds to the challenge of advancing knowledge of unethical behavior from largely descriptive research to a framework aimed to reduce or even eliminate unethical behavior in organizations. The goal is twofold: First, the authors identify approaches to mitigating unethical behavior based on empirical evidence from existing research in moral psychology and behavioral ethics. Second, they develop a framework for evaluating different strategies with prescriptive recommendations on how to reduce unethical behaviors. Overall they find that ethical fixes emerge in two broad categories: values-oriented and structure-oriented approaches. Values-oriented approaches shift people's preferences to be moral, whereas structure-oriented approaches seek to design incentives, decisions, and tasks such that the unethical option is less tempting. Based on theory and empirical findings, the authors propose that adopting both values-oriented and structure-oriented approaches mitigates the risk of adverse effects from one strategy taken from a single approach. Read More

The Contaminating Effects of Building Instrumental Ties: How Networking Can Make Us Feel Dirty

Network ties are essential to advancement in organizations: they provide access to opportunities, political insight, and technical knowledge. Yet networking with the goal of advancement often leaves individuals feeling somehow bad about themselves—even dirty. The authors use field and laboratory data to examine how goal-oriented or instrumental networking influences individual emotions, attitudes, and outcomes, including consequences for an individual's morality. The authors argue that networking for professional goals can impinge on an individual's moral purity—a psychological state that results from a person's view of the self as clean from a moral standpoint and through which a person feels virtuous—and thus make him or her feel dirty. There are three main insights: First, the authors show the importance of a clear conceptual distinction between instrumental networking driven by individual agency versus spontaneous networking reflecting the constraints and opportunities of the social context. Second, the research establishes the relevance of moral psychology for network theory. Third, because people in powerful positions do not experience the morally contaminating effects of instrumental networking, power emerges from this research as yielding unequal access to networking opportunities, thus reinforcing and perpetuating inequality in performance. Read More

‘My Bad!’ How Internal Attribution and Ambiguity of Responsibility Affect Learning from Failure

As scholars and practitioners have observed, failure clearly presents a valuable opportunity for learning in organizations. All too often, however, the opportunity is lost. Indeed, prior studies on the topic suggest that, perhaps ironically, such learning often fails to occur. In this paper the authors begin to uncover when and why individuals are more likely to learn from failed experiences. Specifically, they present evidence from three studies that support a conceptual model of learning from failure as operating through individuals' internal attributions of failure, driven in part by low ambiguity of responsibility, that lead to increased learning effort and subsequent improvement. The paper thus makes theoretical advances and carries implications for managers. Theoretically, the authors focus attention on the role of attribution in learning from failure, showing that attribution style is an important moderator of the relationship between failure and learning. Next, they identify a key situational determinant of individuals' responses to failure: ambiguity of responsibility. Third, they highlight the key role of effort as a mechanism for the effects of learning from failure. For managers, these results emphasize a specific measure that organizational leaders might take before an experience to enhance learning: actively managing perceptions of ambiguity of responsibility. Read More

Corporate and Integrated Reporting: A Functional Perspective

Corporate reporting plays two functions. The first is an "information function" that enables counterparties, such as investors, employees, customers, and regulators, to enter into an exchange of goods and services under specific terms. Companies also benefit from the information function by comparing their performance against peers, thereby informing internal resource allocation decisions. The second is a "transformation function," the result of a company engaging with stakeholders to get their input on the company's resource allocation decisions. The authors argue that integrated reporting is more likely to perform effectively these two functions than separate financial and sustainability reporting. Moreover, as the authors argue, these two functions vary in terms of how important the role of regulation is. Regulation and standard setting is likely to improve the information function but could well impede the transformation function. If regulation is too prescriptive and "rules-based," the risk is that integrated reporting becomes more of a compliance exercise. Read More

Firms and the Economics of Skilled Immigration

Firms play a central role in the immigration of skilled workers to the United States. In this paper the authors review the progress that has been made so far on understanding the impacts of high skilled immigration from the perspective of the firm. They discuss why an understanding of the economics of the firm is important, and emphasize the important degree to which firms internalize substitutions and complementarities over different worker groups and occupations. They then review recent academic work about firms and skilled immigration, and describe important areas for future research from both microeconomic and macroeconomic perspectives, respectively. Overall, the authors make clear that firms play an essential and active role in the skilled immigration process. In fact, the structure of the most important skilled immigration program allows firms to first choose the worker that they want to hire before the immigration to the United States occurs. The same importance is true for universities and students, who often become the workers later hired by firms (e.g., Stephan and Levin 2001, Stephan 2010). Given this policy framework, it is particularly valuable to understand exactly how these institutions choose to be a part of the immigration process, the role of the immigrants in their sponsoring institutions, and how these initial conditions persist for future assimilation of the immigrant. Read More

Profits and Economic Development

"Without development there is no profit, without profit no development," wrote economist and political scientist Joseph Schumpeter in his landmark book The Theory of Economic Development. An open question, however, has been whether excess profits—known as rents—are good for development. Economic theory thus far supports both sides of the argument, yielding conflicting advice for competition policy and anticorruption efforts. This paper examines the question by analyzing a comprehensive industry—level dataset of manufacturing sectors—and by applying methods of the competition-and-growth scholarship of economist Philippe Aghion and colleagues. This approach allows the analysis of industry-level profitability (as opposed to individual firms) and the overall growth of the economy. Evidence suggests that rents, as measured by a high-markup that is also an indication of low competition, seem to slow growth in productivity or output. The effect is strongest in poor countries. Higher rents are associated with a slower removal of tariffs, implying that firms rent-seek to prevent competition and maintain their high margins. This investment in rent-seeking may be in lieu of investment in innovation or new productive assets, which slows the overall growth of the sector. Furthermore, in industries in which high profits should be essential in generating growth, those sectors that would otherwise need external finance but in a country with weak financial markets, the negative impact of rents on growth is especially strong. Findings also show that countries with more rents in the manufacturing sector grow slower even when other controls are introduced. Read More

Revisiting the Classical View of Benefit-Based Taxation

President Barack Obama explains his support for progressive taxes as based on the belief that "those who've benefited most from our way of life can afford to give back a little bit more." Called the classical version of benefit-based taxation, this reasoning has been used by policymakers and scholars for centuries, but it has been assigned at best a subsidiary role in modern research on optimal tax policy. In this paper, the author revisits that view and shows how it might be incorporated into modern theory. It turns out that this classical version of benefit-based taxation fits seamlessly into the modern (Mirrleesian) approach, with results for optimal policy that depend on potentially estimable statistics. Optimal policy according to this view can take a wide variety of forms, including those that match existing policy well. More generally, to the extent that a mixture of this classical benefit-based reasoning and the more conventional welfarist (e.g., utilitarian) reasoning is a good approximation of prevailing objectives for tax policy, the model may offer a useful approach to positive optimal tax theory. Read More

Better Deals Through Level II Strategies: Advance Your Interests by Helping to Solve Their Internal Problems

While most of us focus on our own interests in negotiation, our counterparts are more likely to say "yes" to a proposal if it meets their interests. Frequently, their interests entail satisfying, or at least not annoying, their "behind the table" constituencies. These may include a boss, board, investor group, spouse, client, union membership, community group, NGO, political party, or the US Senate that must ratify the treaty that negotiators prepare on behalf of the President. The author of this paper argues that a potent barrier to success in negotiation is often the prospect that your or the other side's constituents will reject the deal. While most negotiators are highly sensitive to their own constituencies, they tend to pay far less attention to the other side's constituents: "that's their problem. Let them solve it." Yet one low-cost way for negotiators to advance their own interests can be help the other side solve its internal constituency problems—in a manner consistent with each both side's interests. Sophisticated negotiators have been amazingly inventive in coming up with practical and highly valuable approaches to this often‐unexplored challenge. This paper develops and illustrates several such approaches. Read More

Comparing the Cash Policies of Public and Private Firms

Industrial firms listed on stock markets in the United States held $1.5 trillion in cash at the end of 2011. Many commentators and policymakers observed that this so-called "dead money" might be one reason behind the sluggish performance of the United States and other developed economies since the Great Recession. But evidence on such cash-hoarding behavior is limited to listed (or 'public') firms, which account for a relatively small part of the US economy. Do private firms also hold large cash balances? Using a rich panel of over 200,000 non-SEC-filing private US firms, the author finds that the average public firm holds twice as much cash as the average large private firm over the 2002-2011 period. Results are most consistent with the hypothesis that differences in the extent to which public and private firms engage in market timing are a key driver of public firms' higher demand for cash, as the risk of misvaluation induces public firms to raise capital and accumulate precautionary cash reserves when they perceive their equity to be overvalued. Consistent with this hypothesis, the author finds that the cash difference between public and private firms is larger in industries with a higher prevalence of misvaluation shocks. In addition, public firms in these industries tend to save a larger fraction of their equity issuance proceeds than private firms, particularly in times when they have reasons to believe that their equity is overvalued. Read More

Payout Policy

Payout policy is at the core of many key questions in corporate finance. In a world in which financial markets are not frictionless, how much firms pay out and which vehicle they choose to distribute cash to their shareholders may affect their valuation, has a potential impact on how much taxes investors pay, may affect management's investment decisions, and may inform the market about how good the firm is relative to its peers. In this paper the authors review the academic literature on payout policy, with a particular emphasis on developments in the past two decades. Scholarship on payout policy has made significant advancements in the last 20 years, and we now know much more about the importance of taxes, agency, and signaling motives for payout policy. Perhaps the most important change in corporate payout policy in the last two decades has been the secular increase of stock repurchases and the apparent triumph of buybacks over dividends as the dominant form of corporate payouts. Looking at the bigger picture, the authors observe that, until recently, most scholarship has analyzed payout policy in isolation. An important recent development in the payout literature has been to consider the interaction between payout and other corporate policies, such as compensation or investment. The fact that payouts are not simply residual free cash flows underlines the importance of taking seriously the interdependence of financing, investment, and payout decisions. Read More

Corporate Financial Policies in Misvalued Credit Markets

The potential for overvaluation to impact firm decision-making is a potent idea with a long history in economic scholarship from foundational works to modern day texts. However, virtually all work on this idea has considered the potential for equity overvaluation to have an impact. The impact of bond market overvaluation on firm policies has thus far received little attention. This limited focus on potential debt market overvaluation is surprising given its size and importance to the economy: the US corporate bond market comprised $7.7 trillion in assets in 2011. The authors begin to fill the gap in scholarship by introducing the idea that mistakes made by the rating agencies should be correlated with bond pricing mistakes. They then examine the correlation in bond rating mistakes with the issuance decisions of firms as well as their cash holding, investment, and acquisition decisions. Findings include evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75 percent of the debt issuance funds increased capital expenditures and cash acquisitions. Read More

Poverty and Crime: Evidence from Rainfall and Trade Shocks in India

Concern about climate change has spurred a large body of scholarship examining how climate influences human behavior, particularly human conflict. While a link between climate and human conflict is well established, we still do not fully understand the mechanisms that underlie the observed relationship between rainfall and crime. In this paper the authors shed light on these mechanisms using four decades of district-level data from India. They first establish a robust effect of rainfall on different types of crime, with the strongest effects on violent crimes (including murder) and property crimes. They then go beyond previous studies, which simply document the link between weather variations and human conflict, and examine to what extent poverty is the main causal pathway between rainfall and crime. To do so they identify a source of income shocks for households in rural India that is completely independent of the amount of rainfall: trade reform that began in 1991. Findings show that violent crimes and property crimes, the types of criminal activities that are most sensitive to rainfall shocks, indeed respond to trade shocks. The larger the loss in trade protection a district experienced, the higher is the incidence of these crimes. Overall, the results provide evidence for income as a mechanism behind the observed rainfall-crime relationship, which had mostly been assumed in previous scholarship. Read More

Facts and Figuring: An Experimental Investigation of Network Structure and Performance in Information and Solution Spaces

How can managers create organizations that bring people together to successfully solve problems? One increasingly popular managerial tactic to improve problem-solving performance is to increase the connectedness, or what academics call clustering, of the organization. Using everything from transparent, open offices to open social collaboration platforms, connecting everyone and everything, the theory goes, will produce better solutions. True or false? In the lab, the authors randomly assigned individuals to 70 sixteen-person organizations—some more clustered than others—and asked each organization to solve a complex problem: divine the who, what, where, and when of an impending terrorist attack (akin to the famous Clue® whodunit game). They did so using a platform not unlike real intelligence problem-solving environments: Through their computers, individuals could search for information, share information with each other, and share theories about the solutions, while the platform tracked all behavior. The results? Connectedness had different effects on the "facts" and "figuring" stages of problem solving. Search for information (facts) was, indeed, more efficient the more connected the organization. But performance in interpreting the information (figuring) to develop solutions was undermined by too much connectedness. The same connections that helped individuals coordinate their search for information also encouraged individuals to reach consensus on less-than-perfect solutions, making connectedness a true double-edged sword. The authors conclude with a discussion of implications for both theory and practice in our increasingly connected 'small world' and suggest directions for future research. Read More

Learning By Thinking: How Reflection Improves Performance

Knowledge plays an important role in the productivity and prosperity of economies, organizations, and individuals. Even so, research on learning has primarily focused on the role of doing (experience) in fostering progress over time. To compare the effectiveness of different sources of learning, the authors take a micro approach and study learning at the individual level. They argue that learning from direct experience can be more effective if coupled with reflection—that is, the intentional attempt to synthesize, abstract, and articulate the key lessons taught by experience. Using a mixed-method approach that combines laboratory experiments and a field study in a large business process outsourcing company in India, they find support for this prediction. Further, they find that the effect of reflection on learning is mediated by greater perceived ability to achieve a goal (i.e., self-efficacy). Together, these results reveal reflection to be a powerful mechanism behind learning, confirming the words of American philosopher, psychologist, and educational reformer John Dewey: "We do not learn from experience ... we learn from reflecting on experience." Read More

Visualizing and Measuring Software Portfolio Architectures: A Flexibility Analysis

Contemporary business environments are constantly evolving, requiring continual changes to the software applications that support a business. Moreover, during recent decades, the sheer number of applications has grown significantly, and they have become increasingly interdependent. Many companies find that managing applications and implementing changes to their application portfolio architecture is increasingly difficult and expensive. Firms need a way to visualize and analyze the modularity of their software portfolio architectures and the degree of coupling between components. In this paper, the authors test a method for visualizing and measuring software portfolio architectures using data of a biopharmaceutical firm's enterprise architecture. The authors also use the measures to predict the costs of architectural change. Findings show, first, that the biopharmaceutical firm's enterprise architecture can be classified as core-periphery. This means that 1) there is one cyclic group (the "Core") of components that is substantially larger than the second largest cyclic group, and 2) this group comprises a substantial portion of the entire architecture. In addition, the classification of applications in the architecture (as being in the Core or the Periphery) is significantly correlated with architectural flexibility. In this case the architecture has a propagation cost of 23 percent, meaning almost one-quarter of the system may be affected when a change is made to a randomly selected component. Overall, results suggest that the hidden structure method can reveal new facts about an enterprise architecture. This method can aid the analysis of change costs at the software application portfolio level. Read More

Better Deals Through Level II Strategies: Advance Your Interests by Helping to Solve Their Internal Problems

While most of us focus on our own interests in negotiation, our counterparts are more likely to say "yes" to a proposal if it meets their interests. Frequently, their interests entail satisfying, or at least not annoying, their "behind the table" constituencies. These may include a boss, board, investor group, spouse, client, union membership, community group, NGO, political party, or the United States Senate that must ratify the treaty that negotiators prepare on behalf of the President. The author of this paper argues that a potent barrier to success in negotiation is often the prospect that your or the other side's constituents will reject the deal. While most negotiators are highly sensitive to their own constituencies, they tend to pay far less attention to the other side's constituents: "that's their problem. Let them solve it." Yet one low-cost way for negotiators to advance their own interests can be help the other side solve its internal constituency problems-in a manner consistent with each both side's interests. Sophisticated negotiators have been amazingly inventive in coming up with practical and highly valuable approaches to this often‐unexplored challenge. This paper develops and illustrates several such approaches. Read More

Opting Out of Good Governance

New disclosure rules of the Security and Exchange Commission (SEC) require that foreign firms listed on US exchanges articulate more clearly their compliance with exchange requirements. In this paper the authors study the extent to which cross-listed firms opt out of corporate governance rules, analyzing which firms opt out of US exchange requirements and the consequences of doing so. Opting out is quite common, with 80.2 percent of cross-listed firms opting out of at least one exchange corporate governance requirement. Firms that opt out appear to adopt weaker governance practices and have fewer independent directors. The decision to opt out appears to reflect the relative costs and benefits of this governance choice. The costs of complying are likely to be higher for insiders who might enjoy certain private benefits when following weak governance practices allowed in their home country. The benefits of complying are likely to be higher for firms that are attempting to raise capital and grow. Consistent with this tradeoff, the data show that firms based in countries with weak corporate governance are less likely to comply, and those that are based in such countries and are expanding and issuing equity are more likely to comply. Opting out of US exchange requirements also has consequences for how the market values cash holdings. For firms from countries with weak governance requirements, cash within the firm is worth significantly less if the firm opts out of more US exchange requirements. Overall, the paper provides insight about the costs and benefits of complying with stringent governance rules and also sheds light on the effect of governance requirements on valuation. Read More

Speaking of Corporate Social Responsibility

While many scholars have observed that corporate social responsibility (CSR) is a deeply cultural process, there are inconsistent findings on the specific cultural mechanisms by which culture affects CSR. This paper suggests that the way in which corporations use language is a strong predictor of their CSR and sustainability practices. It addresses two questions: 1) Why do CSR practices vary significantly across countries? And 2) How does the future-time orientation of companies' working languages affect their adoption of, compliance to, and engagement in corporate social responsibility programs? Building on the future-time criterion of scholars Dahl (2000) and Chen (2013), which separates languages into two broad categories-those languages that require future events to be grammatically marked when making predictions, and those that do not-the authors examine thousands of global companies across 59 countries from 1999 to 2011. The empirical results support the hypothesis that languages that grammatically separate the current tense from the future tense can significantly affect how corporations perceive future-oriented strategies, and so make corporate behavior less future-oriented. Overall, the authors introduce a new way to think about underlying variation in global CSR practices. As they show in this paper, it is crucial to examine language as an important underlying feature that shapes cultural values and the norms in a society. The study also builds on research into the ways in which perceptual category systems focus the attention, and subsequently, the behaviors, of corporate leaders. Read More

Waste, Recycling and Entrepreneurship in Central and Northern Europe, 1870-1940

The efficient and appropriate collection and disposal of solid waste has been recognized as essential to the hygiene and health of urban societies since the nineteenth century. Over the course of the first half of the twentieth century, sanitary engineers and the broader public also came to understand that the inappropriate treatment of waste could cause major environmental degradation, while recycling could contribute significantly to environmental sustainability. A key question for this industry, therefore, has been whether such social value could be combined with the pursuit of profitable opportunities. In this paper the authors focus on the late nineteenth century through the 1940s, a crucial period for the emergence of firms concerned with waste disposal in industrialized central and northern Europe. The authors show that German, Danish, and other European entrepreneurs built substantial businesses which aimed to achieve "shared value" by making positive social and environmental contributions to their societies. Some of these entrepreneurs had strikingly modern views of environmental challenges and they prefigured many later twentieth-century recycling processes. At the same time, the profit motive encouraged technological innovation, a major ideal of capitalist enterprise, and left a legacy of scientific and engineering knowledge of waste materials and their processing and utilization which benefited later recyclers. Although post-1970 non-profit community recycling centers, municipal collection programs, and recycling divisions of waste management companies provide the terminology and the ideology behind modern recycling, they owe their technological and organizational foundations to an earlier generation of profit-seeking engineers, scientists, and entrepreneurs. Read More

The Use of Broker Votes to Reward Brokerage Firms’ and Their Analysts’ Research Activities

Broker votes are one of the most pervasive yet least understood reporting practices on Wall Street. The votes are essentially ratings of the value of brokers' investment research services. These ratings are produced by institutional investors (the "buy side") and solicited by broker dealers (the "sell side"). Little research to date, however, has examined the determinants of broker votes, their consequences, and their economic function. In this paper the authors use data gathered from a mid-sized investment bank for the years 2004 to 2007 in order to study how broker votes are related to institutional investors' commission payments and analysts' client services and compensation. Results overall suggest that broker votes help to facilitate implicit contractual relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. Broker votes are neither mere popularity contests nor a simple reflection of trading in analysts' covered stocks. Instead, they appear to be a key component of the investment research industry's contracting technology, acting as the nexus for a set of relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. The findings thus deepen our understanding of how information is exchanged on Wall Street and help to explain why the practice of collecting and aggregating client votes—a costly internal reporting procedure—has stood the test of time and has been replicated across countless sell-side research departments. Read More

Return Migration and Geography of Innovation in MNEs: A Natural Experiment of On-the-Job Learning of Knowledge Production by Local Workers Reporting to Return Migrants

Since the mid-1990s, a large number of multinational enterprises (MNEs) have set up research and development centers in China, India, and other emerging markets. Such MNEs face constraints in expanding their "geography of innovation" —that of producing and transferring knowledge across borders—because for the MNE knowledge is likely to be localized within larger, more established centers of knowledge production. How do MNEs in emerging markets circumvent this constraint? In this paper, the author uses personnel data from a Fortune 50 technology firm and studies the role of return migrants in facilitating patenting at the emerging market R&D center. The author also studies on-the-job learning of knowledge production by local employees who report to return migrants at an emerging-market R&D setting. The findings generate insights into the functioning of 'internal labor markets' of multinationals. The results are also important for managers: Given the great many Fortune 500 MNE R&D centers in countries such as China and India, and the large fraction of these centers managed by return migrants, the findings may assist those who set up and manage current and future MNE R&D centers. Read More

Consequences to Directors of Shareholder Activism

Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Read More

Integrated Reporting and Investor Clientele

As a relatively new phenomenon in the world of corporate reporting, integrated reporting (IR) has gained traction across both the corporate and investor community in the last 10 years. A recent pilot program of the International Integrated Reporting Council, for example, included more than 100 large multinational companies supported by an investor network with more than 40 members. Although IR has the potential to fundamentally change corporate reporting, we still know relatively little about its causes and consequences. Proponents of IR argue that the attraction of long-term investors is a benefit of adopting IR. While anecdotal evidence has suggested the presence of a link, no empirical evidence to date has been provided to establish such a relation. In this paper, the author examines how the practice of IR affects the investor base of the firm. Specifically, analyzing data on more than 1,000 firms between 2002 and 2010, he finds that firms practicing IR have a more long-term investor base and fewer transient investors. In addition, evidence supports a causal mechanism from IR to the investor base of a firm. Investor activism on sustainability issues is shown to be effective in improving IR, but such investor-induced changes in IR do not affect the composition of the investor base. Overall, the paper contributes to emerging scholarship that seeks to understand the causes and consequences of sustainability and integrated reporting. It also contributes to studies examining how companies cater to different types of investors. Read More

Management Practices, Relational Contracts, and the Decline of General Motors

What led to General Motors' decline? Long regarded as one of the best managed and most successful firms in the world, its share of the US market fell from 62.6 to 19.8 percent between 1980 and 2009, and in 2009 the firm went bankrupt. The authors argue that the conventional explanations for GM's decline are seriously incomplete. They discuss a number of causes for the firm's difficulties, and make the case that one of the reasons that GM began to struggle was because rival Toyota's practices were rooted in the widespread deployment of effective relational contracts--agreements based on subjective measures of performance that could neither be fully specified beforehand nor verified after the fact and that were thus enforced by the shadow of the future. GM's history, organizational structure, and managerial practices made it very difficult to maintain these kinds of agreements either within the firm or between the firm and its suppliers. The authors also argue that at least two aspects of GM's experience seem common to a wide range of firms. First, past success often led to extended periods of denial: Indeed a pattern of denial following extended success appears to be a worldwide phenomenon. Second, many large American manufacturers had difficulty adopting the bundle of practices pioneered by firms like Toyota. The paper concludes by discussing the implications of this history for efforts to revive American manufacturing. Read More

From Crowds to Collaborators: Initiating Effort and Catalyzing Interactions Among Online Creative Workers

Online "organizations" are becoming a major engine for knowledge development in a variety of domains such as Wikipedia and open source software development. Many online platforms involve collaboration and coordination among members to reach common goals. In this sense, they are collaborative communities. This paper asks: What factors most inspire online teams to begin to collaborate and to do so creatively and effectively? The authors analyze a data set of 260 individuals randomly assigned to 52 teams tasked with developing working solutions to a complex innovation problem over 10 days, with varying cash incentives. Findings showed that although cash incentives stimulated a significant boost of effort per se, cash incentives did not transform the nature of the work process or affect the level of collaboration. In addition, at a basic yet striking level, the likelihood that an individual chooses to participate depended on whether teammates were themselves active. Moreover, communications among teammates led to more communications, and communications among teammates also stimulated greater continuous levels of effort. Overall, the study sheds light on how perspectives on incentives, predominant in economics, and perspectives on social processes and interactions, predominant in research on organizational behavior and teams, can be better understood. Read More

The Diseconomies of Queue Pooling: An Empirical Investigation of Emergency Department Length of Stay

Improving efficiency and customer experience are key objectives for managers of service organizations including hospitals. In this paper, the authors investigate queue management, a key operational decision, in the setting of a hospital emergency department. Specifically, they explore the impact on throughput time depending on whether an emergency department uses a pooled queuing system (in which a physician is assigned to a patient once the patient is placed in an emergency department bed) or a dedicated queuing system (in which physicians are assigned to specific patients at the point of triage). The authors measured throughput time based on individual patients' length of stay in the emergency department, starting with arrival to the emergency department and ending with a bed request for admission to the hospital or the discharge of a patient to home or to an outside facility. The findings show that, on average, the use of a dedicated queuing system decreased patients' lengths of stay by 10 percent. This represented a 32-minute reduction in length of stay—a meaningful time-savings for the emergency department and patients alike. The authors argue that physicians in the dedicated queuing system had both the incentive and ability to make sure their patients' care progressed efficiently, so that patients in the waiting room could be treated sooner than they otherwise would have. Read More

Modularity and Intellectual Property Protection

Modularity is a means of partitioning technical knowledge about a product or process. The authors investigate the impact of modularity on intellectual property protection by formally modeling the threat of expropriation by agents. The principal has three options to address this threat: doing nothing, licensing the focal IP ex ante, and paying agents to prevent their defection. The principal can influence the value of these options by modularizing the technical system and by hiring clans of agents, thus exploiting relationships among them. The paper also gives examples of how managers arrive at a strategy in practice. Overall, the study contributes to the theory of profiting from innovation in three ways: First, it shows how the innovator's best choice of action against expropriation by agents-doing nothing, licensing, or paying agents-derives from the characteristics of the system, i.e., the share of trustworthy agents, the number of agents, the intensity of competition, the size of clans, the number of modules, and the degree of complementarity. Second, the innovator can use clans and modularity to increase profits, and the paper shows how clans and the modular architecture of the system interact to either reinforce or mitigate each other. Third, social relationships and norms of fairness affect the normative implications of an analysis based on rational choice theory. Implications for managers are also discussed. Read More

The Rising Cost of Consumer Attention: Why You Should Care, and What You Can Do about It

Attention is the allocation of mental resources, visual or cognitive, to visible or conceptual objects. Before consumers can be affected by advertising messages, they first need to be paying attention. As Thales S. Teixeira writes in this paper, the quality of consumer attention has been falling for decades. Consumers have lost interest in the information content of ads because they can access more and better information on‐demand on the Web. In addition, the price of marketers' acquiring high-quality attention has increased by as much as nine‐fold in the past two decades. To compensate for these circumstances marketers have typically responded by advertising more or by pursuing other means, such as price promotions, to acquire customers. However, these tactics risk eroding current profits and future revenues. A better solution, argues Teixeira, is to find cheaper attention or increase its conversion into sales. Novel approaches described in the paper, such as Lean Advertising and Viral Ad Symbiosis, can help to mitigate the rising cost of attention. Ultimately, in order to effectively manage the valuable resource of consumer attention, marketers will need to tailor their advertising strategies to the attention contingently available to them. This paper shows how to achieve this through Teixeira's Attention‐Contingent Advertising Strategy. He also lays out the fundamental principles of the economics of attention, an emerging field. Read More

Digital Discrimination: The Case of Airbnb.com

To build trust and facilitate transactions, online marketplaces present information not only about products, but also about the people offering the products. Many platforms now allow sellers to present personal profiles, post pictures of themselves, and even link to their Facebook accounts. While these features serve the laudable goals of building trust and accountability, they can also bring unintended consequences: Personal profiles may facilitate discrimination. Benjamin G. Edelman and Michael Luca investigate the extent of racial discrimination against hosts on the popular online rental marketplace Airbnb.com. They construct a data set combining pictures of all New York City landlords on Airbnb with their rental prices and information about characteristics and quality of their properties. The authors use this data to measure differences in outcomes according to host race. Nonblack hosts are able to charge approximately 12 percent more than black hosts, holding location, rental characteristics, and quality constant. Moreover, black hosts receive a larger price penalty for having a poor location relative to nonblack hosts. These differences highlight the risk of discrimination in online marketplaces, suggesting an important unintended consequence of a seemingly-routine mechanism for building trust. Read More

Tommy Koh: Background and Major Accomplishments of the ’Great Negotiator, 2014

Tommy Koh is a diplomat, professor, and international lawyer currently serving as Ambassador-at-Large for the Government of Singapore. He will be the 2014 recipient of the Harvard Program on Negotiation's "Great Negotiator Award." In this paper, the authors discuss Koh's life, career, and major accomplishments as a negotiator. They summarize several of his most significant negotiations to date, exploring his successes at forging creative, lasting solutions to complex challenges and disputes. The authors discuss Koh's leadership in establishing the United States-Singapore Free Trade Agreement (USSFTA), developing and ratifying a charter for the Association of Southeast Asian Nations (ASEAN), resolving territorial and humanitarian disputes in the Baltics and Asia, and successfully leading two unprecedented global megaconferences: the Third U.N. Conference on the Law of the Sea and the U.N. Conference on the Environment and Development, also known as the Earth Summit. As part of the 2014 Great Negotiator Awards program, negotiation faculty and students will analyze several of these experiences in much greater depth in order to extract their most valuable lessons for theory and practice. Read More

Separating Homophily and Peer Influence with Latent Space

People are often more willing to try new things when they see others doing so. This phenomenon, which academics call "social influence", has a profound impact on many aspects of customer decision-making and marketing. For example, social influence affects consumers' willingness to take up new technologies, adopt and use social networks, and ask their physicians for particular prescription medicines. Marketers are thus eager to understand how and to what extent social influence affects people's consumption decisions. To date, however, it has been difficult to pinpoint the effects of social influence, as researchers have struggled to separate it from a simple fact that like-minded people tend to enjoy the same things, per the adage "Birds of a feather flock together." The authors use the field of mobile app adoption in Japan to examine this problem. Japan is an ideal testing ground because approximately 80-85 percent of all page views occur through mobile. In addition, mobile apps are often social in nature, especially those that are linked to a social network platform. The authors devise a new method to assess social influence by controlling for other factors that usually complicate the picture. Overall, the findings show that peer usage accounts for more than a quarter of all mobile app adoptions. The paper also highlights a risk that firms could overestimate social influence by 40 percent on average, even up to 100 percent in certain cases. The authors' method helps overcome this risk. Read More

Price Coherence and Adverse Intermediation

In modern markets, buyers can often buy the same good or service directly from a seller, and through one or more intermediaries, all at the same exact price. Buyers respond by choosing whichever intermediary offers the greatest benefit - perhaps a rebate, some kind of "points," or superior service. Importantly, buyers ignore the fees that intermediaries charge to sellers. The resulting outcomes can be distortionary and welfare-reducing. In particular, as intermediaries compete to attract buyers, they can set benefit levels so high that no net value is created and, sometimes, that buyers and seller would be jointly better off without intermediaries. The study examines six markets in which intermediaries are prominent: travel booking networks, credit and debit cards, insurance brokers and financial advisors, malls and marketplaces (such as Amazon Marketplace), cashback and rebate services, and search engine advertising. In each instance, a law, norm, intermediary policy, or similar rigidity prevents sellers from passing an intermediary's fees to the specific buyers who choose to use that intermediary. Read More

Redrawing the Lines: Did Political Incumbents Influence Electoral Redistricting in the World’s Largest Democracy?

Most democratic countries undergo a process of redrawing their electoral boundaries every few years, usually with the goal of equalizing population sizes across constituencies. While this is important in maintaining the principle of one-person, one-vote, there is concern that the redistricting process can be influenced by political incumbents to create safe seats, where incumbents are unlikely to face strong electoral challenges ("gerrymandering"). In this paper the authors study this issue in the context of India, the world's largest democracy. India redrew the boundaries of national and state electoral constituencies in 2008 after a gap of three decades. Examining the influence of political incumbents on this redistricting process, the authors find that, by and large, the process achieved its primary goal of equalizing population sizes across constituencies. More importantly, the redistricting process does not appear to have been influenced by incumbent politicians to a great extent, although there is some evidence that the constituencies of specific politicians (advisory committee members) were less likely to undergo unfavorable changes. Overall, the redistricting process did not make a large difference to either the advantage enjoyed by the incumbent party or the electoral prospects of incumbent politicians. An important policy conclusion of the study is that it is possible to implement politically neutral redistricting plans in a developing country, provided that a non-political body is in charge of the process, and that the process is transparent and inclusive of all relevant stakeholders. Read More

Economic Transition and Private-Sector Labor Demand: Evidence from Urban China

One of the key economic and historic events of the late twentieth century was the transition of centrally planned socialist economies to market economies, including the movement of labor from state employment to private employment. The authors examine two questions: 1) What are effective policies for gradually transitioning labor into the private sector? 2) What is the adaptability of labor demand in the new private sector during economic transition? Data from urban China and show that delinking housing benefits from state-sector employment accounts for more than a quarter of the overall increase in labor supply to the private sector during 1986-2005. Furthermore, increasing the private-sector labor supply by 10 percent reduces wages by 1.8 to 3.2 percent. These results have several implications: First, employer-provided housing benefits contribute to reduced labor mobility across sectors, a phenomenon called "job-lock" (similar patterns have been documented for employer-provided health benefits in the United States). Second and more importantly, the private sector, even in its infancy, can absorb a significant amount of labor without large wage declines. However, the projected magnitudes of labor movement into the Chinese private sector are so large that they still imply drastic private-sector wage reductions, if capital and technology movements remain at the same rate as in these data. Thus, to minimize wage reductions, Chinese policy makers may want to consider policies that increase the availability of other factors of production into the private sector, such as greater capital availability or adoption of newer technologies, to raise labor productivity. Read More

Mechanisms of Technology Re-Emergence and Identity Change in a Mature Field: Swiss Watchmaking, 1970-2008

According to most theories of technological change, old technologies tend to disappear when newer ones arrive. As this paper argues, however, market demand for old technologies may wane only to emerge again at a later point in time, as seems to be the case for products like Swiss watches, fountain pens, streetcars, independent bookstores, and vinyl records, which have all begun to claim significant market interest again. Looking specifically at watchmaking, the author examines dynamics of technology re-emergence and the mechanisms whereby this re-emergence occurs in mature industries and fields. Swiss watchmakers had dominated their industry and the mechanical watch movement for nearly two centuries, but their reign ended abruptly in the mid-1970s at the onset of the "Quartz Revolution" (also known as the "Quartz Crisis"). By 1983, two-thirds of all watch industry jobs in Switzerland were gone. More recently, however, as the field has moved toward a focus on luxury, a "re-coupling" of product, organizational, and community identity has allowed master craftsmen to continue building their works of art. The study makes three main contributions: 1) It highlights the importance of studying technology-in-practice as a lens on viewing organizational and institutional change. 2) It extends the theorization of identity to products, organizations, and communities and embeds these within cycles of technology change. 3) It suggests the importance of understanding field-level change as tentative and time-bound: This perspective may allow deeper insights into the mechanisms that propel emergence, and even re-emergence, of seemingly "dead" technologies and industries. (Read an interview with Ryan Raffaelli about his research.) Read More

Managing the Family Firm: Evidence from CEOs at Work

According to prior research, firm performance is weaker among companies with CEOs who have a family connection to the firm owners compared with nonfamily CEOs, that is professionals. Given the ubiquity of family firms and the implications for aggregate income and growth, what explains this variation? This paper provides evidence on the causes, features, and correlates of CEO attention allocation by looking at a simple yet critical difference between family and professional CEOs: the time they spend working for their firms. The Indian manufacturing sector makes an excellent case study because family ownership is widespread and the productivity dispersion across firms is substantial. Examining the time allocation of 356 CEOs of listed firms in this sector, the authors make several findings. First, there is substantial variation in the number of hours CEOs devote to work activities. Longer working hours are associated with higher firm productivity, growth, profitability, and CEO pay. Second, family CEOs record 8 percent fewer working hours relative to professional CEOs. The difference in hours worked is more pronounced in low-competition environments and does not seem to be explained by measurement error. Third, estimates with respect to the cost of effort, due to weather shocks and popular sport events, suggest that family CEOs place a higher relative weight on leisure, which could be due to either a wealth effect or job security. Overall, the evidence highlights the importance of how corporate leaders allocate their managerial attention. Read More

Zooming In: A Practical Manual for Identifying Geographic Clusters

The concept of clusters-high concentrations of economic activity in a specific geographic unit-is the foundation for a vast amount of research in economics, management, urban planning, sociology, and public policy. Despite notable exceptions, little research has looked carefully at the key issue of cluster identification. In this paper the authors detail the reasons, procedures, data, and results of their effort to identify geographic clusters. They want to increase awareness of the complexities behind cluster identification, and to provide a concrete method that can help researchers define clusters more accurately. In particular, the authors address three related questions in cluster identification: (1) What economic activity should be measured to determine clustering? (2) What is the appropriate geographic unit over which economic activity should be measured? (3) What levels of economic concentration are high enough for the geographic unit to be labeled a cluster? They answer these questions with a combination of literature review, theoretical discussion, and illustrations with various algorithms. While they use a specific empirical context-the global semiconductor industry-for illustrative purposes, the insights and methodologies are general enough for other contexts. The organic cluster identification methodology they propose is especially useful when researchers work in global settings, where data available at different geographic units complicates cross-country comparison. Read More

Innovating Without Information Constraints: Organizations, Communities, and Innovation When Information Costs Approach Zero

Information is expensive to process, store, and communicate. At least, this has been the prevailing assumption upon which most of our organizational theories rely. Yet we now live in a world where information is no longer prohibitively expensive. Thus there is tension between logics focused on hierarchy and control and more open and community-centric logics. This calls into question many of the assumptions underlying the strategic and organizational research that has been treated as foundational wisdom in management scholarship. In this paper, the authors explore the implications for managing innovation as information processing, storage, and communication costs approach zero. Overall, they argue that when information constraints drop dramatically and the locus of innovation shifts from residing solely within the hierarchical firm to also encompassing the larger community, there are profound challenges to the received theory of the firm and to theories of organizations and innovation. The authors conclude with thoughts for how these changes present opportunities for research on innovation and organizations. Read More

Information and Incentives in Online Affiliate Marketing

Compared to historic advertising methods, online marketing invites advertisers to attempt a sharply increased quantity of partnerships. Online relationships reduce the transaction costs of buying ad placements. In many advertising marketplaces, standardized contracts let an advertiser accept a proposed placement with a single click, and ad networks widely sell bundles of hundreds or thousands of placements. Meanwhile, many advertisers find they can get valuable leads and favorable pricing from the Internet's myriad small sites. These numerous relationships entail costs, too, such as selecting, compensating, and supervising the sites, making sure each site is suitable to show the advertiser's offer, and making sure sites in fact deliver the promised benefits. Advertisers thus turn to specialists and outside firms to handle important aspects of advertising-buying. In this paper, the authors evaluate advertisers' chosen management structures by measuring the relative prevalence of advertising fraud targeting advertisers engaged in online "affiliate marketing," a performance-based compensation system increasingly common in online ad campaigns. Specifically, the authors identify the vulnerabilities best addressed by outsourcing marketing management to external specialists, versus the problems better overseen by keeping management decisions in-house. They find outside advisors most effective at enforcing clear rules, but in-house staff excel at preventing practices viewed as "borderline" under industry norms. While the results apply most directly to advertisers considering the management structure of their online marketing programs, the analysis also speaks to broader concerns of outsourcing and the boundary of the firm. Read More

Heterogeneous Technology Diffusion and Ricardian Trade Patterns

The principle of Ricardian technology differences as a source of trade is well established in the theory of international economics. This theory argues that countries can focus on producing products in which they have comparative productivity advantages; subsequent exchanges afford higher standards of living in all countries than are possible without trade. While a key theory, economists have struggled to quantify the empirical importance of comparative technology advantages and their link to trade. This is especially difficult given the high degree to which technology states of countries and industries can be correlated with other traits about countries that could also promote trade. This study contributes to scholarship on Ricardian advantages through the development of a substantially larger dataset than previously utilized and the study of changes in technology/trade over time. Even more important, the study provides a tool for isolating relative technology growth in exporting countries across industries. The foundation for this identification is the modeling of Ricardian advantages through differences across countries and their industries in terms of their access to the U.S. technology frontier. The differences arise due to historical migration patterns (e.g., Chinese migration to San Francisco versus Hispanic migration to Miami). The study analyzes how technologies flow differentially to countries and industries based upon the historical settlement patterns of migrants from countries and the spatial development of new technologies in the United States (i.e., which technologies flourished in San Francisco versus Miami). The study finds that these differential technology flows are powerful enough to influence world trade patterns, and in the process, they provide new identification to an age-old theory. Read More

Surfacing the Submerged State with Operational Transparency in Government Services

Research shows that Americans' trust in government is near historic lows and frustration with government performance is approaching record highs. While debates rage about how effective government is in providing basic services, one explanation for these trends in public opinion is that, independent of effectiveness, many voters may simply be unaware that government provides any services at all. Previous research by the authors reveals that seeing the labor in which firms engage improves customer satisfaction. In this paper, the authors design and test an intervention targeted toward increasing citizens' awareness of the services provided by government. Specifically, they present the results of an experiment in which Boston-area residents interacted with a website that visualized the service requests submitted by members of the public and the City's efforts to address those requests. Does seeing the work of government—fixing potholes, repairing streetlamps, removing graffiti, collecting garbage—lead citizens to express more positive attitudes toward government and increase their support for maintaining and expanding the scale of government programs? The study shows that providing greater operational transparency into government's efforts to address citizens' needs can improve attitudes toward government. Read More

Skilled Immigration and the Employment Structures of US Firms

The immigration of skilled workers is of deep importance to the United States, particularly in occupations closely linked to innovation and technology commercialization. Appropriate policies and admissions levels for skilled workers remain bitterly debated in the popular press. The authors analyze how the hiring of skilled immigrants affects the employment structures of US firms. This focus on the firm is both rare and important, since economists typically study immigration through the conceptual framework of shifts in the supply of workers to a labor market; yet substantial portions of the US immigration framework have been designed to allow American firms to choose the immigrants that they want to hire. Young workers account for a large portion of such skilled immigrants; for example, 90 percent of H-1B workers are under the age of 40. Given this context, the authors look specifically at the role of young skilled immigrants within more than 300 large employers and major patenting firms over the 1995-2008 period. The evidence suggests that increased employment of young skilled immigrants 1) raises the overall employment of skilled workers in the firm, 2) increases the immigrant share of these workers, and 3) reduces the older worker share of skilled employees. The latter effect is evident even among natives only. Overall, these results provide a multifaceted view of how young skilled immigration shapes the employment structures of US firms. There are significant implications for the competitiveness of American firms, the job opportunities of natives and immigrants employed by these firms, the larger national innovative capacity of the United States, and much beyond. Read More

Standard-Essential Patents

Standards play a key role in many industries, including those critical for future growth. Intellectual property (IP) owners vie to have their technologies incorporated into standards, so as to collect royalty revenues (if their patents dominate some of the functionalities embodied in the standard) or just to develop a competitive edge through their familiarity with the technology. However, it is hard to know in advance whether patents are complements or substitutes, i.e., how essential they are. Thus a major policy issue in standard setting is that patents that seem relatively unimportant may, by being included into the standard, become standard-essential patents (SEPs). In an attempt to curb the monopoly power that the standard creates, most standard-setting organizations (SSOs) require the owners of patents covered by the standard to grant licenses on fair, reasonable and non-discriminatory (FRAND) terms. Needless to say, such loose price commitments can lead to intense litigation activity. This paper constitutes a first pass at a formal analysis of standard-essential patents. It builds a framework in which essentialization and regulation functions can be analysed, provides a precise identification of the inefficiencies attached to the lack of price commitment, and suggests a policy reform that restores the ex-ante competition called for in the literature and the policy debate. Read More

Path-Breakers: How Does Women’s Political Participation Respond to Electoral Success?

Many explanations have been put forward to explain the gender gap in executive positions in finance, business, and politics. However, scholars know surprisingly little about the effects of exposure to women who are competitively selected into leadership positions. Focusing on India, the world's largest democracy, the authors obtained data on elections to state legislative assemblies in 3,473 constituencies from the Election Commission of India over the period 1980-2007 in which most states had six elections. They used data for the 16 major states of India which account for over 95 percent of the total population. The authors identified a large and significant increase in the subsequent share of women candidates fielded by major parties in Indian state elections. The increase arises mainly from an increased propensity for previous candidates to run for re-election, rather than the entry of new women candidates. Given that a substantial fraction of incumbents in Indian state elections do not re-run and female incumbents overall are less likely to re-run than male incumbents, this is an important result. There is, however, no significant increase in the probability that a woman wins the next election. Consistent with this, the estimated impact on women's candidacy fades over time although a significant impact persists through two elections, which is a period of 10 years. Overall, this study makes clear that it is important to identify the extent to which a spontaneous dynamic operates in launching women into the political sphere when quotas are absent. Read More

What Shapes the Gatekeepers? Evidence from Global Supply Chain Auditors

Private gatekeepers, from credit rating agencies to supply-chain auditors, are supposed to provide unbiased, objective assessments of companies' internal operations, and such private assessments play a central role in contemporary regulatory regimes. While the impartiality of gatekeeping organizations has come into question over the past decade, little is known about what drives the decisions of the individual accountants, auditors, analysts, and attorneys who work at these organizations. Using data from a private, third-party social auditing firm that assesses global supply chain factories' adherence to corporate codes of conduct governing workplace conditions, this study reveals that external auditors' findings are shaped by a combination of economic incentives and social factors. The study highlights opportunities to design and staff audits to maximize their impartiality and credibility. Read More

Increased Speed Equals Increased Wait: The Impact of a Reduction in Emergency Department Ultrasound Order Processing Time

This study of ultrasound test orders in hospital emergency departments (EDs) shows that, paradoxically, increasing capacity in a service setting may not alleviate congestion, and can actually increase it due to increased resource use. Specifically, the study finds that reducing the time it takes to order an ultrasound counter intuitively increases patient throughput time as a result of increased ultrasound use without a corresponding increase in quality of care. Furthermore, the authors show that in the complex, interconnected system or hospitals, changes in resource capacity affects not only the patients who receive the additional resources, but also other patients who share the resource, in this case, radiology. These results highlight how demand can be influenced by capacity due to behavioral responses to changes in resource availability, and that this change in demand has far reaching effects on multiple types of patients. Interestingly, the increased ultrasound ordering capacity was achieved by removing what appeared to be a "wasteful" step in the process. However, the results suggest that the step may not have been wasteful as it reduced inefficient ultrasound orders. In healthcare, these results are very important as they provide an explanation for some of the ever-increasing costs: reducing congestion through increased capacity results in even more congestion due to higher resource use. Overall, the study suggests an operations-based solution of increasing the cost/difficulty of ordering discretionary but sometimes low-efficacy treatments to address the rise in healthcare spending. Therefore, to improve hospital performance it could be optimal to put into place "inefficiencies" to become more efficient. Read More

Do Measures of Financial Constraints Measure Financial Constraints?

A core question in corporate finance is how financial constraints affect firm behavior. To answer this question we need a way to identify constrained firms with reasonable accuracy. Since the financial constraints that a firm faces are not directly observable, scholars have tended to rely on indirect proxies-such as having a credit rating or paying dividends-or on one of three popular indices based on linear combinations of observable firm characteristics such as size, age, or leverage (the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices). In this paper the authors ask: How well do these measures of financial constraints identify firms that are plausibly financially constrained? The short answer is: not well at all. The authors develop three different tests that show that public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in paying out the proceeds of equity issues to their shareholders ("equity recycling"). Results imply that popular measures of financial constraints tend to identify as constrained subsets of firms that differ from the general firm population of public firms on a number of dimensions, but not in their ability to raise external funding. Importantly, the tests developed by the authors can be used to systematically test the extent to which any measure of financial constraints does capture constraints. Read More

Management: Theory and Practice, and Cases

The author reflects upon his diverse experiences throughout his career with the benefits and challenges of case method teaching and case writing. The case method is undergoing tremendous innovation as students in the twenty-first century engage in learning about corporations, management, and board oversight. In particular, the creative and analytical process of writing the novelAdventures of an IT Leader is examined. The book's "hero's journey" foundation continued in a second Harvard Business Press book, Harder Than I Thought: Adventures of a Twenty-First Century Leader, focusing on CEO leadership in the global economy and the fast-changing IT-enabled pace of business. A third novel is in preparation: It concerns corporate leadership challenges into reinventing boards of directors for the twenty-first century. Read More

When $3+$1 > $4: The Effect of Gift Salience on Employee Effort in an Online Labor Market

Do employees work harder when they are paid more? This study shows that paying above-market wages, per se, does not have an effect on effort. The authors offered an experiment in a field setting that allowed them to test for the conditions under which higher wages elicit higher effort. They hired three groups of workers for a data entry task on the online labor market oDesk.com, telling them all that this was a one-time job. Group one ("3") was hired at $3 per hour. Group two ("3+1") was also hired at $3 per hour, but before starting work, people in group two were told that there was unexpectedly extra money in the budget and they would instead be paid $4 per hour. Group three ("4") was hired directly at $4 per hour, so that the "extra" money would not signal a salient "gift" from the employer. Our findings show that higher wages in which the gift was salient (3+1) led to higher and more persistent effort. However, higher wages by themselves (4) had no effect on effort compared to the lower wage (3) condition. Moreover, higher effort in the 3+1 group was strongest for employees with the most experience on oDesk, and those who had worked most recently on oDesk-exactly the kind of workers for whom our $1 additional payment was likely to be most salient (e.g., because it is not common in this labor market). Read More

How Major League Baseball Clubs Have Commercialized Their Investment in Japanese Top Stars

Japanese money flowing from broadcasting rights, sponsorships, and merchandise contributes substantially to the prosperity of Major League Baseball (MLB) in America. This market growth depends on wide exposure of and good performance by Japanese major leaguers. Acquiring and signing these stars can become a passport to get in touch with the Japanese market directly. The authors examine how the MLB clubs have tried to commercialize their investment in Japanese top stars and assesses whether the clubs have succeeded. Seven factors attract revenues from Japanese companies and fans: pitcher or position player, player's popularity, non-stop flights from Japan, distance from Japan, non-sport tourist attractions in a city, size of Japanese community in the city, and player's and team's performance. The most important factor, however, is the player's talent and popularity in terms of performance in both Japan and the US and his media exposure in Japan including endorsement contracts. Read More

Monetary Policy Drivers of Bond and Equity Risks

Given the importance of nominal bonds in investment portfolios, and in the design and execution of fiscal and monetary policy, financial economists and macroeconomists need to understand the determinants of nominal bond risks. This is particularly challenging because the risk characteristics of nominal bonds are not stable over time. In this paper the authors ask how monetary policy has contributed to these changes in bond risks. They propose a model that integrates the building blocks of a New Keynesian model into an asset pricing framework in which risk and consequently risk premia can vary in response to macroeconomic conditions. The model is calibrated to US data between 1960 and 2011, a period in which macroeconomic conditions, monetary policy, and bond risks have experienced significant changes. Findings show that two elements of monetary policy have been especially important drivers of bond risks during the last half century. First, a strong reaction of monetary policy to inflation shocks increases both the beta of nominal bonds and the volatility of nominal bond returns. Positive inflation shocks depress bond prices, while the increase in the Fed funds rate depresses output and stock prices. Second, an accommodating monetary policy that smooths nominal interest rates over time implies that positive shocks to long-term target inflation cause real interest rates to fall, driving up output and equity prices, and nominal long-term interest rates to increase, decreasing bond prices. The paper shows empirical evidence that the Fed monetary policy followed an anti-inflationary stance after 1979, but it has moved to a more accommodating, nominal interest rate smoothing policy since the mid 1990's. Consistent with the predictions of the model, the first period corresponds to a period of average positive Treasury-bond beta and stock-bond correlation, and the second period to a period of average negative bond beta and stock-bond correlation. Overall, results imply that it is particularly important to take account of changing risk premia. Read More

Sharing Design Rights: A Commons Approach for Developing Infrastructure

Traditionally, a commons is a natural resource that gives rise to the problem of collective action: Individuals who act alone without consideration for others will arrive at outcomes that are bad for all. Pioneering research by Elinor Ostrom, a scholar of economic governance, has revealed that the claimants to a common pool resource are sometimes able to organize themselves to manage the commons on a day-today basis and to adapt to changing circumstances. In this paper, the authors study the dynamics of a commons organization: In 2006-2007, the Manchester City Council created a commons organization to design a number of new school buildings. The Council had broad decision rights over school design and construction, but rather than delegating those rights to its own staff or to a joint venture, as were the typical practices, the Council gave each school co-equal rights to approve the design so that no building project could go forward unless signed off by both the school and the Council staff. As such, the Council converted the decision-making process from a controlled, centralized style to a commons-based approach. Using the principles of Ostrom's commons theory the authors show that, overall, the commons form of organizing brought with it concomitant risk. This risk, however, was significantly lessened through the creation of a robust commons organization. Read More

Managing Churn to Maximize Profits

Customer defection or "churn" is a widespread phenomenon across a variety of industries. As customer acquisition costs continue to rise, managing customer churn has become critically important for the profitability of companies. This paper provides a novel method for determining which customers to target in order to maximize the profit of a retention campaign. The authors developed a binary classification method that uses a gain/loss matrix, which incorporates the gain of targeting and retaining the most valuable churners and the cost of incentives to the targeted customers. Results show that this approach leads to far more profitable retention campaigns than the traditional churn modeling approaches. In addition, the additional profits come at no cost for companies. The implementation of the retention campaign is unchanged, only the composition and size of the target group changes compared to traditional approaches. Read More

Imperfect Information, Patent Publication, and the Market for Ideas

The market for ideas improves the innovation process by promoting division of labor between upstream inventors and downstream developers. Frictions such as asymmetric information and search costs may hinder the smooth functioning of the market and delay, or even block, mutually profitable transactions between buyers and sellers. In this paper, the authors study the effects of an important disclosure mechanism, the publication of patent applications, on mitigating these frictions and, thus, facilitating transactions in the market for ideas. In particular, they employ an important policy change in the American Inventors Protection Act (AIPA), which required that U.S. patent applications filed beginning on November 29, 2000 be published 18 months after the application date. Findings show that post-AIPA patents, on average, are licensed 8.5 months earlier than pre-AIPA inventions. This shortening of the licensing lag is economically significant, given the 20-year duration of U.S. patents, and can translate to millions of dollars in profits and licensing revenues. Read More

Organizational Factors that Contribute to Operational Failures in Hospitals

Despite a pressing need to do so, hospitals are struggling to improve efficiency, quality of care, and patient experience. Operational failures—defined as instances where an employee does not have the supplies, equipment, information, or people needed to complete work tasks—contribute to hospitals' poor performance. Such failures waste at least 10 percent of caregivers' time, delay care, and contribute to safety lapses. This paper seeks to increase hospital productivity and quality of care by uncovering organizational factors associated with operational failures so that hospitals can reduce the frequency with which these failures occur. The authors, together with a team of 25 people, conducted direct observations of nurses on the medical/surgical wards of two hospitals, which surfaced 120 operational failures. The team also shadowed employees from the support departments that provided materials, medications, and equipment needed for patient care, tracing the flow of materials through the organizations' internal supply chains. This approach made it possible to discover organizational factors associated with the occurrence and persistence of operational failures. Overall, the study develops propositions that low levels of internal integration among upstream supply departments contributed to operational failures experienced by downstream frontline staff, thus negatively impacting performance outcomes, such as quality, timeliness, and efficiency. Read More

The Impact of Conformance and Experiential Quality on Healthcare Cost and Clinical Performance

This study examines the relationship between hospital's focus on both conformance and experiential dimensions of quality and their impact on financial and clinical outcomes. Conformance quality measures the level of adherence to evidence-based standards of care achieved by the hospitals. Experiential quality, on the other hand, measures the extent to which caregivers consider the specific needs of the patient in care and communication, as perceived by the patient. These are important dimensions to investigate because hospitals may face a tension between improving clinical outcomes and maintaining their financial bottom-line. However, little has been known on the joint impact of these dimensions on hospital performance in terms of cost and clinical quality. The authors' study, which examined data from multiple sources for the 3,458 U.S. acute care hospitals, is a first step towards understanding these relationships. Results show that hospitals with high levels of combined quality are typically associated with higher costs, but better clinical outcomes, as measured by length of stay and readmissions. These results suggest that hospitals face a tradeoff between cost performance and clinical outcomes. The study also finds that the effect of conformance quality on length of stay is dependent on the level of experiential quality. Taken together, these findings underline the important synergy that exists between conformance and experiential quality with regards to clinical outcomes, a topic that has been completely overlooked in the extant literature. Read More

Playing Favorites: How Firms Prevent the Revelation of Bad News

Given the current regulatory environment in the United States (and increasingly globally) of level playing-field information laws, firms can only communicate information in public exchanges. However, even in these highly regulated venues, there are subtle choices that firms make that reveal differential amounts of information to the market. In this paper the authors explore a subtle but economically important way in which firms shape their information environments, namely through their specific organization and choreographing of earnings conference calls. The analysis rests on a simple premise: firms understand they have an information advantage and the ability to be strategic in its release. The key finding is that firms that manipulate their conference calls by calling on those analysts with the most optimistic views on the firm appear to be hiding bad news, which ultimately leaks out in the future. Specifically, the authors show that "casting" firms experience higher contemporaneous returns on the (manipulated) call in question, but negative returns in the future. These negative future returns are concentrated around future calls where they stop this casting behavior, and hence allow negative information to be revealed to the market. Read More

Applying Random Coefficient Models to Strategy Research: Testing for Firm Heterogeneity, Predicting Firm-Specific Coefficients, and Estimating Strategy Trade-Offs

Textbooks generally define firm strategy as a set of decisions focused on managing organizational trade-offs in order to achieve long-term competitive advantage. Although strategy models theorize why the same actions by different firms lead to different effects on firm performance, empirical work typically estimates the average effect of an action across firms. The authors discuss how Random Coefficient Models (RCMs) can close the gap between theoretical and empirical research in strategy. Among other advantages to using RCMs, researchers can make a critical distinction between firm actions (or explanatory variables) that are statistically significant and those that are strategically significant. Read More

Historical Origins of Environmental Sustainability in the German Chemical Industry, 1950s-1980s

This paper examines the emergence of environmental strategies in the chemical industry between the 1950s and the 1980s. German chemical firms have been hailed as "eco-pioneers" in this regard, but this study demonstrates that initially the leading chemical companies of both Germany and the United States followed a similar approach to societal concerns about environmental pollution. Both German and American firms suggested that pollution incidents and complaints were a matter for local responses, tailored to specific settings, and should be considered primarily as nuisances rather than as environmental or health hazards. By the 1970s, however, the evolution of environmental strategies in the German chemical industry diverged greatly from that of the United States. This working paper explores how and why by examining the strategies of two prominent German chemical companies, Bayer and Henkel. The German firms diverged from their American counterparts in using public relations strategies not only to contain fallout from criticism of their pollution impact, but also to create opportunities for changes in corporate culture to encourage sustainability. While the US chemical industry remained defensive and focused on legal compliance, there was a greater proactivity among the German firms. The study stresses the importance of the regional embeddedness of Bayer and Henkel in the state of North Rhine-Westphalia, which made their reputations especially vulnerable to criticism. A new generation of corporate leaders also perceived that more reactive strategies were needed to fulfill societal expectations. They were savvy enough to understand that investing in environmental sustainability could provide an opportunity to create value for the firm, and that self-identifying as eco-pioneers had commercial as well as reputational benefits, provided that the image reflected genuine policies and processes. Read More

U.S. High-Skilled Immigration, Innovation, and Entrepreneurship: Empirical Approaches and Evidence

In the 2008 Current Population Survey, immigrants represented 16 percent of the United States workforce with a bachelor's education. Moreover, immigrants accounted for 29 percent of the growth in this workforce during the 1995-2008 period. Exceeding these strong overall contributions, the role of immigrants within science, technology, engineering, and mathematics (STEM) fields is even more pronounced. Even so, the importance of the global migration of STEM talent has been under-studied. In this paper, which focuses exclusively on the United States' experience, the author reviews academic work regarding the effects of global migration on innovation and entrepreneurship. Findings show that while some aspects of the phenomenon are well understood, such as the quantity and quality of immigrants, scholars still have very little insight on others, such as return migration. Overall, immigration has clearly been essential for the United States' leadership in innovation and entrepreneurship. There is also evidence of positive impacts of high-skilled diasporas for home countries, although the ledger that can be measured in the United States remains incomplete. Read More

What Do We Know About Corporate Headquarters? A Review, Integration, and Research Agenda

For the last five decades, research on the multidivisional firm has developed into one of the most important areas of management research. While the majority of this research deals with the firm's portfolio of businesses and international subsidiaries, there is a smaller but significant body of literature on the corporate headquarters (CHQ) - the multidivisional firm's central organizational unit. In this paper, the authors identify major shortcomings and gaps in this research. They then propose five high-priority research opportunities that demand particular attention: (1) The CHQ's nature and boundaries; (2) the CHQ's "functioning"; (3) the CHQ's staff(ing); (4) the CHQ's relationship with the operating units; and (5) the CHQ's impact. Overall, there is a need for a research agenda that builds upon the collective insights from the review but, at the same time, considers the findings of related literature as well as novel ideas from practice. Read More

The Disintermediation of Financial Markets: Direct Investing in Private Equity

As numerous news stories document, interest on the part of institutional investors in undertaking direct investments—and thus bypassing intermediaries—appears to have increased substantially. More generally, the impact of financial intermediation has also been a subject of considerable examination in the corporate finance literature. On the one hand, these middlemen should be able to overcome transaction cost and information problems; on the other, they may be prone to agency conflicts that affect their performance. In this paper, the authors focus on private equity, a setting in which disintermediation has become increasingly common. Private equity might appear to be a textbook case where the benefits from financial intermediation—in this case, specialized funds—would be substantial: not only are the transaction costs associated with structuring these investments large, but substantial information asymmetries surround the selection, monitoring, and nurturing of the investments, giving rise to potential information advantages for specialized investors. Using proprietary data covering 392 deals by a set of institutions, both co-investments and direct investments, between 1991 and 2011, the authors find a sharp contrast between the performance of solo deals and that of coinvestment deals. Outperformance of solo direct investments is due in part to their ability to exploit information advantages by investing locally and in settings where information problems are not too great, as well as to their relative outperformance during market peaks. The underperformance of coinvestments appears to be associated with the higher risk of deals available for coinvestments. Read More

Performance Responses to Competition Across Skill-Levels in Rank Order Tournaments: Field Evidence and Implications for Tournament Design

Tournaments and other rank-order incentive mechanisms have been used to model a wide range of settings: executive placement, elections, research and development and innovation contests, sports tournaments, and variable sales compensation: situations in which placing at the top of the performance rank-order leads to out-sized payoffs. This article analyzes how the level of competition and size of a tournament affects performance as a result of how strategic interactions affect contestants' incentives to exert high levels of effort. The authors estimate relationships between performance in these contests and competition levels across the full distribution of skill levels. They do this by studying data on software algorithm programming contests in which fine-grained data are available on contestant ability levels and performance over a large number of comparable contests. Findings show that while aggregate and average patterns of performance and effort may decline with increased competition, performance and effort may in fact increase among the highest-skilled contestants. The paper provides guidance to designers of innovation and crowdsourcing tournaments. Read More

How the Zebra Got Its Stripes: Imprinting of Individuals and Hybrid Social Ventures

Creating hybrid organizations that combine existing organizational forms is a complex process. Given the legitimacy challenges facing hybrid organizations, why are they created in the first place? The authors focus on the role of "environmental imprinting" on individuals: this means the persistent effects that individuals' environments during sensitive periods have on their subsequent behaviors. After constructing and analyzing a novel dataset of over 700 founders of social ventures, all guided by a social welfare logic, the authors suggest that individual imprinting helps to explain why an entrepreneur founding a social venture might create a hybrid by incorporating a secondary, commercial logic. Overall, the paper contributes to the understanding of hybrid organizations by providing the first large-scale, empirical examination of the antecedents of the widely-discussed type of hybrids that combine social welfare and commercial logics. Read More

X-CAPM: An Extrapolative Capital Asset Pricing Model

Many investors assume that stock prices will continue rising after they have previously risen, and will continue falling after they have previous fallen. This evidence, however, does not mesh with the predictions of many of the models used to account for other facts about aggregate stock market prices. Indeed, in most traditional models, expected returns are low when stock prices are high: in these models, stock prices are high when investors are less risk averse or perceive less risk. In this paper, the authors present a new model of aggregate stock market prices which attempts to both incorporate expectations held by a significant subset of investors, and address the evidence that other models have sought to explain. The authors' model captures many features of actual returns and prices. Importantly, however, it is also consistent with survey evidence on investor expectations. This suggests that the survey evidence is consistent with the facts about prices and returns and may be the key to understanding them. Read More

The Impact of Patent Wars on Firm Strategy: Evidence from the Global Smartphone Market

Patents and patent enforcement strategies have become an essential part of firms' competitive strategies: They are used as isolating mechanisms to protect intellectual property or as defense mechanisms to help obtain access to external innovations. Using data from the global smartphone market, the authors of this paper investigate the effect of escalated patent litigations—the so-called patent war—on firm strategy. The smartphone industry is a classic example of a business ecosystem, as participants in this industry are highly interconnected and this interconnectivity means that effects on some ecosystem participants are likely to extend to affect the rest. The authors' findings show that the efficacy of patent enforcement systems across markets plays a significant role in firm strategy during patent wars, and ultimately shapes the global competitive landscape. As the patent war intensifies, smartphone vendors, even those not directly involved in patent litigations, gradually shift their business foci to markets with weaker intellectual property (IP) rights protection. This shift, however, is attenuated for vendors with stronger technological capabilities and is more pronounced for vendors whose home markets have weak IP systems. Together, these changes shape the competitive landscape for platform competition. Read More

Waves in Ship Prices and Investment

Dry bulk shipping is a highly volatile and cyclical industry in which earnings, investment, and returns on capital appear in waves. In this paper, the authors develop a model of industry capacity dynamics in which industry participants have trouble forecasting demand accurately and fail to fully anticipate the effect that endogenous supply responses will have on earnings. The authors estimate the model using data on earnings, secondhand prices, and investment in the dry bulk shipping industry between 1976 and 2011. Findings show that returns to owning and operating a ship are predictable and closely related to industry-wide investment in capacity. High current ship earnings are associated with higher ship prices and higher industry investment, but predict low future returns on capital. Conversely, high levels of ship demolitions-a measure of industry disinvestment-forecast high returns. Read More

From Green Users to Green Voters

Does the diffusion of technology affect voting patterns? Technology is usually not aligned with a specific ideology or political party. Indeed, to the extent that technology raises living standards, all parties tend to favor technology diffusion. However, in some cases, voters may associate a political party with a specific technology. Green parties, for example, advocate for the diffusion of green energy technologies and pursue policies that foster the diffusion of green energies. This paper finds a significant effect of photovoltaic (PV) adoption on the increase in the share of votes for Germany's Green Party. In particular, the increase in the diffusion rate of PV systems between 1998 and 2009 led to an increase in the fraction of green votes of 1 percent, which represents 25 percent of the actual increase in the voting rate experienced by the Green Party between 1998 and 2009. Read More

Competition and Social Identity in the Workplace: Evidence from a Chinese Textile Firm

Social identity theory suggests that individuals derive part of their self-concept from their perceived membership in a social group and behave differently towards in-group versus out-group members. But despite the importance of social identity in organizational contexts, the existing empirical evidence in managerial economics has mostly come from lab experiments, and there exist few quantitative studies on the impact of social identity on worker behaviors in real workplaces. This paper provides novel evidence of the impact of social identity on workers' competitive behaviors in a Chinese textile firm that uses relative performance incentives. The firm provides an unusual empirical setting in which there is a historical and institutional division of all weavers into two distinct groups with different social identities: urban resident and rural migrant workers. Our findings show that the weavers do not compete against coworkers who share the same social identity even though there is a tournament incentive to outperform their coworkers in general. Instead, they only compete against coworkers who do not share the same social identity. Managers who design incentive schemes without understanding the dynamics of social incentives in the workplace may fail to achieve the intended effects on productivity. Read More

Firm Competitiveness and Detection of Bribery

Bribery is widespread around the world, illegal, detrimental to economic progress and social stability, and at the same time it can have clear economic benefits for a firm. While the benefits of bribery for a firm, through acquisition of contracts or avoidance of government bureaucracy, are intuitive and well documented, the costs after detection are less well understood. In this paper the author examines how the impact on firm competitiveness from the detection of bribery varies with the identity of the initiator, the method bribery was detected, and the firm's response after detection. All three dimensions are significantly associated with the impact on firm competitiveness. In addition, the data suggest that the most significant impact is on employee morale, followed by business relations and reputation, and then regulatory relations. Read More

Debating the Responsibility of Capitalism in Historical and Global Perspective

The concept of corporate responsibility is often assumed to be recent in origin. This is far from accurate. Indeed, a recent study has traced the long history of corporate responsibility concepts in the United States back to the eighteenth century. This working paper puts this United States evidence in a wider comparative and global perspective. The paper proceeds chronologically, beginning with the era of the first global economy during the nineteenth and early twentieth century, and going forward to the present day. Overall, the author demonstrates that from the nineteenth century, American, European, Japanese, Indian, and other business leaders discussed the responsibilities of business beyond making profits, although until recently such views have not been mainstream. Read More

J. Richard Hackman (1940-2013)

This paper—a tribute to the lifework of the late scholar J. Richard Hackman, a professor of social and organizational psychology at Harvard—recalls his many contributions to our understanding of work design and team effectiveness. As the authors note, Hackman's research changed the face of work design in countless industries, from service and manufacturing jobs, to education, health care, and the performing arts. His theory (with Greg Oldham) of job characteristics, and his evidence about how one could redesign and enrich jobs, made it possible for workers not only to perform well but also to develop and make meaningful contributions through their work. The author or coauthor of 10 books on group effectiveness, Hackman revitalized teams research with his insights into the conditions under which effective collective work processes emerge. Read More

Learning from Double-Digit Growth Experiences

Double-digit growth in real GDP is defined as a compound annual growth rate of 10 percent or more over a period of eight years or longer. This paper was written as a policy memorandum for the Government of Liberia, which seeks rapid growth in order to reach middle-income status by 2030. For Liberia, current IMF forecasts predict growth in real GDP on the order of 6 to 7 percent per year. The comparative analysis of this paper asks: In what ways do countries growing real GDP at double-digit rates differ from countries growing real GDP at rates of 6-7 percent? Overall, the findings suggest that Liberia is reasonably well positioned to become another country with double-digit growth. Yet as the analysis shows, countries that have attained double-digit growth are not unequivocally a group that one should strive to join. The ultra-rapid growers whose growth has been driven by resources, aid, or remittances have not generally conducted the sorts of reforms to the legal, regulatory, and governance environment that could have generated high growth without such unearned income. They have also not generally invested their rents well in infrastructure or human capital. Moreover, post-conflict double-digit growers have found it difficult to reform or invest well. Read More

Accountability of Independent Directors-Evidence from Firms Subject to Securities Litigation

Shareholders have two publicly visible means for holding directors accountable: They can sue directors and they can vote against director re-election. This paper examines accountability of independent directors when firms experience litigation for corporate financial fraud. Analyzing a sample of securities class-action lawsuits from 1996 to 2010, the authors present a fuller picture of the mechanisms that shareholders have to hold directors accountable and which directors they hold accountable. Results overall provide an empirical estimate of the extent of accountability that independent directors bear for corporate problems that lead to securities class-action litigation. These findings are useful for independent directors to assess the extent of risk they face from litigation, shareholder voting, and departure from boards of sued firms. While the percentage of named directors is small compared with the overall population of directors, individual directors can weigh their risk differently. From a policy perspective, the findings provide insight on the role that investors play in holding directors accountable for corporate performance. Read More

Helping You Help Me: The Role of Diagnostic (In)Congruence in the Helping Process within Organizations

Coming up with new ideas and solving difficult problems in modern organizations is increasingly accomplished through collaboration and teamwork. Often when people collaborate to tackle a knowledge-intensive project, they still need external help to achieve their goals: advice, assistance with task completion, team coaching, mentoring, and/or socio-emotional support. Yet we know little about the helping process itself. Indeed, sometimes helping attempts are useless, or worse. By conducting a field study of helping in a major design firm, the authors of this paper analyzed how the helping process unfolded. In particular, they focused on aspects of the process, differentiating episodes that employees assessed as successful from those they deemed unsuccessful. They discovered that the key differentiator was whether the helper and the person being helped established "diagnostic congruence" at the outset - a shared understanding of the state of the project and what sort of help was needed. Overall, the study contributes to our understanding of helping in organizations by discovering the interactional influences on the success of a helping episode. It also sheds light on help from a process perspective, highlights the importance of timing in aspects of the process, and uncovers the prominent role of emotion in perceptions of unsuccessful helping. Read More

Cumulative Innovation & Open Disclosure of Intermediate Results: Evidence from a Policy Experiment in Bioinformatics

The practice of opening intermediate works such as early results, algorithms, materials, data, and techniques—and disclosing and granting access to them for reuse by others—has been observed in many areas of innovation. In this paper, Kevin J. Boudreau and Karim Lakhani devise an experimental approach in order to investigate effects of an open regime on a challenging problem in bioinformatics that was amenable to cumulative innovation. The authors compared outcomes in this open regime with those in a closed regime in which no solutions were disclosed until the end of the experiment. Results suggest important trade-offs related to incentives, participation, and learning. For example, freer disclosures coincided with drops in participation and development activity, consistent with longstanding theories of economic incentives to make investments in innovation. Particularly striking is the magnitude of drops in incentives and participation. Even so, positive effects on learning outweighed the negative effects on incentives. Overall, the study contributes to analysis of the effect of supporting institutions on cumulative innovation. It also raises important questions for policy makers responsible for innovation. Read More

Visualizing and Measuring Enterprise Architecture: An Exploratory BioPharma Case

Achieving effective and efficient management of the software application landscape requires an ability to visualize and measure the current status of the enterprise architecture. To a large extent, this huge challenge can be addressed by introducing tools such as enterprise architecture modeling as a means of abstraction. In recent years, Enterprise Architecture (EA) has become an established discipline for business and software application management. Ideally, EA aids the stakeholders of the enterprise to effectively plan, design, document, and communicate IT and business related issues. Unfortunately, though, EA frameworks rarely explicitly state the kinds of analyses that can be performed given a certain model, nor do they provide details on how the analysis should be performed. In this paper, the authors present and test a method based on Design Structure Matrices (DSMs) and classic coupling measures that could be effective in uncovering the hidden structure of an enterprise architecture. The authors perform such a test using data consisting of a total of 407 architecture components and 1,157 dependencies from a biopharmaceutical company (referred to as BioPharma). Findings suggest that this method can reveal new facts about architecture structure on an enterprise level, equal to past results in the initial cases of single software systems such as Linux, Mozilla, Apache, and GnuCash. Read More

Religion, Politician Identity, and Development Outcomes: Evidence from India

Minority social groups may be disadvantaged by policy choices made by democratically elected leaders. It is therefore pertinent to consider whether increasing the political representation of minority groups improves their outcomes. This paper investigates whether the religious identity of state legislators in India influences development outcomes, both for citizens of their religious group and for the population as a whole. Results show that raising the share of Muslim legislators in individual districts leads to a large and statistically significant decline in infant and neonatal mortality rates. Importantly, they find no significant difference in the impact of Muslim political representation on Muslim compared with non-Muslim households. Indeed, the estimated coefficients indicate smaller beneficial impacts for Muslim children. Overall, these findings contribute to a recent literature on the relationship between religion and development, and to the literature on politician identity. Read More

Social Norms Versus Social Responsibility: Punishing Transgressions Under Conflicting Obligations

Laws and regulations provide guidelines for how to punish transgressions, but ultimately, individuals make the decisions about whether and how much to punish alleged wrongdoers. Many people feel inclined to treat wrongdoers preferentially in certain contexts. For example, people may be tempted to give people a break on "special days" such as birthdays because birthdays are part of a larger class of days with social or religious significance that produce strong norms of helping, kindness, and forgiveness. This study examines what happens when those with the authority to punish find themselves in situations that encourage leniency, specifically on offenders' birthdays. Examining over 134,000 arrest records for driving under the influence (DUI offenses) in the state of Washington during a ten-year period, the researchers find that, counter to predictions, police officers are less likely to be lenient toward marginal offenders (i.e., those just under the 0.08 BAC per se threshold) on their birthdays than on any other day. Overall, the paper argues that exploring how people respond to dual pressures provides insight into how they reconcile competing motivations, whether they can correctly compensate for biases, and additional ways in which discretion may be problematic. Individuals with the responsibility to punish behave differently in the presence of a social norm to treat someone leniently than they do in the absence of that norm. However, contrary to common intuition, the resolution of this tension results in harsher treatment of offenders rather than leniency. Read More

The Entrepreneurial Gap: How Managers Adjust Span of Accountability and Span of Control to Implement Business Strategy

The management accounting literature of the past twenty years is replete with studies of budgeting systems, balanced scorecards, performance measures, and contract-based incentives. Relatively little attention has been devoted, however, to the organization structure in which these systems exist. Existing accounting theory has little to say, for example, on how the design of performance measures might differ if a business is organized by function, by region, or by product or customer group. In this study, which augments in-depth field data collected by the author in three separate companies with a larger data set generated by 72 teams of MBA student researchers, organization design is reintroduced as a critical variable in understanding management control systems in the context of intensifying global competition. Results suggest that managers appear to adjust span of accountability relative to span of control based on the degree of innovation and independent initiative they wish to foster. In addition, when managers want employees to build long-term relationships with customers, develop new products and services, or navigate the labyrinths created by complex organization designs, they set span of accountability wider than span of control. Read More

Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

In accounting and finance the implied cost of equity capital (ICC)—defined as the internal rate of return that equates the current stock price to discounted expected future dividends—is an increasingly popular class of proxies for the expected rate of equity returns. Though ICCs are intuitively appealing and have the potential to help researchers better understand the cross-sectional variation in expected returns, much remain unknown about the sources of their measurement errors and how to correct for them; thus their use in regression settings should be interpreted with caution. This paper studies the measurement errors properties of GLS, a popular implementation of ICCs developed by Gebhardt, Lee, and Swaminathan (2001). The paper finds that ICCs can have persistent measurement errors that are associated with firms' risk or growth characteristics, and thus produce spurious results in regression settings. It also finds that ICC measurement errors are driven by not only analyst forecast biases but also functional form assumptions, suggesting that correcting for the former alone is unlikely to fully resolve these measurement-error issues. Together, these findings emphasize the importance of complementing ICC regressions with realized returns to establish robust inferences on expected returns. Read More

Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly

The instability of banks in the financial crisis of 2008 has stoked the enduring debate about optimal capital requirements. One of the central concerns has long been the possibility that capital requirements affect banks' overall cost of capital, and therefore lending rates and economic activity. In this paper, the authors estimate how leverage affects the risk and cost of bank equity and the overall cost of capital in practice. They are especially motivated by the potential interaction of capital requirements and the "low risk anomaly" within the stock market: That is, while stocks have on average earned higher returns than less risky asset classes like corporate bonds, which in turn have earned more than Treasury bonds, it is less appreciated that the basic risk-return relationship within the stock market has historically been flat-if not inverted. Using a large sample of historical US data, the authors find that the low risk anomaly within banks may represent an unrecognized and possibly substantial downside of heightened capital requirements. However, despite the fact that tightened capital requirements may considerably increase the cost of capital and lending rates, with adverse implications for investment and growth, such requirements may well remain desirable when all other private and social benefits and costs are tallied up. Read More

Prosocial Bonuses Increase Employee Satisfaction and Team Performance

Designing effective incentive schemes is a central challenge for a wide range of organizations, from multinational corporations to academic departments. In pursuit of identifying the most effective strategies, organizations have devised an impressive variety of such bonuses, from fixed salaries to pay-per-performance, from commissions to end-of-year bonuses. In this paper, the authors suggest that the wide variety in such schemes masks a shared assumption: That the best way to motivate employees is to reward them with money that they then spend on themselves. The authors—Lalin Anik, Lara B. Aknin, Michael I. Norton, Elizabeth W. Dunn, and Jordi Quoidbach—propose an alternative means of incentivizing employees—what they term "prosocial bonuses"—in which organizations provide employees with bonuses used to engage in positive actions towards charities and coworkers, from donating money to remote countries to taking a coworker to lunch. The authors examine the impact of these prosocial bonuses on employee satisfaction and team performance, by reporting results from field experiments in settings ranging from bank employees in Australia to pharmaceutical sales representatives in Belgium to dodgeball teams in Canada. Overall, results suggest that a minor adjustment to employee bonuses—shifting the focus from the self to others—can produce measurable benefits for employees and organizations. Read More

Non-Standard Matches and Charitable Giving

In this article, Michael Sanders, Sarah Smith, and Michael I. Norton review evidence suggesting that matching schemes—an increasingly common strategy used by nonprofits and firms to increase giving in which organizations match employee donations to charity—may not always prove effective. The authors offer several novel matching schemes designed to improve the effectiveness of matching, some focused on individual donors in isolation and some focused on donors embedded in organizations. The authors' hope is to spur further research assessing the efficacy of these schemes, reducing the tendency for matching schemes to crowd out donations and making them more likely to increase charitable behavior. Read More

Improving Store Liquidation

Store liquidation, defined as the time-constrained divestment of retail stores through an in-store sale of inventory, is a critical aspect of the retail industry for both defunct and going concerns. Store liquidation is important for firms and investors, affecting everything from retailer performance to how retailers are financed and how investors are compensated. Further, store liquidation is fundamental to innovation in the retail sector, since extracting value from defunct stores and firms is a key step in the process of creative destruction. In this paper, the authors introduce methods for increasing the efficiency of store liquidations operated by retail asset disposition firms, and they thus extend management science techniques to a consequential problem that has not yet been addressed by the literature. These methods were developed through a collaboration with GBG, a prominent liquidator, during the liquidation of over $3B of inventory. Read More

Board Games: Timing of Independent Directors’ Dissent in China

Independent directors are an integral part of corporate governance. Despite the copious scholarly debates surrounding board independence, however, little progress has been made in studying the inner workings of public boards. Fortunately, the regulatory environment in China offers a rare window to observe the inner workings of independent directors. This paper is one of the first statistical investigations of the circumstances under which so-called "independent" directors voice their independent views. The authors explore the following questions: 1) Why do independent directors dissent? 2) Under which circumstances is an independent director more likely to issue an open dissent? and 3) Does dissent matter sufficiently to affect independent directors' careers and firm performance? Unlike most of the previous models that view boards as a monolithic entity that "shares a common agenda on all matters," this study allows the authors to see boards as consisting of individuals with different utility functions and to examine board behaviors at the individual director level. Read More

Hidden Structure: Using Network Methods to Map System Architecture

All complex systems can be described in terms of their architecture, that is, as a nested hierarchy of subsystems. Despite a wealth of research highlighting the importance of understanding system architecture, however, there is little empirical evidence on the actual architectural patterns observed across large numbers of real world systems. In this paper, the authors developed robust and reliable methods to detect the core components in a complex system, to establish whether these systems possess a core-periphery structure, and to measure important elements of these structures. Overall, the findings represent a first step in establishing some stylized facts about the structure of real-world systems. Read More

If Technology Has Arrived Everywhere, Why Has Income Diverged?

To respond to the question posed in the title of their paper, the authors explore one potential driver—the dynamics of technology adoption. Using a stylized model of adoption that accounts for individual technologies, the authors identify two margins of adoption: adoption lags and penetration rates. Analyzing a panel of adoption lags and penetration rates for 25 technologies and 132 countries, they show that adoption lags have converged across countries over the last 200 years, while penetration rates have diverged. Feeding these patterns into the aggregate representation of their model economy, they next evaluate the effects of cross-country evolution of adoption patterns on the cross-country evolution of income growth. The paper's main finding is that the evolution of adoption patterns accounts for the vast majority of cross-country evolution of income growth for many country groupings. Therefore, adoption dynamics are at the core of cross-country differences in per-capita income over the last 200 years, a phenomenon known as the Great Divergence. Read More

Marketplace or Reseller?

Intermediaries can often choose to operate as a marketplace, as a reseller, or as a hybrid having some products offered under each of the two different modes. For example, Alibaba.com, eBay.com, Premium Outlets, and Simon Malls act as marketplaces, in which suppliers sell directly to buyers via a platform. In contrast, retailers like 7-Eleven, Eastbay.com, Lowes, and Zappos.com resell the products they purchase from suppliers to buyers. A hybrid mode is also possible: For example, the largest electronics retailer in the United States, Best Buy, has taken a step towards the marketplace mode by allowing Apple, Samsung, and Microsoft to launch their own ministores within Best Buy stores. What economic tradeoffs drive an intermediary to adopt one mode over the other, or both? In this paper, the authors provide a new style of modeling intermediaries' strategic positioning decisions and a theory of which products an intermediary should offer in each mode. They also present a guide to how intermediaries should optimally position themselves between the two different modes. Managerial implications not only apply to an intermediary choosing between positioning itself as a pure reseller or a pure marketplace, but to hybrid modes in which the intermediary needs to determine how many products (and in the case of diverse products, which products) to offer in each mode. Read More

Clusters of Entrepreneurship and Innovation

For many decades, the common wisdom among local officials pursuing employment growth for their areas was to attract a large firm to relocate. This "smokestack chasing" led to many regional governments bidding against each other and providing substantial incentives to large plants making their location choice decisions. The success of entrepreneurial clusters in recent decades, however, has challenged this wisdom, and now many policy makers state that they want their regions "to be the next Silicon Valley." This has led to extensive efforts to seed local entrepreneurship, with today's politicians routinely announcing the launch of an entrepreneurial cluster in a hot industry, such as biotechnology, nanotechnology, or advanced manufacturing. In this paper, the authors explore the rationale for and efficacy of policies to promote local entrepreneurship and innovation and reflect on recent initiatives in this domain. Read More

Innovation, Reallocation, and Growth

Industrial policies that subsidize (often large) incumbent firms, either permanently or when they face distress, are pervasive. Despite the ubiquity of such policies, their effects are poorly understood. They may encourage incumbents to undertake greater investments, increase productivity, and protect employment. But they may also reduce economic growth by discouraging innovation by both entrants and incumbents and slowing down reallocation. The reallocation implications of such policies may be particularly important because the existing literature attributes as much 80 percent of productivity growth in the United States to reallocation when less efficient firms exit and more efficient firms enter. In this paper, the authors build a model of firm innovation and growth that enables an examination of the forces jointly driving innovation, productivity growth, and reallocation. This model fits the key moments from microdata reasonably well, and is in line with the range of micro estimates in the literature. Read More

Exclusive Preferential Placement as Search Diversion: Evidence from Flight Search

Measuring the net effect of search diversion is important for understanding the extent to which search engines and other intermediaries may act to influence consumer behavior. This paper makes two contributions. First, the authors develop a theoretical model to establish conditions when a search engine chooses to divert search to a less relevant service. Results indicate that search engines have a larger incentive to divert search when they are able to alter the consumers' perceptions of the difference between non-paid and paid placements, and when search engines place a large weight on revenue. These results are consistent with instances where some search engines have labeled paid links with confusing euphemisms or not at all, and where some search engines have mixed paid and non-paid links in the same area of the screen. Second, the authors measure the impact of a diversion mechanism where a search engine exclusively awards a non-paid preferred placement slot to its own service. Specifically, they examine Google's preferred placement of Flight Search. Analysis indicates that there was an 85 percent increase in click-through rates for paid advertising and a 65 percent decrease in click-through rates for non-paid algorithmic search traffic to competing online travel agencies. Both changes are statistically significant, providing evidence of Google's ability to influence how consumers choose services after they search. Read More

Competing with Privacy

Personal consumer information has become a valuable asset in the marketplace and an important element of firm strategy. While consumers are unable to control the disclosure practices of services that collect their personal information, they can decide which services to trust and how much information to provide. How do these choices shape competition? The analysis in this paper explains how firms engaging in disclosure choose to share the benefits with consumers by subsidizing them, and firms charging positive prices choose not to engage in disclosure. Competition is likely to increase the supply of both subsidized and no-disclosure services. Moreover, subsidized services have the potential to remain highly profitable under competition despite the fact that disclosure generates consumer disutility. Overall, these findings are particularly relevant to the business models of Internet firms. Findings also contribute to inform the regulatory debate on consumer privacy. Read More

The Impact of Pooling on Throughput Time in Discretionary Work Settings: An Empirical Investigation of Emergency Department Length of Stay

Improving the productivity of their organizations' operating systems is an important objective for managers. Pooling—an operations management technique—has been proposed as a way to improve performance by reducing the negative impact of variability in demand for services. The idea is that pooling enables incoming work to be processed by any one of a bank of servers, which deceases the odds that an incoming unit of work will have to wait. Does pooling have a downside? The authors analyze data from a hospital's emergency department over four years. Findings show that, counter to what queuing theory would predict, pooling may actually increase procesdsing times in discretionary work settings. More specifically, patients have longer lengths of stay when emergency department physicians work in systems with pooled tasks and resources versus dedicated ones. Overall, the study suggests that managers of discretionary work systems should design control mechanisms to mitigate behaviors that benefit the employee to the detriment of customers or the organization. One mechanism is to make the workload constant regardless of work pace, which removes the benefit of slowing down. Read More

The Auditing Oligopoly and Lobbying on Accounting Standards

The US auditing industry has been characterized as an oligopoly, which has successively tightened from eight key players to four over the last 25 years. This tightening is likely to change the incentives of the surviving big auditors, with implications for their role in our market economy. Motivated by the economic and public policy implications of the tightening audit oligopoly, the authors of this paper investigate the changing relation between the big firms and accounting standards. Accounting standards are a key input in the audit process and, through their effects on financial reporting, can impact capital allocation decisions in the economy. Results show that the big auditors are more likely to identify decreased reliability in proposed standards as the auditing oligopoly has tightened: This suggests that big auditors perceive higher litigation and political costs from the increased visibility that accompanies tighter oligopoly. The findings are also consistent with tighter oligopoly decreasing competition among the surviving firms to satisfy client preferences in accounting standards. The findings do not support the concern that tightening oligopoly has rendered the surviving big firms "too big to fail." Read More

Managers and Market Capitalism

In whose interests should managers act, particularly when structuring market regulations in highly technical or specialized matters that are largely outside public purview? This paper raises questions about the role of managers in sustaining the conditions for market capitalism to achieve its normative objectives. Rebecca Henderson and Karthik Ramanna begin with a discussion of the normative arguments for fully competitive markets as a resource allocation mechanism in complex societies. They suggest that Milton Friedman's assertion that the business of business is to increase its profits was in fact a moral assertion rooted in this normative framework. Next, they discuss the conditions for the existence of competitive markets and offer a brief overview of the institutions that provide them, noting that a combination of for-profit, pure public, and public-private institutions are needed to sustain capitalism. This perspective has two implications for managers. First, in many cases the opportunity to provide market completing institutions is a significant profit opportunity. Second, in those cases in which the provision of an institution is a scarcely attended political process or a public good that cannot be easily realized by managers, managers may have a duty to mitigate this market incompleteness even if it is not immediately profit maximizing to do so. Ultimately, managers' actions are likely to shape the moral and political legitimacy of market capitalism. Read More

Monitoring and the Portability of Soft Information

This study examines the "portability" of soft information within a decentralized financial institution. Using a unique dataset on loans from a large credit union and employees' notes summarizing their interactions with borrowers, the authors provide new insights on the portability of soft information within organizations, focusing in particular on an internal monitoring system used at this field site which, in effect, acts as a central repository of soft information gathered in the course of interactions between employees and customers. Contrary to the prevailing view that soft information lacks portability, results provide evidence that the "stock" of soft information accumulated in this system has persistent effects on the lending decisions of employees. Overall, findings indicate that the centralization of soft information acquired in past borrower-employee interactions can enable organizations to separate this informational asset from individual employees to facilitate future loan decisions. These results suggest that centralized information technology can alleviate the well-documented barriers of transmitting soft information consistent with economic theories on the role of centralization of information as a complement to decentralized decision-making. Read More

Entrepreneurs, Firms, and Global Wealth since 1850

This paper examines the historical causes of the wealth gaps between the West and "the Rest." It integrates the business history literature into the current dominant explanations of global wealth and poverty which focus on deficient institutions, poor human capital development, geography, and culture. It argues that there is a "missing gap" between these factors, and the entrepreneurs and firms which create wealth and drive innovation. The paper examines why entrepreneurial catch-up was so challenging in the Rest in the nineteenth century. It shows that nonetheless productive business enterprises were emerging in Asia, Latin America, and Africa by the first half of the twentieth century. However, these were often crippled by the subsequent era of Communism and state intervention. The second global economy from the 1980s provided new opportunities for firms from the Rest to catch up, including easier access to knowledge and capital through returning diaspora, business schools and management consultancies, and smarter state capitalism. (A revised version of this working paper is forthcoming in Entrepreneurship and Multinationals: Global Business and the Making of the Modern World, Northampton, MA: Edward Elgar, fall 2013). Read More

How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments

The United States has witnessed a large increase in income concentration over the past several decades. While standard theory predicts that support for redistribution should increase with income inequality, there has been little evidence of greater demand for redistribution despite historic increases in income concentration. A possible explanation is that people are unaware of the increase in inequality, and greater information would substantially move redistributive preferences. The authors examine the determinants of redistributive preferences through randomized online survey experiments with Amazon Mechanical Turk, a rapidly growing new laboratory to carry out social experiments. The results show that information changes people's beliefs about the current level of inequality and leads them to become more favorable to redistributive policies like the estate tax. Read More

Carry Trade and Exchange-Rate Regimes

In emerging countries, carry-trade activity and foreign participation in local-currency bond markets have increased dramatically over the past decade. This study revisits the issue of choosing an exchange-rate regime under the assumption that emerging markets can borrow internationally in local currency. This hypothesis reflects a new trend in international capital flows: carry trade and relevant foreign participation in local-currency bond markets. Results show that, by means of international borrowing in domestic currency, emerging countries can partially offset foreign shocks. The authors argue that as emerging nations develop their local currency markets, a "pseudo-flexible regime," whereby a country accumulates reserves in conjunction with debt, is the best policy alternative under real external shocks. Read More

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax

This research investigates the effectiveness of the Value Added Tax in facilitating tax enforcement and sheds light on the role of information and third-party reporting for taxation. Drawing on results from two field experiments with over 400,000 Chilean firms, it provides evidence for the self-enforcing power of the paper trail in the VAT and for spillovers in tax enforcement through firms' trading networks more generally. The findings also show that while the VAT paper trail seems to be highly effective in Chile overall, the mere existence of a VAT system, in the absence of credible deterrence, does not lead to self-enforcement. Results have implications for public finance in developing countries and for tax policy in general. Read More

Prominent Job Advertisements, Group Learning, and Wage Dispersion

What role do peers play when job seekers assess prospects? This research presents a stylized model that generates wage inequality as a result of people's reliance on peers for information about the wages that are offered in the market and the length of time one can expect to spend unemployed. The key idea of the model is that people whose peers have low wages and short unemployment spells come to expect that all jobs have relatively low wages so they accept low-wage jobs relatively quickly even when they shouldn't. People with peers that have higher wages are, instead, more choosy and wait for better jobs. Read More

The Dirty Laundry of Employee Award Programs: Evidence from the Field

Many scholars and practitioners in human resource management have recently argued that awards and other forms of on-the-job recognition provide a "free" way to motivate employees. But are there unintended, negative effects of such awards? In this paper, the authors simultaneously examine the costs and benefits of an attendance award program that was implemented in an industrial laundry plant. The award used in the study was effective in that it reduced the average rate of tardiness among employees. However, it also led to a host of potential spillover effects that the plant manager readily admits were not considered when designing the program, and that reduced overall plant productivity. Overall, findings demonstrate that an award program that appears to be effective may also induce unintended consequences severely reducing the net value of the program. These results highlight the impact such a program can have on the overall performance of the firm and suggest caution when designing and implementing such programs. Read More

Hurry Up and Wait: Differential Impacts of Congestion, Bottleneck Pressure, and Predictability on Patient Length of Stay

This paper quantifies and analyzes trends related to the effects of increased workload on processing time across more than 250 hospitals. Hospitals are useful settings because they have varying levels of workload. In addition, these settings have high worker autonomy, which enables workers to more easily adjust their processing times in response to workload. Findings show that heavy load plays a significant role in processing times. Congestion is associated with longer lengths of stay. More surprisingly, when there is a high load of incoming patients from a low pressure area (emergency medical patients), current hospital inpatients' stays are longer compared to when incoming patients are from a high pressure area (emergency surgical patients). Furthermore, high predictability of the incoming patients (e.g. scheduled surgical patients) is associated with shorter lengths of stays for the current inpatients than when the incoming patients are less predictable (emergency surgical patients). In this study, there was no decrease in quality of care for patients with shorter lengths of stay. Read More

Do Display Ads Influence Search? Attribution and Dynamics in Online Advertising

The introduction of online metrics such as click through rate (CTR) and cost per acquisition (CPA) by Google and other online advertisers has made it easy for marketing managers to justify their online ad spending in comparison to the budgets used for television and other media. However, these metrics suffer from two fundamental problems: (a) they do not account for attribution, since they give credit to the last click and ignore the impact of other ad formats that may have helped a consumer move down the conversion funnel, and (b) they ignore the dynamics, since they only account for the immediate impact of ads. As firms spend more of their ad dollars on online search and display, managers and researchers alike recognize a need for more careful attribution adjustment that takes into account the journey consumers follow before conversion as well as account for the impact of ads over time. In this paper, the authors use time series models to infer the interaction between search and display ads and also capture their impact over time. Examining data from a bank that used online advertising to acquire new customers for its checking account, the authors found that display ads have a significant impact on search applications, as well as clicks. The majority of this spillover was not instant, but took effect only after two weeks. On the other hand, search advertising did not lead to an increase in display applications. However, search ads showed significant dynamic effects on search applications that made them very cost effective in the long run. Read More

In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

Why do "mixed corporations" exist? In which conditions could they become efficient organizational forms? In this paper, the authors argue that the effectiveness of mixed enterprise depends on a hybrid governance structure combining elements of private ownership with public checks-and- balances against uncertain governmental interference. This is a delicate equilibrium to obtain and one not without challenges. Exploring the promise and perils of this approach by looking at the recent experience of a sample of national oil companies (NOCs)-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-the authors suggest that from the perspective of a social planner, the coexistence of minority private investors with state actors can generate improvements in operational and financial performance. From the perspective of private shareholders, there are risks that can be outweighed by some of the advantages of state-owned enterprises. Three different factors explain private investor interest. These are 1) the existence of countervailing privileges from partnering with the government, 2) the resort to improved corporate governance and legal constraints that limit the opportunity for political abuse, and 3) ex ante price discounting. Read More

Fostering Organizational Learning: The Impact of Work Design on Workarounds, Errors, and Speaking Up About Internal Supply Chain Problems

In competitive environments, it is essential that organizations develop techniques that increase the willingness of employees to improve organizational performance. This is especially true in complex service organizations, such as hospitals, where employees have a wide range of discretionary activities that they can perform and lower levels of supervision. For this paper, the author conducted a series of laboratory experiments to test the possibility that managers can manipulate specific work circumstances to increase employees' willingness to speak up about problems, regardless of the employees' individual characteristics. Findings show that participants were more likely to contribute improvement suggestions when employees' role orientation was primed to include process improvement as part of daily work activities and when deliberate blockages made it difficult to work around problems in a way that conformed with policy. The study supports the notion that employee positive behavior can stem from deliberate work design, which falls under managers' jurisdiction, rather than solely from self-motivated employees. Overall, the research advances understanding of the influence of work design on two important employee behaviors-improvement-oriented action and risky workarounds that may harm customers. Read More

Developing the Guts of a GUT (Grand Unified Theory): Elite Commitment and Inclusive Growth

Why do some countries successfully initiate episodes of rapid growth while others suffer extended stagnation? Furthermore, why are some countries able to sustain growth episodes over many decades of rapid or steady growth, while other growth episodes end in reversion to stagnation or collapse? This paper represents an initial step in a research agenda aiming to build a unified theory of growth that considers the complex dynamics and varied roles of elites. The analytical model suggested here is capable of generating both transitory and sustained episodes of accelerated growth. As Pritchett and Werker argue, progress on a unified theory of growth would explain, better than current long-run growth theories, the onset of growth episodes. It would also examine how the dynamics of growth interact with existing political and institutional configurations to produce feedback effects on policy and institutions such that some growth episodes end in bust or stagnation while others are continued. Read More

Expectations of Returns and Expected Returns

Much of modern asset pricing seeks to explain changes in stock market valuations using theories of investors' time-varying required returns. Although researchers have achieved considerable progress in developing proxies for expected returns, an important but often overlooked test of these theories is whether investors' expectations line up with these proxies. This paper shows that they do not. Read More

Fostering Translational Research: Using Public-Private Partnerships to Improve Firm Survival, Employment Growth, and Innovative Performance

The authors demonstrate that a unique Danish mediated public-private partnership model for fostering the translation of basic science into commercial applications help firms significantly decrease the likelihood of bankruptcy while substantially increasing the average level of employment. Funded firms in the study were granted significantly more patents and published more peer-reviewed papers, and the impact of these publications was significantly higher. In addition, the mediated partnership model improved the knowledge produced as well as the collaborative behavior of scientists with a significantly higher level of citations and more cross-institutional coauthored publications. Read More

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

Personal selling is a primary marketing mix tool for most B2B firms to generate sales. Yet there is little research on how the compensation plan motivates a sales force and affects performance. This paper develops and estimates a dynamic structural model of sales force response to a compensation plan with various components: salary, commissions, lump-sum bonus for achieving quotas, and different commission rates beyond achieving quotas. Overall, the analysis helps assess the impact of (1) different components of compensation and (2) the differential importance of periodic bonuses on performance on different segments of sales people. Read More

The Dynamic Advertising Effect of Collegiate Athletics

The primary form of mass media advertising by academic institutions in the United States is, arguably, through its athletics program. This study investigates the possible advertising effects of intercollegiate athletics. Specifically, it looks at the spillover effect and the magnitude and divergence that athletic success has on the quantity and quality of applications received by an academic institution of higher education in the United States. Overall, findings show that athletic success has a significant impact on the quality and quantity of applicants to these institutions. However, athletic success has relatively more importance to the students with lower ability. Students of higher ability have a stronger preference for the quality of education compared to their lower-ability counterparts. Read More

Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?

Governance scholars debate the relative importance of country characteristics and firm characteristics in understanding variations in corporate governance practices of firms in emerging economies. One of the main questions is whether weak or incomplete public institutions dictate the governance quality of firms located in these countries. Results of analysis in this paper provide evidence that many emerging economy firms distinguished themselves above and beyond their home country peers in corporate governance ratings during the last decade. This rise was due primarily to firm-level characteristics. The fact that firm characteristics, and especially fixed effects, played a substantially greater role in emerging economies suggests that there is something happening inside these firms that allowed them to differentiate themselves from their home institutions and peer firms. These findings are important for both investors and firms in emerging economies. Investors will be able to observe corporate governance variance within countries and identify valuable investment opportunities. Also, firms should enjoy a sense of agency in their prospects for growth, unhampered by an environment with weak and incomplete governance institutions or low financial market development. Read More

Dollar Funding and the Lending Behavior of Global Banks

A striking fact about international financial markets is the large share of dollar-denominated intermediation done by non-US banks. The large footprint of global banks in dollar funding and lending markets raises several important questions. This paper takes the presence of global banks in dollar loan markets as a given, and explores the consequences of this arrangement for cyclical variation in credit supply across countries. In particular, the authors show how shocks to the ability of a foreign bank to raise dollar funding translate into changes in its lending behavior, both in the US and in its home market. Overall, the authors identify a channel through which shocks outside the US can affect the ability of American firms to borrow. Although dollar lending by foreign banks increases the supply of credit to US firms during normal times, it may also prove to be a more fragile source of funding that transmits overseas shocks to the US economy. Read More

Boardroom Centrality and Firm Performance

Economists and sociologists have long studied the influence of social networks on labor markets, political outcomes, and information diffusion. These networks serve as a conduit for interpersonal and inter-organizational support, influence, and information flow. This paper studies the boardroom network formed by shared directorates and examines the implications of having well-connected boards, finding that firms with the best-connected boards on average earn substantially higher future excess returns and other advantages. Read More

These Are the Good Old Days: Foreign Entry and the Mexican Banking System

In this paper, the authors take on an aspect of contract design that is fundamental to explain economic development and financial stability. They study the incentives contained in the "partnership" contract between bankers, the government, depositors, and bank shareholders, and examine how the incentives that come out of that contract explain the volatility of the banking system. The main insight is that bankers in developing countries with weak property rights demand rents (such as high barriers to entry) and lax regulation, as a way to compensate them for the political risk they face of being expropriated by the government or used for policy objectives (for example, if the government forces banks to buy its debt). Depositors, on the other hand, demand deposit insurance in case bankers are reckless, while minority shareholders demand high returns to compensate for the risk of insider lending or reckless behavior on the part of bankers. Then, the combination of high barriers to entry, lax regulation, and deposit insurance induces bankers to take on more risks to try to maximize their rents, and does not encourage depositors and minority shareholders to monitor bankers either (as the government limits downside risk for them). This dynamic, in the case of Mexico, led to frequent banking crises between the 1970s and the 1990s. This was the case until 1997, when the government allowed foreign bankers take over the largest domestic commercial banks and improved the monitoring of banks. This increased the stability of the system. There has not been a crisis since then, partly because of improvements in regulation and partly because foreign bankers have been more conservative, not only because they have standardized procedures to deal with risk but also because they are closely monitored by their parent banks abroad. Read More

Punctuated Generosity: How Mega-events and Natural Disasters Affect Corporate Philanthropy in US Communities

Even in a global age, local communities offer a critical context for organizational behavior. This paper asks: Since corporate giving is often locally focused, what happens to local firms' philanthropy when a major event disrupts the life of the community? Mega-events might be actively solicited (such as the Olympics, the Super Bowl, political conventions), or natural (floods and hurricanes). In particular, the authors studied how major events within communities affected the philanthropic contributions of locally headquartered corporations in the US between 1980 and 2006. There are three main findings: 1) Actively solicited mega-events had a positive effect in the event year, but also displayed more complex time-dependent dynamics. In some cases, the effects on corporate philanthropy were visible two years before the event and lasted up to six years, before eventually tapering off. 2) The impact of destructive, unexpected events depended on their magnitude. While major natural disasters depressed philanthropic spending by local corporations, smaller-scale disasters stimulated it. 3) Organizational and community factors moderated some of the effects of events. Overall, findings demonstrate the theoretical importance of looking at geography and events in tandem. Mega-events shape institutional processes in significant ways. This paper is forthcoming in Administrative Science Quarterly. Read More

Cost of Capital Dynamics Implied by Firm Fundamentals

Despite ample evidence that expected returns are time varying, there has been relatively little empirical research on estimating the dynamics of firm-level expected returns. Capturing the dynamics of firm-level expected returns is important, because it allows for a better understanding of firm risk over time and can inform investors in tailoring their portfolios to match their desired investment horizons. Findings show that cost of capital is time varying and highly persistent. The authors also demonstrate that the model produces empirical proxies of expected returns that can predict future stock returns up to three years into the future and sorts portfolio returns with near monotonicity. Aside from its practical contributions, this paper adds to a budding finance and accounting literature that studies the properties of expected return dynamics. Read More

Deregulation, Misallocation, and Size: Evidence from India

India carried out wide-ranging deregulation policies in 1991. Significant sectors of the economy were opened up for private participation through de-licensing and allowing entry to industries previously reserved exclusively for the state-owned sector. This paper analyzes the efficiency impact of the removal of a specific distortion: compulsory industrial licensing that regulated firm entry and imposed output capacity constraints on Indian firms prior to 1991. Did industrial delicensing in India, which relaxed entry barriers and capacity constraints on firm size, lead to a change in firm size distributions within industries? Read More

The Promise of Positive Optimal Taxation: A Generalized Theory Calibrated to Survey Evidence on Normative Preferences Explains Puzzling Features of Policy

The traditional goal of optimal tax research among economists has been to choose the "right" normative objective for policy and characterize the tax system that best attains it. However, public opinion on the appropriate normative criterion has been seen as beside the point. An alternative goal, pursued in this paper, is to characterize the tax system that best attains the normative objective that prevails in reality. Weinzierl makes three contributions. First, he presents novel survey evidence on the empirical normative preferences of individuals in the United States. The evidence shows that few respondents prefer the conventional Utilitarian policy or the Rawlsian alternative, and a plurality (nearly half) prefer policies that reflect a mixed objective that gives weight to both Utilitarianism and Equal Sacrifice. Second, he generalizes the conventional optimal tax model to accommodate evidence of a mixed objective for taxation. Third, he shows that the empirically-preferred calibration of the generalized theory has remarkable explanatory power as a positive optimal tax model. Taken together, the survey results, theoretical analysis, and calibrated simulations of this paper demonstrate the potential of a positive optimal taxation research agenda. They show that we can rigorously capture empirical evidence on what tax policies individuals find acceptable and, as one might hope, use the resulting model to better understand how actual tax policy is and (arguably) ought to be designed. Read More

The Spatial Diffusion of Technology

Technology disparities are critical for explaining cross-country differences in per capita income. Despite being non-rival in nature and involving no direct transport costs, technology diffuses slowly both across and within countries. Even when a technology has arrived in a country, it takes years and even decades before it has diffused to the point of having a significant impact on productivity. Why does technology diffuse slowly? How do we explain cross-country differences in its speed of diffusion? In this paper, the authors study the diffusion over time and space of 20 major technologies in 161 countries over the last 140 years. The spatial effects they identify for technologies vanish over time. For most technologies, this implies that the effect of geography is initially strong, decays over time, and eventually disappears. This is the first paper to document these patterns in adoption rates for a large number of technologies and countries. Estimates provided of structural parameters can be used to inform spatial theories of growth. Closed for comment; 0 Comments posted.

The Novelty Paradox & Bias for Normal Science: Evidence from Randomized Medical Grant Proposal Evaluations

A key task for executives and managers involved with innovation is to evaluate new ideas and proposals. In the sciences, one longstanding hypothesis contends that research ideas outside the mainstream are susceptible to being discounted, rejected, or ignored. These days, expert peer review in academic science is the approach most relied upon for enabling research agendas and providing research funds. Are novel research projects—those deviating from existing research paradigms—treated with a negative bias in expert evaluations? In this paper, the authors investigate how nascent scientific hypotheses are evaluated, specifically looking at the process by which medical research grant proposals are assessed by "gatekeepers": in this case, elite researchers from a leading medical school. Innovation requires novelty—but novelty, as this paper shows, is not appreciated and is in fact penalized. These findings help explain concerns about incrementalism in science and also point at the challenge that most organizations face when dealing with novel topics Read More

Pay for Environmental Performance: The Effect of Incentive Provision on Carbon Emissions

Research has shown that reducing carbon emissions and exhibiting good environmental performance are important for corporations. But how exactly are these environmental goals carried out within organizations? In this paper, the authors analyze the incentive structures of climate change management for a sample of large, predominantly multinational organizations. The authors then characterize and assess the effectiveness of different types of incentive schemes that corporations have adopted to encourage employees to reduce carbon emissions. Results suggest that contrary to widespread belief in the effectiveness of monetary incentives, in fact the adoption of monetary incentives is associated with higher carbon emissions. By contrast, the use of nonmonetary incentives is associated with lower carbon emissions. Overall, the study suggests that socially positive tasks significantly impact the effectiveness of different types of incentives and should be considered in the design of accounting and control systems. Read More

Leading Amidst Competing Technical and Institutional Demands: Revisiting Selznick’s Conception of Leadership

Leadership can be greatly enriched by the insights of Philip Selznick (1919-2010), the author of landmark studies in organizational theory, the sociology of law, and public administration. His work on the Tennessee Valley Authority, for example, showed that the combination of technical and institutional pressures compels even well-intentioned leaders to concede to external demands that threaten an organization's character. He further conceptualized how leaders can overcome these pressures and uphold the integrity of their organization and the institutional values it embodies. In this paper, Besharov and Khurana join with other scholars to highlight how a "Selznickian" approach contributes to contemporary research on leadership: first, by directing our attention to the role of values even in avowedly utilitarian organizations and, second, by suggesting that the protection and promotion of values is an essential task of leadership. Besharov and Khurana also focus on fundamental dualities and tensions between the institutional realm of values, culture, and politics, and the technical realm of efficiency, rationality, and administration. This paper explains how these two realms are interrelated, and articulates how leaders can uphold institutional values while simultaneously meeting technical imperatives. The authors hope the paper provides a starting point for new research on how leaders uphold institutional values in the face of often conflicting technical demands. Read More

The Political Economy of Bilateral Foreign Aid

Foreign aid has always been political, a fact long noted by diplomats, journalists, and scholars. But then, political forces are behind why aid was developed in the first place and why it continues to survive, even as much of this aid has as its goal to promote economic development or poverty reduction. From a developmental standpoint the political economy of aid allocation and receipt can interfere with its optimal distribution. Aid policymakers, who want to maximize the developmental impact of foreign assistance, have devised a number of ways to attempt to subvert the political forces at work. This paper, a chapter in a forthcoming book, explores the distortions present in aid allocation and spending, and the development community's efforts to depoliticize such allocation and spending. As it turns out, none of their solutions can shield foreign aid from the heavy hand of politics. Read More

The Value of Advice: Evidence from Mobile Phone-Based Agricultural Extension

This paper evaluates a new service that provides mobile-phone based agricultural consulting to poor farmers in India. For decades, the Government of India, like most governments in the developing world, has operated a system of agricultural extension, intended to spread information on new agricultural practices and technologies through a large work force of public extension agents. Evidence of the efficacy of these extension services, however, is limited. This paper describes a randomized field experiment examining the potential for an alternate route to improving agricultural management. Specifically, the authors evaluate Avaaj Otalo (AO), a mobile phone-based technology that allows farmers to call a hotline, ask questions, and receive responses from agricultural scientists and local extension workers. Findings show that AO had a range of important, positive effects on farmer behavior. This paper may be the first rigorous evaluation of mobile phone-based extension and, more generally, the first evaluation of a demand-driven extension service delivered by any means. Read More

Reinforcing Regulatory Regimes: How States, Civil Society, and Codes of Conduct Promote Adherence to Global Labor Standards

Multinational corporations are under increasing pressure to manage their global supply chains in ways that are environmentally sustainable and socially responsible. Many companies have responded to this pressure by asking their suppliers to adhere to codes of conduct governing labor conditions and environmental management. This paper examines the conditions under which tens of thousands of suppliers across many countries are more likely to adhere to the labor practices these codes of conduct call for. Findings indicate that suppliers are more likely to adhere to codes of conduct in countries that not only have made binding domestic and international legal commitments to protect workers' rights, but that also have high levels of press freedom and nongovernmental organization activity. Greater code of conduct adherence is also found among suppliers that serve buyers located in countries where child labor is a more salient issue. This research reveals the critical importance of maintaining multiple, overlapping, and reinforcing governance systems, and urges caution to those hoping that private regulatory regimes can substitute for effective government regulation. Overall, this paper points the way toward building more effective private regulatory regimes. Read More

An Outside-Inside Evolution in Gender and Professional Work

How do organizations adapt to social transformation? In the US, one of the most visible changes in employment since the 1980s—the growing representation of highly educated women—has challenged widely held understandings about gender and professional work. Although much is known about social institutions and social issues at the institutional and organizational levels, researchers still know very little about how individual organizations experience and internalize gradual shifts in deeply held social understandings. To bridge the gap, this study analyzes nearly 20 years of data to explore the adaptation of one professional service firm to an increase in women in the professional workforce and the shifting discourse around gender and work. Findings show that the firm internalized shifts in the social institution of gender through iterated cycles of analysis and action, integrating external pressures from the changing social institution of gender into its beliefs, structure, policies, programs, and practices. Overall, the study reveals how the interplay between activities and beliefs directs the pace and course of organizational change over time. Read More

Vulnerable Banks

Since the beginning of the US financial crisis in 2007, regulators in the United States and Europe have been frustrated by the difficulty in identifying the risk exposures at the largest and most levered financial institutions. Yet, at the time, it was unclear how such data might have been used to make the financial system safer. This paper is an attempt to show simple ways in which this information can be used to understand how deleveraging scenarios could play out. To do so the authors develop and test a model to analyze financial sector stability under different configurations of leverage and risk exposure across banks. They then apply the model to the largest financial institutions in Europe, focusing on banks' exposure to sovereign bonds and using the model to evaluate a number of policy proposals to reduce systemic risk. When analyzing the European banks in 2011, they show how a policy of targeted equity injections, if distributed appropriately across the most systemic banks, can significantly reduce systemic risk. The approach in this paper fits into, and contributes to, a growing literature on systemic risk. Read More

No Margin, No Mission? A Field Experiment on Incentives for Pro-Social Tasks

Organizations from large corporations to NGOs use a range of nonfinancial performance rewards to motivate their employees, and these rewards are highly valued. While theory has suggested mechanisms through which nonfinancial incentives can elicit employee effort, evidence on the mechanisms, and on their effectiveness relative to financial incentives, remains scarce. This paper helps to fill this gap by providing evidence from a collaboration with a public health organization based in Lusaka, Zambia, that recruits and trains hairdressers and barbers to sell condoms in their shops. This setting is representative of many health delivery programs in developing countries where embedded community agents are called upon to deliver services and products, but finding an effective way to motivate them remains a significant challenge. Findings show the effectiveness of financial and nonfinancial rewards for increasing sales of condoms. Agents who are offered nonfinancial rewards ("stars" in this setting) exert more effort than either those offered financial margins or those offered volunteer contracts. Read More

Pay Harmony: Peer Comparison and Executive Compensation

This paper demonstrates how horizontal wage comparisons within firms and concerns for "pay harmony" affect firm policies in setting pay for executives. Using a rich dataset of pay practices for the senior-most executives within divisions, Gartenberg and Wulf ask whether horizontal comparisons between managers in similar jobs affect pay. The authors also evaluate evidence in support of a tradeoff between pay harmony and performance pay. Findings are consistent with the presence of peer effects in influencing pay policies for executives inside firms. These results contribute to the ongoing policy debate on the consequences of transparency and mandatory information disclosure and potential ratchet-effects in executive pay. For practitioners involved in designing the structure of executive compensation and pay disclosure policies for firms -- including compensation committee directors, senior human resource executives, and compensation consultants -- it is important to recognize the tradeoff between the incentive effects of performance-based pay and costs of peer comparison that arise from unequal pay when designing executive wage contracts. The research also raises questions on the costs of pay disclosure and on labor markets more generally. Read More

Governing Misvalued Firms

For decades, economists have argued that stocks can get priced irrationally and that this divergence from fundamental value may impact managerial decisions. If overvaluation leads to misbehavior and if strong governance curbs misbehavior, then governance should be particularly valuable in times of overvaluation. This simple yet powerful idea surprisingly has not been explored in the literature. In this paper, the authors fill the gap and ask whether strong corporate governance is especially important during periods of overvaluation when agency costs of managerial misbehavior are high. Results of joint tests of the perverse effects of overvaluation and the ability of governance to counteract them suggest that boards and shareholders looking to create long run value need to increase vigilance and oversight during times when the firm's stock is outperforming. This vigilance is especially important when CEOs have powerful pay-for-performance incentives. Read More

Securities Litigation Risk for Foreign Companies Listed in the US

In the US, securities class action litigation provides investors with a mechanism to hold companies and managers accountable for violations of securities laws. This study examines the incidence of securities class action litigation against foreign companies listed in the US and the mechanism driving the litigation risk. Looking at more than 2,000 securities class action lawsuits between 1996 and 2010, the authors find that significant litigation risk does exist for foreign issuers, but at rates considerably lower than for US companies. The authors also identify potential factors in lower litigation rates: 1) transaction costs and 2) the lower rate of trigger events such as accounting restatements, missing management forecasts, or sharp drops in stock prices that are needed in a lawsuit context to allege intentional and wrong prior disclosures on the part of managers. This suggests that while the effective enforcement of securities laws is constrained by transaction costs, availability of high quality information (that reveals potential misconduct) can contribute to a well-functioning litigation market for foreign firms listed in the US. Read More

Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

The authors study restatements by foreign firms listed in the US, compare the extent of restatements by the foreign firms to that of domestic US firms, and examine the role of home country characteristics on the likelihood of the foreign firms restating their financials. When foreign firms list in the US, they become subject to the same accounting rules and regulations as US firms. However, results suggest that foreign firms listed in the US restate significantly less than comparable US firms. This difference is not because the foreign firms have superior accounting quality but because of opportunistic avoidance of issuing a restatement. The difference is driven primarily by firms originating from countries with weaker institutions. Overall, findings imply that restatements are a less accurate measure of the extent of reporting problems in an international setting compared to US domestic firms. Read More

Causes and Consequences of Linguistic Complexity in Non-US Firm Conference Calls

Does the form in which financial information is presented have consequences for the capital markets? The authors examine the level of linguistic complexity of more than 11,000 conference call transcripts from non-US firms between 2002 and 2010. Findings show that the linguistic complexity of calls varies with country-level factors such as language barriers, but also with firm characteristics. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases. Overall, these results may be useful to foreign firms that wish to communicate with investors globally. Analysts and investors around the world may also find the results helpful since they might be able to push managers to speak in a less complex manner. This study is the first to analyze conference calls in a cross-country setting. Read More

Diasporas and Outsourcing: Evidence from oDesk and India

Diaspora-based exchanges have been important for centuries, but the online world reduces many of the frictions these networks solved. How do the Internet and diaspora networks connect? This study investigated the importance of Indian diaspora connections on the oDesk platforms for outsourcing. oDesk is the world's largest online labor market, processing $30 million per month in contracts as of May 2012. This research finds strong evidence that diasporas still matter and influence economic exchanges even when many frictions are minimized. In fact, the case study suggests more often than not that diaspora use increases as familiarity with the platform increases. This suggests a longer-term complementarity between diaspora networks and online tools that may aid the persistence of these networks. At the same time, the oDesk evidence also makes clear that the role of diaspora networks should not be overstated. While they contributed to India's success on oDesk, diaspora connections were clearly not a driving force in India becoming the top destination for oDesk contracts. Read More

Self-Serving Altruism? When Unethical Actions That Benefit Others Do Not Trigger Guilt

Not a day goes by without the revelation of unethical behavior by a politician, movie star, professional athlete, or high-ranking executive. This paper asks: Is a person's willingness to cross ethical lines influenced by the presence of others who may benefit? Research by Francesca Gino, Shahar Ayal, and Dan Ariely. Findings show that cheating is motivated by potential benefits to others. The authors analyze the results of three experiments to suggest that the potential benefits which dishonesty may create for others not only help people justify their own bad behavior but also serve as a self-serving motivator for it. Focusing on the social utility of others, people more freely categorize their own actions in positive terms and avoid negative updating of their moral self-image. As a result, people feel less guilty about their dishonest behavior when others-in addition to themselves-can benefit from them. Among the implications: Team settings might be conducive to dishonest behavior among group members, and thus might not be ideal to foster learning. Read More

License to Cheat: Voluntary Regulation and Ethical Behavior

One powerful tool, at least in theory, that policymakers can rely on to stem cheating is regulation through monitoring and sanctions. But regulation does not really help when individuals and firms who are supposed to be regulated may have the ability to determine how much regulation they face, or even whether they face it at all. This paper studies what happens when individuals can avoid or circumvent regulation and monitoring intended to curb unethical conduct. Results from several experiments show significantly more misreporting under voluntary regulation (where participants have a choice of whether to be regulated) than when they are either all submitted to mandatory regulation or when no opportunity for regulation exists. These findings have several practical implications: For example, policies imposing either no regulation or total regulation may be preferable to policies that allow for regulation that is easily circumvented. Read More

Colocation and Scientific Collaboration: Evidence from a Field Experiment

In recent years there has been considerable interest in the policy arena on fostering collaborative and especially interdisciplinary collaborations. Yet there is scant evidence on how to do this in practice. To learn how team members find each other in the scientific community and decide to collaborate, the authors designed and carried out an experiment involving Harvard University and its affiliated hospitals. Results suggest that matching between scientists may be subject to considerable frictions, even among scientists in relatively close geographic proximity and in the same organizational system. However, even a brief and focused event facilitating face-to-face interactions can be useful for the formation of new scientific collaborations. Read More

Public Procurement and the Private Supply of Green Buildings

Government purchasing programs often have policy objectives that go beyond getting a good deal for the taxpayer. For example, governments may purchase products with enhanced environmental or safety features not only to reduce environmental impacts and safeguard employees, but also to promote broader adoption of similar products in the private market. Such policies have been deployed by governments across the United States and European Union, but little is known about how well they actually work. This paper examines the impact of environmentally friendly government procurement policies on private-sector adoption of the targeted products. The authors find that municipal government green building procurement policies that apply only to municipal buildings also accelerate the use of green building practices in the private sector, both in the cities with these policies as well as in neighboring cities. They also find that such government policies encourage private-sector investment in complementary services, which likely reduces green building costs to private developers. Read More

Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

Films are a risky business because much more is known about the quality and revenue potential of a film post-production than pre-production. Using rich data on the US film industry, this paper explores variation in property right allocations, investment choices, and film revenues to find empirical support for three predictions based on property rights theory. (1) Studios underinvest in the marketing of independent films relative to studio-financed films. (2) Because of underinvestment, independent films have lower revenues than comparable studio-financed films. (3) If production cost and marketing investment are complementary, underinvestment in marketing harms large-budget films more than small-budget films, making it more likely that large-budget films will be studio-financed. Kuppuswamy and Baldwin's paper may be the first to provide evidence that vertical integration affects the revenue of specific products through its impact on marketing investments in those products. Read More

What Do Managers Do? Exploring Persistent Performance Differences among Seemingly Similar Enterprises

Decades of research using a wide variety of detailed plant- and firm-level data has provided strong evidence of persistent performance differences among seemingly similar enterprises. But what causes these differences? In this paper, the chapter of a forthcoming book, Gibbons and Henderson focus on the role of "relational contracts" in sustaining persistent performance differences among seemingly similar enterprises. The paper provides evidence both that many important management practices rely on relational contracts, and that relational contracts can be hard to build and change. They explore a number of reasons that relational contracts may be difficult to build, exploring both "bad parameters" and "bad luck" and the difficulties inherent in communicating the full terms of an evolving contract. They suggest that this perspective opens up a rich field of research into the role that managers play in sustaining superior performance and explore a number of theoretical and empirical approaches that may prove fruitful in building further understanding. Read More

Entrepreneurship in the Natural Food and Beauty Categories Before 2000: Global Visions and Local Expressions

How do entrepreneurs create a market? Geoffrey Jones takes a historical approach and focuses on influential figures who created new categories of natural and organic food, agriculture, and beauty products over the course of the twentieth century. At first these pioneering entrepreneurs, often motivated by ideological or religious convictions, faced little consumer demand for "green" products and little consumer knowledge of what they entailed. The creation of new categories thus involved a lengthy process with three overlapping waves of entrepreneurship. First, the diffusion of ideas through publishing, and promotion of research and education, engaged many entrepreneurs. They were, in effect, making the ideological case for natural products, and providing the basis for them to be made available. Second, entrepreneurs engaged in the creation of industry associations which could advocate, as well as give the nascent industry credibility and create standards. Finally, entrepreneurial ventures established retail stores, supply and distribution networks, and created brands. Read More

Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment

Microfinance has exploded in popularity and coverage in recent years, particularly in meeting the large unmet demand for finance. But what is the optimal loan contract structure? This paper examines the relative merits of joint and individual liability contracts by analyzing the effect of contract structure on a group of borrowers who are willing to borrow with either individual or group liability. Findings show that group liability structure significantly improves repayment rates. Overall, these results provide the first credible evidence that group liability contracts improve upon individual liability, particularly in ensuring repayment and increasing savings discipline among clients. Read More

Spatial Organization of Firms: Internal and External Agglomeration Economies and Location Choices Through the Value Chain

How do firms decide location strategy for distinct activities in the value chain, such as manufacturing, research and development, or sales? Does strategy depend on geographically bounded spillovers between firms, or within firms? This paper uses data for organic expansions in the US by firms in pharmaceuticals in 1993-2005 to consider two types of expansions. The first is internal: an increase in employment in existing establishments. The second is external: opening new establishments. Alcacer (HBS) and Delgado (Fox School of Business) argue that decisions about geographical location are a tradeoff between external drivers pulling firms to geographically disperse activities and internal drivers pushing within-firm collocation, either across activities (such as manufacturing and R&D) or within activities (such as multiple R&D labs). Read More

IP Modularity: Profiting from Innovation by Aligning Product Architecture with Intellectual Property

Firms increasingly practice open innovation, license technology out and in, outsource development and production, and enable users and downstream firms to innovate on their products. However, while such distributed value creation can boost the overall value created, it may create serious challenges for capturing value. This paper argues that in order to optimize value capture from a new product or process, an innovator must manage the artifact's intellectual property (IP) and its modular structure in conjunction. In other words, each module's IP status needs to be defined carefully and its boundaries must be placed accordingly. Fundamentally, IP modularity eliminates incompatibilities between IP rights in a given module, while permitting incompatibilities within the overall system. This in turn allows a firm to "have its cake and eat it too": It can reap the benefits of an open architecture while at the same time reducing the costs of opportunism on the part of suppliers, complementors, and employees. Read More

FIN Around the World: The Contribution of Financing Activity to Profitability

A basic premise of financial economics is that financial markets aid the flow of capital to its best use. In a frictionless world, every firm's return on equity (ROE) would equal the firm's cost of equity capital. However, numerous frictions at the firm and country level cause return on equity to vary considerably within and across countries. In this paper, the authors study one prominent friction―the availability of domestic credit from banks―and investigate how differences in the availability of domestic credit across countries influences the resulting leverage, spread, and the net financing contribution to firms' return on equity. Results show that the influence of domestic credit in a country, the rate that trade credit and financial credit substitute for each other, and how operating performance flows through to the financial performance, all depend critically on the relative size of the firm in its home economy. Read More

Level II Negotiations: Helping the Other Side Meet Its ‘Behind the Table’ Challenges

Many situations make it important to productively synchronize "internal" with "external" negotiations. In fact, much research to date has focused on how each side can best manage its internal opposition to agreements negotiated "at the table." Often implicit in this research is the view that each side's leadership is best positioned to manage its own internal conflicts. Traditionally, a negotiator does this by 1) pressing for deal terms that will meet its internal objections, and 2) effectively "selling" the agreement to its key constituencies. However, James Sebenius argues that to achieve your own goals in negotiation it is also vital to understand all the ways in which you can help the other side with the its "behind-the-table" barriers (and vice versa). Independent of any altruistic motives, helping them to solve "their internal negotiation problem" is often the best way to get them to say yes to an agreement that is in your interest. To do this, negotiators should explicitly probe the full set of the other party's interests including the other side's interest in dealing effectively with its internal, behind-the-table challenges and conflicts. This requires you to deeply probe the context in which they are enmeshed: the web of favorable and opposing constituencies as well as their relationships, perceptions, sensitivities, and substantive interests. By way of a number of challenging case examples, this paper details a number of ways to develop this fuller understanding and to act effectively on it. Read More

The Effect of Institutional Factors on the Value of Corporate Diversification

How does the value of corporate diversification vary with institutional development? Using data on diversified firms from 38 countries over a 15-year period, the authors explore the effect of capital market efficiency, labor market efficiency, and product market efficiency on the excess value of diversified firms relative to their single segment peers. Specifically, the paper analyzes whether these institutional variables explain the variance in the value of diversified firms across different countries. Findings show that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital markets. In addition, there is evidence that the efficiency of the country's labor market also has a significant effect on the excess value of diversified firms. Read More

Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Recent research presents convincing evidence that incentives rewarding loan origination may cause severe agency problems and increase credit risk, either by inducing lax screening standards or by tempting loan officers to game approval cutoffs even when such cutoffs are based on hard information. Yet to date there has been no evidence on whether performance-based compensation can remedy these problems. In this paper, the authors analyze the underwriting process of small-business loans in an emerging market, using a series of experiments with experienced loan officers from commercial banks. Comparing three commonly implemented classes of incentive schemes, they find a strong and economically significant impact of monetary incentives on screening effort, risk-assessment, and the profitability of originated loans. The experiments in this paper represent the first step of an ambitious agenda to fully understand the loan underwriting process. Read More

Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines

Does entrepreneurship cause urban growth? Economists and policymakers often argue yes, but it is remarkable how little is known about what lies behind this relationship. This paper investigates the connection more closely using a link between historical mineral and coal deposits and modern entrepreneurship observed in US cities today. Because the process of bringing ores out of the earth is a capital-intensive operation that often benefits from large-scale operations, cities with a historical abundance of nearby mineral and coal mines developed industrial structures with systematically larger establishments and less entrepreneurship. These early industrial traits persisted long after the initial conditions faded through intergenerational transmissions, path dependency, and similar. Using this variation, the study finds the strong connection between a city's initial entrepreneurship and subsequent economic growth is still observed after removing the most worrisome endogeneity. This connection works primarily through lower employment growth of startups in cities that are closer to mines. Read More

Channels of Influence

How do firms differentially navigate the global marketplace to buy and sell goods? The answer is critical to identifying which firms will ultimately succeed, and how investors should allocate capital amongst these firms. This paper analyzes the strategic entry choices of firms seeking to expand their businesses to overseas markets. Using customs and port authority data detailing the international shipments of all U.S. publicly-traded firms, the authors show that firms import and export significantly more with countries that have a strong resident population near the firm headquarters. In addition, by analyzing the formation of World War II Japanese internment camps in order to study external shocks to local ethnic populations, the authors also identify a causal link between local networks and firm trade. However, capital markets and sell-side analysts have difficulty deciphering even these observable channels, so make significant mistakes in assessing the positive impact of these links. Findings overall show a surprisingly large impact of immigrants' economic role as conduits of information for firms in their new countries. This research provides new evidence on the economic impact of immigration and ethnic diversity in the United States. Read More

Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children’s Abilities Depend on Parents’ Resources

Economists have long recognized that parents' resources and investment in their children may be key determinants of their children's outcomes. Recent evidence indicates that increasing the disposable incomes of poor parents raises the performance of their children on tests of cognitive ability. That finding suggests that current tax policy may affect the future distribution of underlying income-earning abilities in the taxpayer population. However, the dominant model of optimal taxation has been unable to take this effect into account. This study explores the implications for optimal policy of taking a more nuanced approach. Using a calibrated model to simulate optimal policy, the authors find that the optimal policy redistributes substantially more toward low-ability parents and earlier generations than does status quo policy. This paper may be the first to model this complexity and derive policy implications. Read More

Field Evidence on Individual Behavior & Performance in Rank-Order Tournaments

Contests abound in everything from amateur and professional sports to arts, architecture, manual labor, and engineering. Just as large-scale online contest platforms that provide ongoing tournament-based work and compensation have emerged, large industrial companies increasingly use them as a complement to in-house research and development. What difference does increased competition make to individual participants? This paper analyzes data from algorithmic programming contests to shed light on the mechanisms that underlie changes in performance in reaction to increased competition. Three mechanisms may account for a performance decline: reduction in effort, increased risk taking, and deterioration in cognitive processing. The study also shows how the ability of competitors affects their reactions to increased competition. Overall, results suggest that a better understanding of behavioral responses in contests can aid both public policy and contest designers. Read More

Key Drivers of Successful Implementation of an Employee Suggestion-Driven Improvement Program

Service organizations frequently implement improvement programs to increase quality. These programs often rely on employees' suggestions about improvement opportunities. Yet organizations face a trade-off with suggestion-driven improvement programs. Should managers use an "analysis-oriented" approach to surface a large number of problems, prioritize these, and select a small set of high priority ones for solution efforts? Or is it better to take an "action-oriented" approach, addressing problems raised by frontline staff regardless of priority ranking? In this paper the authors weigh the tradeoff between these two different approaches. Using data from 58 work groups in 20 hospitals that implemented an 18-month-long employee suggestion-driven improvement program, the authors find that an action-oriented approach was associated with higher perceived improvement in performance, while an analysis-oriented approach was not. The study suggests that the analysis-oriented approach negatively impacted employees' perceptions of improvement because it solicited, but not act on, employees' ideas. Read More

A Randomized Field Study of a Leadership WalkRounds™-Based Intervention

Hospitals face an imperative to improve quality, increase efficiency, and improve customer experience. Many hospitals utilize process improvement techniques to achieve these goals. One technique to involve senior managers, known in hospitals most commonly as Leadership WalkRounds™, is a program of visiting the organization's frontlines to observe and talk with employees while they do their work. The intention is that managers and frontline staff will work together to identify and resolve obstacles to efficiency, quality, or safety. (For brevity, the authors refer to it in this paper as WalkRounds™.) Rigorous testing of the effectiveness of process improvement interventions generally, and WalkRounds™ particularly, however, has been rare. This paper presents results from a field study that tested the effectiveness of a safety improvement program inspired by WalkRounds™. The authors compare pre-program and post-program measures of perceived improvement in performance (PIP) from work areas in hospitals that were randomly selected to implement the program, with pre- and post- measures from the same types of work areas in control hospitals. Findings show that, contrary to expectations, the WalkRounds™-based program was associated with decreased PIP. This study calls into question the general effectiveness of WalkRounds™ on employees' perceptions, which had been assumed in prior literature. Read More

Children Develop a Veil of Fairness

Is children's fair behavior motivated by a desire to be fair —or merely the desire to appear fair? The results of several experiments suggest that as children grow older they become increasingly concerned with appearing fair to others, which may explain some of their increased tendency to behave fairly. Since even young children can radically shift their behavior from fair to unfair based on whether authority figures are aware of their behavior, it might be naive to believe that shrewd adults will be fair without similar oversight. By understanding the limitations of fairness, policymakers can discover how to leverage fairness to increase socially desirable behavior in some circumstances, while limiting its occasional wastefulness. Read More

Dividends as Reference Points: A Behavioral Signaling Approach

While managers appear to view dividends as a signal to investors, managers also argue that standard dividend signaling models are not focused on the correct mechanisms. These standard models posit that executives use dividends to destroy some firm value and thereby signal that plenty remains: The "money burning" typically takes the form of tax-inefficient distributions, foregone profitable investment, or costly external finance. Executives who actually set dividend policy overwhelmingly reject these ideas yet, at the same time, are equally adamant that dividends are a signal to shareholders and that cutting them has negative consequences. In this paper, the authors develop what they believe to be a more realistic signaling approach. Using core features of prospect theory as conceptualized by Daniel Kahneman and Amos Tversky (the fathers of behavioral economics), they create a model in which past dividends are reference points against which future dividends are judged. The theory is consistent with several important aspects of the data. Baker and Wurgler also find support for its broader intuition that dividends are paid in ways that make them memorable and thus serve as stronger reference points and signals. Read More

The Cost of Friendship

In venture capital, friendship can be expensive. Using the VC industry as a testing ground, the authors seek to answer two questions about collaboration: What personal characteristics influence individuals' desires to work together in venture capital syndication? And given the influence of these personal characteristics, does attraction help or hurt investment performance? After examining the biographical characteristics and activities of more than 3,500 individual venture capitalists from 1975 to 2003, the authors show that people are more likely to collaborate with those who share similar characteristics with them. Findings also show that individual venture capitalists collaborate with other venture capitalists for both ability- and affinity-based characteristics. When they collaborate for ability-based characteristics it enhances investment performance; but when they partner for affinity-based characteristics it dramatically reduces investment returns. Read More

Legislating Stock Prices

This paper examines the importance of firms' relationships with their legal and political environment, and the actors who form this environment. Governments pass laws that affect firms' competitive landscape, products, labor force, and capital, both directly and indirectly. And yet, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, the authors gather insights into the likely impact of government legislation on firms. Specifically, the authors demonstrate that legislation has a simple yet previously undetected impact on firm prices. Read More

Rainmakers: Why Bad Weather Means Good Productivity

Most people believe that bad weather conditions reduce productivity. In this research the authors predict and find just the opposite. Using empirical data from laboratory experiments as well as from a mid-sized Japanese bank, the research demonstrates that weather conditions influence one's own cognition and focus. For indoor work contexts, worker productivity is higher on bad rather than good weather days. By reducing the potential for cognitive distractions, bad weather was actually better at sustaining individuals' attention and focus, and, as a result, increasing their productivity. Overall, findings deepen understanding of the factors that contribute to worker productivity. Read More

Unobserved State Fragility and the Political Transfer Problem

This paper describes how the dynamics of unobserved state fragility may generate negative consequences for other countries. Ahmed and Werker argue for the theoretical possibility that autocrats experiencing a windfall in unearned income may find it optimal to donate some of the windfall away in order to make the state less attractive a prize to a potential insurgent. Additionally, recipients of the aid may themselves become more repressive with high aid and fall into conflict with lower levels of aid. These joint phenomena make up what the authors term the political transfer problem. The largest windfall in unearned income of the 20th century, the period from 1973-85 during which oil prices were at all-time highs, produced political dynamics consistent with this model. Read More

The Need for (Long) Chains in Kidney Exchange

It is illegal in the U.S. and in most of the world to buy or sell organs for transplantation. Kidney exchange arises because a healthy person has two kidneys and can donate one to a person in need of a transplant. But a donor and his or her intended recipient may be incompatible. An incompatible patient-donor pair can exchange with another pair, or with more than one other pair, in a cycle of exchanges among patient-donor pairs that allows each patient to receive a kidney from a compatible donor. In addition, sometimes exchange can be initiated by an altruistic donor who does not designate a particular intended patient, and in that case a chain of exchanges need not form a closed cycle. This paper seeks to understand why such longer chains have become increasingly important in practical kidney exchange. The answer has to do with the growing percentage of patients for whom finding a compatible donor is difficult. These "highly sensitized" patients are those for whom finding a transplantable kidney is difficult, even from a donor with the same blood type, because of tissue-type incompatibilities. This paper shows that highly sensitized patients are the ones to benefit from longer cycles and chains, and that this does not harm low-sensitized patients. Read More

Monetary Policy and Long-Term Real Rates

Samuel G. Hanson and Jeremy C. Stein document that distant real forward rates react strongly to news about the future stance of monetary policy. These movements in forward rates appear to reflect changes in term premia, which largely accrue over the next year, as opposed to varying expectations about future real rates. The evidence suggests that one driving force behind time-varying term premia is the behavior of yield-oriented investors, who react to a cut in short rates by increasing their demand for longer-term bonds, thereby putting downward pressure on long-term rates. Read More

When Supply-Chain Disruptions Matter

Disruptions to a firm's operations and supply chain can be costly to the firm and its investors. Many companies have been subjected to such disruptions, and the impact on company value varies widely. Do disruption and firm characteristics systematically influence the impact? In this paper, the authors identify factors that cause some disruptions to be more damaging to firm value than others. Insight into this issue can help managers identify exposures and target risk-mitigation efforts. Such insights will also help investors determine whether a company is exposed to more damaging disruptions. Read More

Financial vs. Strategic Buyers

What drives either financial or strategic buyers to have a more dominant position in mergers and acquisitions activity at different points in time? The question of competition matters not only because the economic magnitude of this activity is so large, but also because the balance of power between financial vs. strategic acquirers changes the ownership structure of assets and alters the incentives and governance mechanisms that surround the economic engine of our economy. This paper explores how the possibility of misvalued debt markets can both fuel merger activity and alter the balance between PE and strategic buyers. The authors use an approach based on a model of private equity (PE) and strategic merger activity in which all players in the model make value-maximizing decisions conditional on their information. Findings suggest that the possibility of misvalued debt may have important impacts on both firms and investors, on who buys whom, and for default levels in the economy. Read More

The Rich Get Richer: Enabling Conditions for Knowledge Use in Organizational Work Teams

Individuals on the periphery of organizational knowledge-sharing networks, due to inexperience, location, or lack of social capital, may struggle to access useful knowledge at work. An electronic knowledge repository (KR) offers a practical solution to the challenges of making knowledge available to people who might otherwise lack access to relevant expertise. Such a system may function as a knowledge-access equalizer. However, the presence of a knowledge repository will not solve the problem of access to knowledge for those at the periphery of the organization unless it is used. In this paper, the authors begin to theorize the social and structural conditions that support KR use by exploring whether individuals on the organizational periphery take advantage of KRs, or whether KRs function more to enrich individuals whose experience and position already provide them better access to other knowledge sources. Using extensive data on KR use at a global, outsourced provider of software services, the authors' results show that despite the seeming promise of a KR to integrate or equalize peripheral players, it instead enriches knowledge access for people who are already well positioned. Findings thus suggest that KR use is not simply an individual activity based on need, but is instead enabled by certain social conditions (such as familiarity and experience) and inhibited by others (such as status disparities and remote location). An organizational KR thus fails to serve as an equalizer absent intervention. Read More

Investment Incentives in Proprietary and Open-Source Two-Sided Platforms

While proprietary and open-source software have coexisted since the early days of the computing industry, competition between these two modes of development has intensified dramatically following the surge of the Internet in the mid-1990s. This paper provides a first step to better understand incentives to invest in proprietary and open platforms. Specifically, the authors examine a model of a proprietary and an open-source two-sided platform to study equilibrium investment in platform quality. Their analysis provides answers to three important questions: (1) How are the incentives to invest in platform quality affected by the degree of platform openness? (2) Which of these two modes of governance leads to investment closer to the social optimum? And (3), how are incentives to invest in platform quality moderated by competition between proprietary and open two-sided platforms? Comparing monopoly platforms reveals that for a given level of user and developer adoption, investment incentives are stronger in proprietary platforms. However, open platforms may receive larger investment because they may benefit from wider adoption, which raises the returns to quality investment. The authors also find that proprietary platforms may benefit from higher investment in competing open platforms when developers multi-home, a result that helps explain why a proprietary platform such as Microsoft has chosen to contribute to the development of Linux. Read More

Charitable Giving When Altruism and Similarity are Linked

This paper presents a model to help explain several aspects of charitable giving. First, individuals do not appear to reduce their contributions to a charity significantly when they learn that the government or other individuals have increased the funds that they devote to the charity's beneficiaries. Indeed, sometimes people increase their contributions when they hear that others have contributed more. Second, there are often several distinct charities that contribute to the same beneficiaries, and these charities frequently differ by the donor population to whom they target their appeal. Lastly, the extent to which individuals contribute to charity differs greatly, even among countries that appear otherwise quite similar. Rotemberg's model shows that two assumptions grounded in evidence from psychology are helpful in explaining these regularities. Specifically, the combination of (1) letting altruism be larger towards like-minded people and (2) having self-esteem depend on the number of people that agree with oneself is consistent with small reductions in one's own giving in response to larger giving by others. Read More

Why Do We Redistribute So Much but Tag So Little? The Principle of Equal Sacrifice and Optimal Taxation

Why don't we tax personal characteristics such as height, race, and gender? The conventional optimal tax model suggests that we should, while no societies do. This paper proposes an explanation: conventional optimal tax theory has yet to capture the diversity of normative principles with which society evaluates taxes. Incorporating a role for the principle of equal sacrifice in how taxes are designed, a principle held by many leading thinkers to be the natural criterion of justice in taxation, substantially improves the match between the theory of optimal taxes and the reality of tax policy. This alternative reconciles three features of real-world policy that seemed incompatible in the standard model: limited taxation of personal characteristics not directly linked to ability, moderate marginal tax rates at high incomes, and substantial redistribution to the poor. Read More

Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production

Nations with greater openness to multinational production exhibit, on average, higher productivity and faster economic growth. This positive relationship, likely conditional on many factors, is often attributed to knowledge spillover, such as direct knowledge transfer through partnership, the possibility to learn from the innovation and experiences of foreign firms, and the interaction and movement in labor markets. However, another less stressed explanation centers on firm selection whereby competition from multinationals leads to market reallocation and survival of only the most productive domestic firms. Moreover, as only firms with greater productivity are able to overcome the fixed cost of foreign investment, countries with greater openness to multinational production are thus attracting foreign firms that are, by selection, more productive. The above mechanisms all imply a positive relationship between multinational production and host-country productivity but represent sharply different economic causalities and policy implications. The self-selection of multinational firms suggests that higher host-country productivity can reflect the productivity of self-selected multinational firms, instead of the causal effect of multinational production. In contrast, domestic firm selection and knowledge spillover imply multinational production causes higher aggregate, domestic productivity. How the latter two affect domestic production is countervailing: tougher domestic firm selection results in a contraction of domestic production while knowledge spillover creates positive externalities. In this paper the authors disentangle the roles of knowledge spillover and firm selection in determining the aggregate productivity and welfare impact of multinational production and quantify the relative importance of these distinct sources of gains. Results show that firm selection and market reallocation constitute an important source of productivity gains while its relative importance varies across nations. There are crucial implications for policy aimed at influencing foreign direct investment (FDI) flows. Read More

De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution

Individuals differ in the value they place on consumption relative to leisure. These preference differences help explain why some earn more than others, and they are a central part of popular and scholarly debates over taxation. In this paper, Benjamin Lockwood and Matthew Weinzierl show that variation in these preferences may also help explain why the extent of redistribution varies across countries and US states, and why (at least in the case of the United States) redistribution is weaker than conventional theory would suggest. More generally, Lockwood and Weinzierl argue that neglecting the role of preferences substantially impairs our understanding of both optimal and existing tax policy. Overall, findings suggest that this paper's generalized normative optimal tax model may be a better guide to policy advice than the conventional one. Read More

Negotiation Processes As Sources of (And Solutions To) Interorganizational Conflict

Negotiations are often conceptualized as a means of managing or resolving conflict. Yet just as the process of negotiation may be a solution to conflict in some cases, it may be a source of conflict in others. This paper examines how contextual features within organizations affect negotiation processes and outcomes, and how these processes in turn become a source of or solution to interorganizational conflict. The authors argue that principals, agents, and teams face different sets of constraints and opportunities in negotiations. It is thus important to understand the link between unfolding interactions (the subject of considerable negotiation process research) and more macro features of organizations, such as formalization of roles, culture, or party representation. Read More

Communicating Frames in Negotiations

Economists examining bargaining behavior and outcomes often disregard the complex role of communication, restrict interaction to offers and counteroffers, or study the mere presence of communication while ignoring or constraining its content. This paper asks: How and why does talk sometimes make bargaining more cooperative and other times make bargaining more competitive? The answer may depend on examining what is being communicated about the underlying purpose of the interaction. Kathleen L. McGinn and Markus Noth argue that the content of communication frames the bargaining situation and thus can help predict bargaining behavior and final agreements. Read More

Looking Up and Looking Out: Career Mobility Effects of Demographic Similarity among Professionals

While women and racial minorities have increasingly crossed the threshold into professional service organizations, the path to the top remains elusive. Why do inequalities persist? McGinn and Milkman study processes of cohesion, competition, and comparison by looking at career mobility in a single up-or-out professional service organization. Findings show that higher proportions of same-sex and same-race superiors enhanced the career mobility of junior professionals. On the flip side, however, higher proportions of same-sex or same-race peers increased the likelihood of women's and men's exit and generally decreased their chances of promotion. This research highlights how important it is to look at both cooperative and competitive effects of demographic similarity when trying to address the problem of persistent underrepresentation of women and minorities at the highest levels in organizations. Read More

Trade Credit and Taxes

Economists have extensively analyzed the effects of taxation on many aspects of corporate financial policy, including borrowing and dividend distributions. But the effects of corporate income taxes on trade credit practices have been much less understood. Research by Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr. develops the idea that trade credit allows firms to reallocate capital in response to tax differences. Using detailed data on the foreign affiliates of US multinational firms, the authors are able to observe affiliates of the same firm operating in different countries and therefore facing different corporate income tax rates. Taken together, the findings illustrate that firms use trade credit to reallocate capital from low-tax jurisdictions to high tax jurisdictions to capitalize on tax-induced differences in pretax marginal products of capital. Their actions imply that tax rate differences across countries significantly affect capital allocation within firms, depressing investment levels in high tax jurisdictions and introducing differences between the productivity of capital deployed in different locations. Read More

Leviathan in Business: Varieties of State Capitalism and their Implications for Economic Performance

State capitalism, the widespread influence of the government in the economy, still looms large in developed and developing countries after over two decades of extensive state reform and privatization. Research by Aldo Musacchio and Sergio G. Lazzarini documents the extent and reach of state capitalism around the world and explores the economic implications of these new forms of state capitalism. There are three key arguments: First, state capitalism in the twenty-first century combines majority ownership of state-owned enterprises with a hybrid form that includes minority equity investments as well as other forms of support for private firms (such as subsidized loans). Second, all of those forms are present around the world, both in rich and poor countries, and in most cases they co-exist. Although some countries appear to have a prevalence of the minority investor mode while other countries emphasize the majority mode, in most cases the two modes jointly occur. Third, the emergence of those modes is explained by a host of environmental, political, and historical factors; and the economic performance of each mode depends on certain contingencies that should affect their benefits and costs, such as the economic distortions that they may generate. Read More

Information Technology and Boundary of the Firm: Evidence from Plant-Level Data

It has long been believed that information technology (IT) has the potential to shift the boundaries surrounding where production takes place. Specifically, networked IT investments are supposed to reduce costs of monitoring behavior of internal and external partners, thereby improving incentives and reducing the risk of opportunistic behavior. Networked IT can also reduce costs of coordinating economic activity within and between firms. This study, by Chris Forman and Kristina McElheran, explores how IT investments influence vertical integration in supply chain relationships. Read More

Reaching for Yield in the Bond Market

"Reaching for yield"—investors' propensity to buy high yield assets without regard for risk—has been identified as one of the core factors contributing to the buildup of credit that preceded the financial crisis. Despite this potential importance, however, the way in which reaching for yield works and where it occurs is not well understood. Professors Bo Becker and Victoria Ivashina examine reaching for yield in the corporate bond market by looking among insurance companies, the largest institutional investor in this arena. Findings suggest that reaching for yield may limit the effectiveness of capital regulation to a time-varying and unpredictable extent. Reaching for yield may also allow regulated entities to become riskier than regulators and legislators intend, and may impose distortions on the corporate credit supply. Read More

“Power from Sunshine”: A Business History of Solar Energy

In each generation, the concept of getting "power from sunshine" has attracted entrepreneurial visionaries who encountered a perennial problem: Solar energy was expensive compared to conventional fuels that were not priced to incorporate wider environmental costs. This paper by Geoffrey Jones and Loubna Bouamane provides a business history of solar energy between the nineteenth century and the present day. Its covers early attempts to develop solar energy, the use of passive solar in architecture before World War II, the subsequent growth of the modern photovoltaic (PV) industry, and alternative non-PV technologies such as parabolic collectors. As the authors argue, building viable business models proved crucially dependent on two factors: the prices of alternative conventional fuels and public policy. Read More

Location Choices Under Strategic Interactions

How do firms decide their location when expanding geographically? This paper explores how strategic interaction among competitors affects firms' geographic expansion across time and markets. HBS professor Juan Alcacer builds a model in which two firms that differ in their capabilities enter sequentially into two markets with different potentials for profit. The model is solved using game theory under three learning scenarios that capture the ability of a firm to transfer its capabilities across markets: no learning, local learning, and global learning. Three equilibrium strategies emerge: accommodate, marginalize, and collocate. Alcacer identifies how these strategies are more or less likely to emerge depending on three parameters: initial relative firm capabilities, relative market profitability, and learning rates. For managers, the paper illustrates different ways that firms can use location choices across time and geographic markets as a tool to enhance or preserve their competitive position within an industry. Read More

How Short-Termism Invites Corruption--And What to Do About It

A long-term time horizon is most sensible where a business or investor has some edge and when short-term risks associated with a longer-term strategy are hedged and opportunity costs minimized. However, when perverse, short-term incentives artificially encourage executives to ignore high-yielding, long-term opportunities, then the costs of short-termism set in. The recent financial crisis suggests that the rise of short-termism has been especially troublesome in the finance industry. In this paper, Malcom Salter starts by analyzing a case involving the mortgage-banking desk at Citigroup because it can help us think about how short-termism-the collapsed time horizon of both business decision makers and investors-not only sabotages an enterprise's reputation and value, but also invites individual and institutional corruption. He then examines the key drivers of short-termism in contemporary business, and their potential effects on the behavior of both executives and their organizations. He concludes by proposing mechanisms to deter the corrupting effects of short-termism, including changes in both business and public policy. Read More

Conflict Policy and Advertising Agency-Client Relations: The Problem of Competing Clients Sharing a Common Agency

This paper takes a fresh look at a recurring and often contentious issue in agency-client relations: Should an advertising agency simultaneously serve competing accounts or should the agency be restricted from doing so? Professor Alvin J. Silk traces the evolution and current state of industry practices with respect to conflict norms and policies; reviews the body of conceptual and empirical research that is available about the sources and consequences of conflicts, and outlines some directions for future research to address unresolved policy issues. Read More

Creating a Venture Ecosystem in Brazil: FINEP’s INOVAR Project

Since the mid-1990s, several groups in Brazil have been working on developing an indigenous venture capital ecosystem, largely to stimulate the establishment of innovative companies and help them gain access to capital. In 2000, the Brazilian government's Agency for Innovation (Financiadora de Estudos e Projectos, or FINEP), with support from the Multilateral Investment Fund (MIF), unveiled INOVAR, a program to address these needs. In the 12 years since INOVAR's debut, the program has had two iterations and has been recognized as a role model for government efforts to stimulate a VC ecosystem. In this paper, Ann Leamon and Josh Lerner present a brief background on private equity in both Latin America and Brazil, then explore the genesis of INOVAR (Innovation), the details of the program, and its results. They conclude with challenges to be addressed. Read More

Componential Theory of Creativity

The componential theory of creativity is recognized as one of the major theories of creativity in individuals and in organizations, serving as a partial foundation for several other theories and for many empirical investigations. It was first articulated by Teresa Amabile in 1983 and has undergone considerable evolution since then. In essence the theory is a comprehensive model of the social and psychological components necessary for an individual to produce creative work. The theory specifies that creativity requires a confluence of four components: Creativity should be highest when 1) an intrinsically motivated person with 2) high domain expertise and 3) high skill in creative thinking 4) works in an environment high in supports for creativity. Read More

Organization Design for Distributed Innovation

MIT professor Eric von Hippel first coined the term "distributed innovation" to describe a system in which innovation emanates not only from the manufacturer of a product but from many sources including users and rivals. Over the years, systems of distributed innovation—so-called business ecosystems—have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In this paper, prepared for the 1st Organizational Design Conference, held at Harvard Business School in August 2012, HBS professor Carliss Baldwin examines four central themes: 1) Distributed innovation as the unintended consequence of modularity; 2) The advantage of business ecosystems for creative problem-solving; 3) Organizational design of business ecosystems; and 4) Competition and technological innovation in business ecosystems. Overall, Baldwin argues that the potential benefits of distributed innovation must be recognized, and the field of organization design must broaden its traditional focus on the individual firm to encompass this compelling new approach for creating value. Read More

Is a VC Partnership Greater Than the Sum of Its Partners?

Venture capital investments are an important engine of innovation and economic growth, but extremely risky from an individual investor's point of view. Furthermore, there are large differences in fund performance between top quartile and bottom quartile venture capital funds. The ability to consistently produce top performing investments implies that there is something unique and time-invariant about venture capital firms. But to what extent are the important attributes of performance a part of the firm's organizational capital or embodied in the human capital of the people inside the firm? Michael Ewens and Matthew Rhodes-Kropf find that the partner is extremely important. Additionally, results suggest that venture capital partnerships are not much more than the sum of their partners. Partners are often significantly different from each other, but "good" firms are those with a group of better partners. Thus, firms that have maintained high performance across many funds may have simply been able to retain high quality partners rather than actually provide those partners with much in the way of fundamental help. Read More

Creating an R&D Strategy

This note by Gary P. Pisano provides a framework for designing an R&D strategy. It starts with the simple notion that a strategy is a system approach to solving a problem. An R&D strategy is defined a coherent set of interrelated choices across decision concerning: organizational architecture, processes, people, and project portfolios. To illustrate the framework, we use examples of three pharmaceutical companies and examine how their different R&D strategies were rooted in different assumptions about the core driver of R&D performance. This suggests that the very first question to be answered in strategy development is: What's our shared understanding of the root cause of the problem we are trying to solve? Read More

The Flattened Firm—Not as Advertised

For decades, management consultants and the popular business press have urged large firms to flatten their hierarchies. Flattening (or delayering, as it is also known) typically refers to the elimination of layers in a firm's organizational hierarchy, and the broadening of managers' spans of control. While flattening is said to reduce costs, its alleged benefits flow primarily from changes in internal governance: by pushing decisions downward, firms not only enhance customer and market responsiveness, but also improve accountability and morale. But has flattening actually delivered on its promise and pushed decisions down to lower-level managers? In this paper, Julie Wulf shows that flattening actually can lead to exactly the opposite effects from what it promises to do. Wulf used a large-scale panel data set of reporting relationships, job descriptions, and compensation structures in a sample of over 300 large U.S. firms over roughly a 15-year period. This historical data analysis was complemented with exploratory interviews with executives (what CEOs say) and analysis of data on executive time use (what CEOs do). Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy. In sum, flattening at the top is a complex phenomenon that in the end looks more like centralization. Yet it is crucial to consider different types of decisions and activities and how they vary by level in the hierarchy. Read More

No News Is Good News: CSR Strategy and Newspaper Coverage of Negative Firm Events

This study examines the gatekeeping role of the media in determining which negative corporate events reach a broader audience. Jiao Luo, Stephan Meier, and Felix Oberholzer-Gee test the idea that investments in corporate social responsibility (CSR) create public good will, leading the media to treat companies with a superior CSR track record in a favorable manner. They find the opposite. Newspapers are more likely to report negative news about companies if the companies invested heavily in CSR. For example, oil companies that invest in clean energy face a greater risk of media coverage in the event of an oil spill. An analysis of the tone of media coverage shows that news reports are no more positive for CSR leaders than for the average company. Read More

Learning by Supplying

Offshore outsourcing of manufacturing and related activities to China and other emerging economies is changing the competitive landscape in many industries. Some predict that lessons learned by emerging market firms in their role as suppliers to major branded producers will allow them to develop the capabilities necessary to become viable world-class competitors, possibly at the expense of current market leaders. In this paper Juan Alcacer and Joanne Oxley subject this "learning by supplying" hypothesis to the test, analyzing data on evolving technological and marketing capabilities of suppliers in the mobile handset industry. Contrary to some of the more alarmist commentary in the popular press, the researchers' observations suggest that the progression from trusted supplier to threatening competitor among electronics manufacturing firms is far from inevitable. Findings also point to the existence of quite distinct pathways to technological and market learning for suppliers. The divergent learning outcomes for suppliers serving operators and branded producers reinforce the idea that, while operators involve suppliers in all aspects of production, branded producers strictly limit access to customer-facing activities, thus reducing suppliers' opportunities for learning in this domain. Read More

Putting Integrity into Finance: A Purely Positive Approach

Behavior that lacks integrity leads to value destruction. This paper analyzes some common beliefs, actions, and activities in finance that are inconsistent with being a person or a firm of integrity. Each of these beliefs leads to a system that lacks integrity, i.e., one that is not whole and complete and therefore creates unworkability and destroys value. Focusing on these phenomena from the integrity viewpoint, the authors argue, makes it possible for managers to focus on the value that can be created by putting the system back in integrity and correcting the non-value maximizing equilibrium that exists in capital markets. Overall, this paper summarizes a purely positive theory of integrity that has no normative elements whatsoever, and demonstrates how it applies to both individuals and organizations. In effect, integrity is a factor of production just like knowledge, technology, labor, and capital, but it is undistinguished—and its affect (by its presence or absence) is huge. Read More

What Makes a Critic Tick? Connected Authors and the Determinants of Book Reviews

The professional critic has long been heralded as the gold standard for evaluating products and services such as books, movies, and restaurants. Analyzing hundreds of book reviews from 40 different newspapers and magazines, Professor Michael Luca and coauthors Loretti Dobrescu and Alberto Motta investigate the determinants of professional reviews and then compare these to consumer reviews from Amazon.com. Read More

Why Every Company Needs a CSR Strategy and How to Build It

Despite certain criticisms, more and more companies in the world practice some form of corporate social responsibility. This paper offers a pragmatic alternative framework for CSR with a view towards developing its practice in an evolutionary way. The authors' extensive experience working with CSR practitioners convinces them that exhorting companies to hone their CSR practice under a shared value framework does not reflect the reality for a majority of businesses. CSR executives oversee a variety of social initiatives that may or may not directly contribute to a company's business goals. The role of an executive is to achieve the difficult task of reconciling the various programs, quantifying their benefits, or at least sketching a logical connection to the business, and securing the support of his or her business line counterparts. This role, when performed well, would lead to the development of a CSR strategy for the company. Read More

Is India’s Manufacturing Sector Moving Away from Cities?

One of the biggest challenges in development is urbanization. Within developing countries, nearly two billion people are expected to move from rural regions into cities in the next two decades. This paper closely examines the movement of economic activity in Indian manufacturing between urban and rural areas. The authors find that while the organized sector is becoming less urbanized, the unorganized sector is becoming more urbanized. This process has been most closely linked to greater urbanization changes in districts with high education levels; a second role is often evident for public infrastructure as well. On the whole, these urbanization changes have modestly improved the urban-rural allocation of industries within India's districts. Read More

Technology Choice and Capacity Portfolios Under Emissions Regulation

What technologies should firms invest in when emissions are costly? With the European Union Emissions Trading Scheme in the EU, California's Assembly Bill 32, the Regional Greenhouse Gas Initiative in the northeastern US, and now Australia's Clean Energy Bill, more and more firms are having to ask themselves that question when planning their capacity portfolios. This paper uses formal theory to analyze firms' technology choice and capacity portfolios, both when emissions are taxed and when they are regulated under cap-and-trade. David Drake, Paul R. Kleindorfer, and Luk N. Van Wassenhove find that even when average emissions price is assumed to be equivalent to that under an emissions tax, firms are more profitable under cap-and-trade. The emissions price uncertainty under cap-and-trade that many argue will destroy value instead equips firms with a real option that increases value. In addition to comparing profits under emissions tax and cap-and-trade regimes, the authors identify a number of potential adverse outcomes that can arise as a consequence of emissions legislation that should be taken into consideration when formulating future climate policy. Read More

Clear and Present Danger: Planning and New Venture Survival Amid Political and Civil Violence

Strategy theory often takes for granted the role of state institutions in providing stable, predictable environments in which new firms are founded. Yet, many states around the world (such as Iraq, Sudan, South Sudan, Syria, and the Democratic Republic of Congo) lack political institutions of sufficient strength to ensure personal safety and public order, thereby creating environments where civil and political violence can ferment. This paper explores the impact of such violence on new venture processes. Results show that comprehensive planning was negatively correlated with venture survival in such environments. While there are implications for strategy theory, the study is also relevant to entrepreneurs and organizations promoting new venture planning in less-developed countries, particularly those experiencing political and civil turmoil. Currently, prospective entrepreneurs are taught the importance of business planning by both universities and non-governmental organizations that offer entrepreneurial training. But this study suggests that such training will have mixed effects on new venture survival, depending on the extent to which these entrepreneurs pursue ventures in violent and uncertain environments. In such contexts where governments fail to maintain public safety and order, these training programs may actually increase the likelihood of new venture failure. Read More

An Exploration of Luxury Hotels in Tanzania

Tanzania is justly famous for its incredible natural landmarks such as the Rift Valley, Ngorongoro Crater, Lake Manyara, Mount Kilimanjaro, Zanzibar, and, above all, the Serengeti and the Great Migration. Why, despite being so richly endowed in touristic resources, does Tanzania receive relatively few tourists and little revenue from tourism? Diego Comin explored the drivers and influencing factors on the size of the tourism sector, using as a starting point the abnormally high prices of upscale hotels in Tanzania, especially in the safari areas. Findings suggest that the cost of supplying upscale hotel services is not sufficient to explain the abnormally high prices, and the more likely candidate is high markups. Interviews with hotel managers supported this conclusion. In addition, while cross-country differences in demand are large, once we control for these differences, discrepancies in upscale hotel prices account for a significant share of cross-country differences in demand, and cross-country differences in demand are very persistent. On the basis of the role of word-of-mouth, learning by doing, and pecuniary externalities in driving differences in demand, there may be room for the Tanzanian government to induce lower hotel prices and to try to independently increase the foreign perception of the country's attractiveness. Read More

When Performance Trumps Gender Bias: Joint versus Separate Evaluation

Gender-based discrimination in hiring, promotion, and job assignments is difficult to overcome. This paper suggests a new intervention aimed at avoiding biased assessments: an "evaluation nudge," in which employees are evaluated jointly rather than separately regarding their future performance. While joint evaluation is common for most hiring decisions, especially at the lower levels, it is rarely used when job assignments and promotions are being considered. The research shows that a joint-evaluation mode succeeds in helping employers choose based on past performance, irrespective of an employee's gender and the implicit stereotypes the employer may hold. While it is not always feasible to bundle promotion decisions and explicitly compare candidates, the research suggests that, whenever possible, joint evaluation would increase both efficiency and equality. Findings have implications for organizations that want to decrease the likelihood that hiring, promotion, and job-assignment decisions will be based on irrelevant criteria triggered by stereotypes. Read More

The Stock Selection and Performance of Buy-Side Analysts

Important differences between buy- and sell-side analysts are likely to affect their behavior and performance. While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds). This paper examines buy recommendation performance for analysts at a large, buy-side firm relative to analysts at sell-side firms throughout the period of mid-1997 to 2004. The researchers find evidence of differences in the stocks recommended by the buy- and sell-side analysts. The buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts' clients) prefer that buy-side analysts cover less volatile and more liquid stocks. The study also finds that the buy-side firm analysts' stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest. This and future studies may help sell-side and buy-side executives to allocate their financial and human resources more strategically. Read More

Causes and Consequences of Firm Disclosures of Anticorruption Efforts

Academic research on corruption has typically focused on its macro causes and consequences. While the country level is certainly important to understand, it is at the firm level where many questions remain unanswered. This study examines 480 of the world's largest companies, using ratings by Transparency International of firms' public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Read More

Customer-Driven Misconduct: How Competition Corrupts Business Practices

Competition is typically thought to generate many positive outcomes including lower prices and higher productivity. But competition can also lead firms to increase quality for their customers in ways that are both illegal and socially costly. This paper examines the impact of competition on the vehicle emissions testing market, and finds that firm misconduct increases with competitive pressure and the threat of losing customers to rival firms. These results have serious implications for policy makers and managers. This paper is among the first to empirically demonstrate that increased competition can motivate firms to provide illicit quality to avoid losing business. Read More

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China

Economists have argued that the "Great Divergence" between the developed and underdeveloped world in the nineteenth century was reinforced—if not caused—by rapid improvements in schooling that occurred in the advanced economies. Explaining differences in economic development today may hinge on understanding why most societies failed to develop adequate primary education in the late nineteenth and early twentieth centuries. This study sheds new light on the comparative experiences of Brazil, Russia, India, and China (BRIC) during the formative years of their primary education systems. Read More

Short-Termism, Investor Clientele, and Firm Risk

In recent decades, commentators have argued that many corporations exhibit short-termism, a tendency to take actions that maximize short-term earnings and stock prices rather than the long-term value of the corporation. The authors develop a proxy for short-termism at the company level using conference call transcripts and then examine whether companies with more short-term horizons have (i) an investor base that is more short-term oriented, (ii) higher stock return volatility, and (iii) higher equity beta. The authors find that short-term oriented firms have more short-term oriented investors and higher risk. This paper contributes to the literature on the capital market effects of managerial and investor horizons. Read More

The Dynamic Effects of Bundling as a Product Strategy

This paper investigates the practice of bundling as a product strategy, and identifies how consumers make choices between products and bundles in a dynamic environment. Authors Timothy Derdenger and Vineet Kumar look at the handheld video game market to study bundling in a platform setting with the goal of investigating several key questions of interest to practitioners who make product decisions: First, do consumers value bundles over and beyond their component products, indicating a synergy, which some researchers have hypothesized? Second, have there been differing opinions on whether mixed bundling, that is offering both the bundle and individual products for sale, is more effective than offering only pure bundles or even compared to offering only the products for sale? Given the prevalence of bundling in technology markets, it is critical to understand whether bundling is more effective in environments with strong network effects or with weak network effects. Read More

Breaking Them In or Revealing Their Best? Reframing Socialization around Newcomer Self-Expression

How can organizations build strong, sustainable employment relationships from the very start? To date, the socialization literature has focused on transmitting and maintaining culture so that new employees accept the organizational values and behavioral norms. Many organizations require newcomers to wear standard wardrobes, forbid personal possessions, follow detailed verbal scripts, and enforce appropriate displays of emotion all designed to hinder individuality. In two studies described in this paper, the authors found that organizational and employee outcomes were better when socialization tactics encouraged authentic self-expression of newcomers' personal identities and signature strengths. Organizational socialization is optimized when organizations start by recognizing and highlighting newcomers' unique identities at the very beginning of the employment relationship, when identity negotiation is a critical concern for both parties. Read More

Platform Competition Under Partial Belief Advantage

In platform competition in a two-sided market, a platform's ability to attract consumers depends not only on the consumers' beliefs regarding its quality, but also on consumers' beliefs regarding the platform's ability to attract the other side of the market. For example, in the market for smart-phones the recent introductions of Apple's iPhone 4S with the improved operating system, and Samsung's Galaxy II with the improved Android 4, open a new round in the competition between the two platforms. The ability of each platform to attract users depends not only on its perceived quality, but also on users' beliefs regarding the number new applications developed for the platform. Likewise, the ability to attract application developers to the platform depends on their beliefs regarding the number of users that will join the platform. In a competitive market, some platforms may enjoy more favorable beliefs of the market (about their ability to attract ``the other side) than other platforms. Such a belief advantage may be source of a competitive advantage. In this paper, the authors look at how the belief advantage helps the platform to compete in the market, and also how a platform may create the belief advantage. The authors find that the degree of the platform's belief advantage affects its decision regarding its business model (whether to subsidize buyers or sellers), as well as the access fees and the size of the platform. Moreover, the paper looks into the optimal advertising strategy that leads to creating belief advantage. This paper contributes to scholarship on economics and business strategy. Read More

Learning from My Success and From Others’ Failure: Evidence from Minimally Invasive Cardiac Surgery

The importance of failure in the learning process is well recognized. In organizations as work grows increasingly fragmented—more specialized and divided into smaller tasks—the role of individuals in organizational learning becomes more important. This paper examines how individuals learn directly from their own past experience, and indirectly from the past experience of others. Focusing on one particular performance outcome, the quality of surgeries, findings indicate that individuals learn the most from their own successes and the failures of others, possibly because in both cases they attribute the outcomes to internal rather than external factors. This research has implications for healthcare and organizations more generally. Research by KC Diwas, Bradley R. Staats, and Francesca Gino. Read More

Relational Contracts and Organizational Capabilities

If capabilities are indeed a source of sustained competitive advantage, why don't they diffuse more rapidly? Capabilities diffuse slowly even when managers acknowledge that they are behind and are spending heavily to catch up, and where there appears to be industrywide agreement about best practice. This paper by R. Gibbons and R. Henderson suggests that the often slow diffusion of competitively significant capabilities is because many key managerial practices rely on relational contracts: an economist's term for collaboration sustained by the shadow of the future, as opposed to formal contracts enforced by courts. Building these relational contracts requires moving beyond task knowledge to the development of "relational knowledge." Relational knowledge may be substantially more difficult to develop than task knowledge both because there is much more of it and because its acquisition is complicated by incentive problems. Overall, while it is well established that organizations are replete with relational contracts, these informal understandings may be one of the reasons that competitively important practices are sometimes surprisingly slow to diffuse. Read More

Team Scaffolds: How Minimal In-Group Structures Support Fast-Paced Teaming

It is increasingly necessary for 24/7 shift operations to include some component of team-based work. But how can organizations support such work among constantly changing groups of people in a setting where stable teams are not feasible? This research investigates an organizational structure the authors call team scaffolds: a role set with collective responsibility for accomplishing interdependent tasks. Studying the implementation of team scaffolding in a high-stakes setting, a city hospital emergency room, the authors observed that workers readily affiliated with the temporary teams—even without ongoing relationships—and worked together intensely during the short duration of these groupings, even developing a competitive dynamic with other team scaffolds. The role sets established job placeholders in an interdependent group so that people starting up a shift could take their places in the set and immediately understand the interdependence and accountability they shared with others. Overall, this design improved the ability and motivation of clinicians to engage in teaming. Read More

Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO

Many studies as well as anecdotes document a link between the structure of chief executive officer (CEO) compensation and various measures of earnings manipulation. In this paper, HBS professors Oberholzer-Gee and Wulf analyze all components of compensation packages for CEOs and for managers at lower levels in a large sample of firms over more than 10 years, between 1986 and 1999. Results suggest that the effects of incentive pay on earnings management vary considerably by both type of incentive pay and position. Overall, it appears that the primary focus of compensation committees on equity incentives for CEOs overlooks a critical component in curbing earnings manipulation. If one wanted to weaken incentive pay to get more truthful reporting, diluting bonuses-particularly that of the chief financial officer (CFO)-would be the place to start. This may be the first study to analyze the relationship between CEO, division manager, and CFO compensation and earnings management. Read More

Observation Bias: The Impact of Demand Censoring on Newsvendor Level and Adjustment Behavior

As the fundamental model for managing inventory under demand uncertainty, the newsvendor model has received significant research attention, but behavioral issues—the focus of this paper—have been less well studied. Nils Rudi and David Drake demonstrate how different aspects of the newsvendor model, a rather complex managerial decision setting, result in a combination of behavioral deviations from the normative solution prescribed within existing literature. The results can help managers prioritize order quantity improvements based on product margins and the degree of demand feedback available in the setting that they operate in. Read More

Discretion Within the Constraints of Opportunity: Gender Homophily and Structure in a Formal Organization

Research has demonstrated that people associate most with others who are similar to themselves, including others of the same sex. What are the implications of such patterns for organizations? This study, written by Adam M. Kleinbaum, Toby E. Stuart, and Michael L. Tushman, offers evidence of how and by whom formal lateral structures serve to link together an otherwise siloed organization. Analyzing millions of e-mail interactions among tens of thousands of employees of a single large firm, the researchers find that it is women more than men who tend to bridge formal structural boundaries in organizations. Thus women play a potentially valuable role in creating ties throughout an otherwise siloed multidivisional corporation. Despite the influence of a firm's formal organizational structure, people often have plenty of discretion to exercise choice. Same-sex interaction results from discretionary choice within the boundaries of the firm's opportunity structure. These results suggest (but do not prove) that same-sex interaction especially by woman can help to span formal organizational boundaries that are otherwise difficult to traverse. The findings raise questions for future research about whether conventional wisdoms regarding gender differences in social network structure remain accurate in current-day organizations. Read More

Behavioral Ethics: Toward a Deeper Understanding of Moral Judgment and Dishonesty

What makes even good people cross ethical boundaries? Society demands that business and professional schools address ethics, but the results have been disappointing. This paper argues that a behavioral approach to ethics is essential because it leads to understanding and explaining moral and immoral behavior in systematic ways. The authors first define business ethics and provide an admittedly biased history of the attempts of professional schools to address ethics as a subject of both teaching and research. They next briefly summarize the emergence of the field of behavioral ethics over the last two decades, and turn to recent research findings in behavioral ethics that could provide helpful directions for a social science perspective to ethics. These new findings on both intentional and unintentional unethical behavior can inform new courses on ethics as well as new research investigations. Such new directions can meet the demands of society more effectively than past attempts of professional schools. They can also produce a meaningful and significant change in the behavior of both business school students and professionals. Read More

Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management

The size of a CEO's executive team has increased dramatically in recent decades, but little has been known about its composition. Using a rich dataset of US firms from 1986 to 2006, this paper documents the dramatic increase in the number of functional managers in the executive team. The size of the team in these firms doubled over the time period from five to 10 positions, with approximately three-fourths of the increase attributable to functional managers (such as Chief Financial Officer, Chief Marketing Officer, and so on) rather than general managers. The paper explores the drivers of these changes. Findings are critical for practitioners, and specifically CEOs, as they structure their executive teams and more generally as they make decisions to implement or execute strategy. Read More

What Do Development Banks Do? Evidence from Brazil, 2002-2009

Private firms in developed and developing markets find themselves competing with the so-called "national champions"—private and state-owned enterprises that receive entitlements, mostly trade protections and/or subsidized credit from the government. Most of these national champions get support by proposing long-term projects with large capital investment that would usually not be easy to fund using private capital. This paper, written by Research by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon, uses evidence from Brazil to look at what happens to firm performance, investment, and financial expenditures when companies get subsidized credit from the Brazilian National Bank of Economic and Social Development, known as BNDES. Read More

Income Inequality and Social Preferences for Redistribution and Compensation Differentials

Market-based factors have substantially increased inequality in the United States over the last three decades. If the inequality caused by these mechanisms reduces social preferences regarding distributive equality, the inequality can become amplified and entrenched. The potential thus exists for the formation of a "vicious cycle" where increases in disparity weaken concern for wage equality or redistribution. This weakened concern affords greater future compensation differentials, a shrinking of the welfare state, and so on that further increase inequality and again shift preferences. Alternatively, changes in social preferences can counteract inequality increases. William Kerr characterizes how changes in inequality affect social attitudes towards government-led redistribution and compensation differentials. The results of this study provide mixed evidence regarding the vicious-cycle hypothesis. Kerr's findings suggest that social preferences regarding inequality adjust to desire more redistribution while allowing greater labor market inequality. Read More

Got Local Food?

As consumers become more aware of the health and environmental implications of how food is grown and produced, demand for local food has increased considerably. This paper examines the operational tradeoffs in fresh produce supply to gain insights on what drives the structure of the supply chain and how "local food" can become a viable sourcing strategy for a large retailer. HBS professor Deishin Lee and coauthors show that there are complementary operational synergies when retailers and farmers increase scale and specialize. This implies that when small farmers are capacity constrained, they can be squeezed out of the supply chain. Technological advances in farming practices, efficiency gains in transportation, and space constraints in retail stores result in supply chain members mutually benefitting from their decision to increase scale, leading to specialization. The study characterizes the conditions under which vertical differentiation and operational scope can increase the viability of the small local farmer. This paper contributes to work on supply chain design and environmental sustainability. Read More

Expectations, Network Effects and Platform Pricing

In markets with network effects, the value that users gain from platforms depends on the number of other users of the same type who join the same platform (direct network effects) or the number of users of a different type that join (cross-group network effects). Examples include social networks like Facebook or Google+, payment systems like PayPal or Visa, videogame systems like PlayStation 3 and Xbox 360, smartphone platforms like Apple's iPhone or Google's Android, etc. Users typically rely on the media, market reports, or word of mouth to form expectations about the total number of other users that join a given platform. However, most of the time these users are unable to calculate the effect of platforms' prices on adoption by other users. In other words, they do not take price into account when forming expectations. To analyze platform profits, Andrei Hagiu and Hanna Hałaburda model different degrees of user sophistication in forming price expectations in markets with network effects. They show that firms have different preferences regarding the average sophistication of their user base depending on market structure. Read More

The Impact of Modularity on Intellectual Property and Value Appropriation

Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation in open systems is made possible by the modularity of the underlying product or process. Carliss Y. Baldwin and Joachim Henkel provide a systematic analysis of value appropriation in closed and open modular systems, with implications for managers. Modular systems are made up of components that are highly interdependent within sub-blocks, called modules, and largely independent across those sub-blocks. Despite the technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. The paper argues that strategies for capturing value in an open, modular system must be formulated at the module level. But modularity is not a single strategy: it is rather a large set of strategic options and related tactics that can be deployed in different ways depending on the interplay of countervailing forces. Read More

Intermediaries for the IP Market

Some assets are traded in liquid markets with the help of many, thriving intermediaries: houses and apartments, financial products, books, DVDs, electronics and all sorts of collectibles. Intellectual property (IP) in general, and patents in particular, are not among those assets. In fact, one could argue that the market for patents is one of the last large and inefficient markets in the economy. IP is the ultimate intangible asset and extremely hard to value. Moreover, there are high search and transaction costs on both sides of the market, and the risk of litigation makes all potential participants even more cautious. Despite these difficulties, there could be attractive opportunities to create intermediation mechanisms to match patent creators with patent users and facilitate transactions between them. In recent years, a variety of novel intermediaries has emerged, all using different business models while attempting to bring more liquidity to the patent market. In this paper, Andrei Hagiu and David Yoffie explore the fundamental economic issues responsible for the low liquidity in the market for patents and provide a brief overview of patent intermediaries. They next focus on platform-type intermediaries (i.e., who enable search and transactions without ever taking possession of IP assets) and discuss the reasons for their lack of traction to date. The authors then turn to merchant-like intermediaries and the factors that have made them comparably more successful and influential than platforms. Finally, they discuss efficiency questions raised by patent intermediaries. Read More

The Evolving Basis for Legitimacy of the World Trade Organization: Dispute Settlement and the Rebalancing of Global Interests

The WTO is reconfiguring people's relationships to goods and services by facilitating trade and the consequent conversion of goods and ideas into property, including ones previously gifted or kept local. Unsurprisingly, there has been considerable opposition from the losers in the free trade system and attendant challenges to the legitimacy of the WTO. Arthur Daemmrich argues that understandings of legitimacy change over time, especially as organizations like the WTO interact with organized interests, including member countries and outside NGOs. He provides a brief history of the WTO as an organizational entity managing the institution of free trade, and a case study of a lengthy international trade dispute between Brazil and the United States over agricultural subsidies generally and cotton subsidies in particular. At the WTO, he writes, an important shift has taken place from the strategy of building organizational legitimacy through expanding membership to institutional deepening via the dispute process. Thus the WTO has become one of a few key sites for working out how knowledge claims will be formulated, framed, and validated on the international level. Read More

When to Sell Your Idea: Theory and Evidence from the Movie Industry

How completely should an innovator develop his idea before selling it? HBS assistant professor Hong Luo addresses this question in a theoretical framework that links the sales stage to the innovator's "observable quality." She uses the context of Hollywood movie script writing-looking at whether it's better to pitch the mere idea for a film or to write the entire screenplay and then try to sell it "on spec." Read More

Charitable Giving When Altruism and Similarity Are Linked

Harvard Business School professor Julio J. Rotemberg looks at what makes people decide to contribute to a charity. He focuses on two psychological factors: that people feel better about themselves when other people agree with them, and that people tend to be more charitable to other like-minded people. Read More

Are There Too Many Safe Securities? Securitization and the Incentives for Information Production

Markets for near-riskless securities have suffered numerous shutdowns in the last 40 years, with the recent financial crisis the most prominent example. This suggests that instability could be a general characteristic of such markets, not just a one-time problem associated with the subprime mortgage crisis. Professors Samuel G. Hanson and Adi Sunderam argue that the infrastructure and organization of professional investors are in part determined by the menu of securities offered by originators. Since robust infrastructure is a public good to originators, it may be underprovided in the private market equilibrium. The individually rational decisions of originators may lead to an infrastructure that is overly prone to disruptions in bad times. Policies regulating originator capital structure decisions may help create a more robust infrastructure. Closed for comment; 0 Comments posted.

What Impedes Oil and Gas Companies’ Transparency?

Oil and gas companies face asset expropriations and corruption by foreign governments in many of the countries where they operate. In addition, most of these companies operate in multiple host countries. What determines their disclosure of business activities and hence transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim examine three forms of disclosure costs that oil and gas managers could potentially consider. Both the US government and the European Union are currently considering laws that would require oil and gas companies to disclose information about operations in host countries. Read More

Local Industrial Structures and Female Entrepreneurship in India

Despite its recent economic advances, India's gender balance for entrepreneurship remains among the lowest in the world. Improving this balance is an important step for India's achievement of greater economic growth and gender equality. This paper uses detailed micro-data on the unorganized manufacturing and services sectors of India in 2000-2005 to identify and quantify the importance of existing female business networks for promoting subsequent entrepreneurship among women at the district-industry-year level. Read More

The Organization of Firms Across Countries

Economists have been paying increasing attention to the role that culture plays in a firm's overall performance. This paper focuses on how trust—a key cultural factor—affects firms' decision-making process, size, and productivity. Research was conducted by Nicholas Bloom of Stanford University, Rafaella Sadun of the Harvard Business School, and John Van Reenen of the London School of Economics. Read More

Carbon Tariffs: Impacts on Technology Choice, Regional Competitiveness, and Global Emissions

Under current emissions regulation such as the European Union Emissions Trading Scheme (EU-ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the Northeast US, imports entering the region fall outside the regulatory regime and incur no carbon costs. As a result, imports can compete within the carbon-regulated region with a new-found advantage, potentially altering the competitive balance between emissions-regulated and -unregulated firms. While implementing carbon tariffs—border adjustments— may appear to be a straightforward solution to this asymmetry, the potential for such a measure to be interpreted as a trade barrier, and thereby initiate a reciprocal tariff, has thus far stymied debate on the issue. This paper explores the impact of such border adjustments on firms' technology choice, regional competitiveness, and global emissions. The analysis shows that border adjustments (or lack thereof) play a vital role in determining firms' technology and production choices, both of which are fundamental operations management decisions that ultimately determine economic and environmental performance. Results have implications for each of the primary stakeholders: regulators making the policy decision regarding border adjustments; firms interested in understanding their competitiveness and location strategies under a border adjustment; and technology producers interested in assessing the potential impact of border adjustments on demand for cleaner technologies. Read More

Caste and Entrepreneurship in India

Has India's political revolution been accompanied by corresponding changes in the economic sphere? This paper argues that for the most vulnerable, whether in villages or cities, the social structure has not changed. While Scheduled Castes, Scheduled Tribes, and traditionally "middle-level" castes have made significant progress at the level of political representation in independent India, their progress in entrepreneurship has been uneven. By looking at the ownership of enterprises across the country, this paper sheds light on two larger narratives about India's emerging political economy: first, that the rich have benefitted more than the poor, the towns and cities more than the villages, and the upper castes more than the lower castes has acquired salience in several quarters. And second, that "Dalit entrepreneurship," a category conspicuous by its absence in India's business history, has become a significant trend. Findings by Lakshmi Iyer, Tarun Khanna, and Ashutosh Varshney show that while the "middle-level" castes have made progress in entrepreneurship, the Scheduled Castes and Scheduled Tribes are considerably under-represented in the entrepreneurial sphere. That is, for Scheduled Castes and Scheduled Tribes, political gains have not manifested themselves in greater entrepreneurial prowess. Read More

The Dynamics of Firm Lobbying

Lobbying is a primary avenue through which firms attempt to change policy in the United States, with total expenditures outnumbering campaign contributions by a factor of nine. While lobbying by businesses is a frequently debated issue, there has been little systematic empirical evidence on these behaviors at the firm level. This paper is one of the first to begin to fill this gap. To do so, the researchers constructed an empirical model of lobbying behavior of publicly traded, US-headquartered firms between 1998 and 2006. They also looked in depth at a specific policy shift that has been the subject of significant public debate: the dramatic decline in the limit on H-1B visas that occurred in 2004. Findings show that the decline in the limit on H-1Bs did not induce new firms to lobby that were not previously lobbying on other issues. The decline did, however, significantly shift lobbying resources towards high-skilled immigration issues amongst firms that had lobbied previously for other issues. Moreover, the manner in which this shift occurs among firms already lobbying indicates little constraint on adjustments across issues important for firms. Read More

Private Equity and Employment

Is there truth to the claim that leveraged buyouts bring huge job losses? In this paper, the authors examine employment responses to US private equity buyouts at a much more granular level than earlier research, exploiting a much larger sample of transactions, a more extensive set of controls, and a novel ability to track outcomes at firms and establishments (e.g., individual factories and offices). They also exploit the strengths of their data to explore new questions about private equity's role in the creative destruction process and its impact on restructuring activity inside target firms. Overall, they find that private equity buyouts catalyze the creative destruction process in the labor market as measured by gross job flows and the purchase and sale of business establishments, with only a modest net impact on employment. Research by Steven J. Davis, John C. Haltiwanger, Ron S. Jarmin, Josh Lerner, Javier Miranda. Read More

Engaging Supply Chains in Climate Change

Managing a company's risks and opportunities associated with climate change—including its physical and regulatory implications—requires focusing not only on internal operations, but also on supply chains, especially since greenhouse gas (GHG) emissions in supply chains typically exceed those from a company's own operations. But this requires obtaining climate change information from suppliers, which some are reluctant to share. In this paper, Chonnikarn (Fern) Jira and Michael W. Toffel examine proprietary data from the Carbon Disclosure Project's Supply Chain Project, a collaboration of multinational corporations asking their key suppliers to share information about their GHG emissions and their vulnerabilities and opportunities associated with climate change. Jira and Toffel find evidence that a supplier is more likely to share this information when it faces several buyers requesting the information, when its buyers appear committed to actually using this information, and when the supplier is in a relatively competitive industry and is thus particularly vulnerable to being replaced by its rivals. These findings can help managers better predict which suppliers will be more willing to share climate change information, and which might require more incentives or pressure to share this information. Read More

The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance

Robert G. Eccles, Ioannis Ioannou, and George Serafeim compared a matched sample of 180 companies, 90 of which they classify as High Sustainability firms and 90 as Low Sustainability firms, in order to examine issues of governance, culture, and performance. Findings for an 18-year period show that High Sustainability firms dramatically outperformed the Low Sustainability ones in terms of both stock market and accounting measures. However, the results suggest that this outperformance occurs only in the long term. Managers and investors who are hoping to gain a competitive advantage in the short term are unlikely to succeed by embedding sustainability in their organization's strategy. Overall, the authors argue that High Sustainability company policies reflect the underlying culture of the organization, where environmental and social performance, in addition to financial performance, are important, but these policies also forge a strong culture by making explicit the values and beliefs that underlie the mission of the organization. Read More

Spatial Determinants of Entrepreneurship in India

In South Asia, which regional traits encourage local entrepreneurship? While multiple studies have considered this question in advanced economies, especially for the manufacturing sector, there has been very little empirical evidence for developing countries like India. While India has historically had low entrepreneurship rates, this weakness is improving and will be an important stepping stone to further development. In this paper, the authors explore the spatial determinants of local entrepreneurship in India for both manufacturing and services. At the district level, their strongest evidence points to the roles that local education levels and physical infrastructure quality play in promoting entry. They also find evidence that strict labor regulations discourage formal sector entry, and better household banking environments encourage entry in the unorganized sector. The paper then evaluates how incumbent industrial structures of cities shape the type of entrants that emerge in local areas. Startups are more frequent for a city in industries that share common labor needs or have customer-supplier relationships with the city's incumbent businesses. This is among the first studies to quantify the spatial determinants of entrepreneurship in India. Moreover, it moves beyond manufacturing to consider services, which are very important for India's economic growth. Read More

CEO Bonus Plans: And How to Fix Them

Discussions about incentives for CEOs in the United States begin, and often end, with equity-based compensation. After all, stock options and (more recently) grants of restricted stock have comprised the bulk of CEO pay since the mid-1990s, and the changes in CEO wealth due to changes in company stock prices dwarf wealth changes from any other source. Too often overlooked in the discussion, however, is the role of annual and multiyear bonus plans—based on accounting or other non-equity-based performance measures—in rewarding and directing the activities of CEOs and other executives. In this paper, Kevin J. Murphy and Michael C. Jensen describe many of the problems associated with traditional executive bonus plans, and offer suggestions for how these plans can be vastly improved. The paper includes recommendations and guidelines for improving both the governance and design of executive bonus plans and, more broadly, executive compensation policies, processes, and practices. The paper is a draft of a chapter in Jensen, Murphy, and Wruck (2012), CEO Pay and What to Do About it: Restoring Integrity to both Executive Compensation and Capital-Market Relations, forthcoming from Harvard Business School Press. Read More

Investment Cycles and Startup Innovation

In this paper, HBS professors Nanda and Rhodes-Kropf examine how the environment in which a new venture was first funded relates to its ultimate outcome, by specifically looking at what happened to venture capital-backed startups funded between 1980 and 2004. Results show that firms that were funded in "hot" markets were more likely to fail but created more value and had more highly cited patents when they succeeded. These results suggest that that flood of capital in hot markets lowers the cost of experimentation for early stage investors, and therefore allows them to fund more novel projects in periods of heated financial activity. Read More

Multi-Sided Platforms

Research in multi-sided platforms (MSPs) studies how payment networks bring together cardholders and retailers, shopping malls bring together shoppers and retailers, and video game systems bring together gamers and game developers. Andrei Hagiu and Julian Wright propose a new definition of MSPs that aims to capture what makes eBay, shopping malls, Yellow Pages directories, and dating websites different from "regular" firms such as a bakery or car dealership, as well as how to characterize less clear-cut examples. They also discuss the economic trade-offs that determine where organizations choose to place themselves on the continuum between MSPs and resellers, or between MSPs and input suppliers. Read More

Pricing and Efficiency in the Market for IP Addresses

Every device connected to the Internet—from PCs to tablets, printers to cash registers—needs an IP address. The current addressing standard, IPv4, uses addresses with 32 binary digits, allowing approximately 4 billion IP addresses. The world's centralized supply of unused IP addresses reached exhaustion in February 2011, and networks in most countries will soon find they cannot easily obtain additional IPv4 addresses. While addresses may now be bought and sold, the institutions and rules of these transfers are not yet well-developed. Nor have economic models examined the unusual characteristics of this market. Benjamin Edelman and Michael Schwarz model the market for IPv4 addresses, including evaluating novel rules intended to avoid possible harms from the purchase and sale of IP addresses, as well as predicting price trends. Read More

Fairness, Efficiency, and Flexibility in Organ Allocation for Kidney Transplantation

For many people who suffer end-stage renal disease, a kidney transplant is considered a potentially life-saving gift. Allocation policies for kidneys from deceased donors are thus of central importance and have to accomplish major objectives in alleviating human suffering, prolonging life, and providing nondiscriminatory, fair, and equal access to organs for all patients. In this paper, the authors focused on national allocation policies in the United States and the recent effort to revise the current policy. Their design of a national allocation policy focuses on perhaps the simplest, most common and currently used priority method, namely a point system. They also present four case studies in which they designed new policies under different scenarios. Read More

Market Interest in Nonfinancial Information

During the past two decades, there have been many ideas for improving business reporting of nonfinancial information such as on a company's environmental, social, and governance (ESG) performance. Using data from Bloomberg, authors Robert G. Eccles, Michael P. Krzus, and George Serafeim provide insights into market interest in nonfinancial information at a level of granularity not available until now. They identify exactly what information is of greatest interest, contrasting both the global and U.S. market across the full spectrum of ESG information and for each component of ESG, as well as Carbon Disclosure Project metrics. They also show variation in interest across asset classes and firm types, and present preliminary explanations for these differences. Read More

Historical Trajectories and Corporate Competences in Wind Energy

Analyzing developments in the wind turbine business over more than a century, Geoffrey Jones and Loubna Bouamane argue that public policy has been a key variable in the spread of wind energy since the 1980s, but that public policy was more of a problem than a facilitator in the earlier history of the industry. Geography has mattered to some extent, also: Both in the United States and Denmark, the existence of rural areas not supplied by electricity provided the initial stimulus to entrepreneurs and innovators. Building firm-level capabilities has been essential in an industry which has been both technically difficult and vulnerable to policy shifts. Read More

The Cost of Capital for Alternative Investments

An accurate assessment of the cost of capital is fundamental to the efficient allocation of capital throughout the economy. Alternative investments are investments made by sophisticated individual and institutional investors in private investment companies like hedge funds and private equity funds. These investments are frequently combined with financial leverage to bear risks that may be unappealing to the typical investor or that require flexibility that public investment funds may not provide. Often there is a real possibility of a complete loss of invested capital. For this paper, Jakub W. Jurek and Erik Stafford study the required rate of return for a risk-averse investor allocating capital to alternative investments. They argue that the risks borne by hedge fund investors are likely to be positive net supply risks that are unappealing to average investors, such that they may earn a premium relative to traditional assets. Read More

Market Competition, Government Efficiency, and Profitability Around the World

Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Read More

US Healthcare Reform and the Pharmaceutical Industry

The 2010 Patient Protection and Affordable Care Act (ACA) will restructure the US health care market in the coming years. For the pharmaceutical industry, the ACA is likely to prove a mixed blessing. In this paper, Assistant Professor Arthur Daemmrich analyzes the political economy of health care, specifically concerning health care reform. He then considers how the ACA will affect the pharmaceutical sector, both quantitatively in terms of the size of the prescription drug market and qualitatively in terms of industry structure and competitive dynamics. Daemmrich also places the current reforms into historical context and describes the political negotiations that enabled passage of the ACA. Read More

What Environmental Ratings Miss

Environmental ratings of companies are based on "green" management efforts and the environmental performance of their operations. In this paper, Michael Toffel and Auden Schendler argue that these ratings neglect companies' actions that seek to influence environmental policy, which can have a much broader impact than their internal efforts. As a result, sustainability ratings risk seriously misleading consumers and investors, and can even enable "greenwashing" by allowing corporations to game the system, gaining high rankings for greening their operations despite advocating for less stringent environmental policy. Toffel and Schendler argue that environmental ratings should factor in political contributions, CEO advocacy work, and engagement with non-governmental organizations, among other actions. This would erode the environmental ratings of companies advocating weaker environmental policy, and bolster the ratings of those advocating more stringent environmental policy. Read More

Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations

As firms increase the scale of their global operations, monitoring operations across borders becomes increasingly challenging. Transparency in the external information environment can help multinational corporations monitor foreign subsidiaries and resolve internal agency problems. In this paper, researchers Nemit O. Shroff, Rodrigo S. Verdi, and Gwen Yu find that foreign subsidiaries located in country-industries with more transparent information environments are better able to translate local growth opportunities into investments. Read More

Reviews, Reputation, and Revenue: The Case of Yelp.com

In just six years, Yelp.com has managed to crowdsource 20 million reviews of restaurants and other services by creating and leveraging an impressive social network of people who enjoy writing reviews. But can a bunch of amateur opinionators working for free really transform the restaurant industry, where heavily marketed chains and highly regarded professional critics have long had a stronghold? To answer this question, HBS professor Michael Luca combined Yelp reviews with revenues for every restaurant that operated in Seattle, WA at any point between 2003 and 2009. Applying a new method to tease out the causal effect of reviews (separate from the effect of underlying quality), the study shows that a one-star increase on Yelp leads to a 5 to 9 percent increase in revenue. Yet Yelp doesn't work for all restaurants. Chain restaurants —which already spend heavily on branding —are unaffected by changes in their Yelp ratings. This suggests that consumer reviews present a new way of learning in the Internet age, and are fast becoming a substitute for traditional forms of reputation. Read More

Salience in Quality Disclosure: Evidence from the U.S. News College Rankings

Why are the U.S. News and World Report College Rankings so influential? According to this paper by Michael Luca and Jonathan Smith, it's at least in part because U.S. News makes the information so simple. While earlier college guides had already provided useful information about schools, U.S. News did the work of aggregating the information into an easy-to-use ranking, making it more salient for prospective students. The authors show that these rankings matter in a big way: a one-rank improvement leads to a 0.9 percent increase in applicants. However, students tend to ignore the underlying details even though these details carry more information than the overall rank. Read More

Measuring Teamwork in Health Care Settings: A Review of Survey Instruments

It is critical to accurately assess teamwork in health-care organizations. About 60 percent of primary-care practices in the United States use team-based models to coordinate work across the broad spectrum of health professionals needed to deliver quality care; in many other countries the percentage is almost 100 percent. While the benefits of effective teamwork are substantial, effective teamwork is often lacking in these settings, with negative consequences for patients. To date, little has been known about the survey instruments available to measure teamwork. In this paper Valentine, Nembhard, and Edmondson report the results of their systematic review of survey instruments that have been used to measure teamwork in various contexts. Their research helps to identify existing teamwork scales that may be most useful in testing theoretical models. Read More

Sovereigns, Upstream Capital Flows and Global Imbalances

Uphill capital flows and global imbalances have been at central stage in debates among academics and policymakers for quite some time. Many have argued that capital has been flowing upstream from fast-growing developing nations to stagnant countries in the last decade. At the same time, these emerging countries accumulate a vast amount of reserves. HBS Professor Laura Alfaro and coauthors dissect capital flows between 1970 and 2004 into private and public components for every type of capital, namely FDI, equity and debt. The authors show that upstream flows and global imbalances are manifestations of the same underlying phenomenon: the central role of official flows in determining the international allocation of capital. Private capital does not flow on average uphill from emerging market countries and total capital flows uphill only out of five Asian countries including China due to reserve accumulation which completely dwarfs the net inflows of private capital. Read More

Ethnic Innovation and US Multinational Firm Activity

What effects do immigrant scientists and engineers have on the global activities of the firms that employ them? To what extent do these high-skilled immigrants help US multinationals capitalize on foreign opportunities? Professors Foley and Kerr analyze key data concerning US patents, direct investment abroad, research and development, and the ownership structure of firms. They show that immigration enhances the competitiveness of US multinationals. Taken together, the results have implications for immigration policies. Many debates about immigration focus on the potentially deleterious impact of low wage immigrants on the domestic workforce. However, Foley and Kerr point out that immigrants who are skilled enough to engage in innovative activity generate benefits for firms that are seeking to do business abroad. Read More

Quantity vs. Quality: Exclusion by Platforms with Network Effects

Many well-known platforms regulate access and transactions even though excluded users would be willing to pay the "price of admission." For example, Apple routinely excludes certain application developers from its highly popular iPhone store, and videogame console manufacturers such as Microsoft, Sony, and Nintendo restrict access to a select set of game developers. Exclusion is oftentimes a necessary strategic instrument, which allows platforms to trade off the quantity versus the "quality" of users. Andrei Hagiu's paper builds a simple strategic model that formalizes the choices of possible exclusion policies and discusses the potential gains and losses of exclusion. Read More

First-Party Content, Commitment and Coordination in Two-Sided Markets

Two-sided platforms face a challenging coordination problem that consists of attracting both buyers and sellers. Participation by both depends on their expectations of participation on the other side of the market. To improve such coordination, many platforms provide "first-party content," such as games (e.g. Microsoft's Halo on Xbox), objective search results (Google and Bing) or, in the case of Amazon and eBay, product information and payment systems. First-party content makes participation more attractive to one side (typically, users), independently of the presence of sellers. Importantly, first-party content may be either a complement or a substitute for third-party sellers' products. For instance, Halo is a substitute for games provided by Electronic Arts on the Xbox; on the other hand, the Xbox Live online playing system is a complement. Similarly, Amazon's shipping services complements its third-party sellers' offerings, but the products Amazon sells under its own name compete with them. Professors Hagiu and Spulber examine the incentives that two-sided platforms have to invest in first-party content in order to coordinate adoption by both sides. The authors show that the incentives for firms to use first-party content depend crucially on the nature of buyers' and sellers' expectations and the relationship between first-party content and third-party seller participation (complements or substitutes). Read More

The Globalization of Corporate Environmental Disclosure: Accountability or Greenwashing?

Between 2005 and 2008, the world saw a dramatic increase in corporate environmental reporting. Yet this transition toward greater transparency and accountability has occurred unevenly across countries and industries. Findings by professors Christopher Marquis and Michael W. Toffel provide the first systematic evidence of how the global environmental movement affects corporations' environmental management practices. Firms' use of symbolic compliance strategies, for instance, is affected by specific corporate characteristics and by institutional context. This study contributes to a larger body of research on the effects of global social movements and environmental reporting. Read More

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980

What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Read More

Managing Political Risk in Global Business: Beiersdorf 1914-1990

After the outbreak of World War 1, management of political risk became a central concern for firms, especially those operating internationally. These risks were on many levels, from expropriation to exchange controls and other economic policies. German firms, which had flourished during the second industrial revolution of the late nineteenth century, and enthusiastically expanded internationally, found themselves especially exposed to such risks. Focusing on one such firm, Beiersdorf, a German-based pharmaceutical and skin care company (and, during the Nazi years, a so-called Jewish business), the authors examine corporate strategies of political risk management during the twentieth century, especially the volatile years of Nazi Germany. The history of Beiersdorf highlights areas of managerial discretion. Faced by the worst of all worlds, the firm survived and was able, albeit at great cost, to rebuild its business. Read More

The International Politics of IFRS Harmonization

Contrary to its staid image in popular culture, accounting has reigned at the forefront of globalization over the last decade. As of 2010, about 100 countries, including all of the world's major economies, either have adopted a common set of accounting principles known as International Financial Reporting Standards, have initiated an IFRS harmonization program, or have in place a national strategy to respond to IFRS. In fact, the proliferation of IFRS worldwide is one of the most important developments in corporate governance today. Through a series of case studies on Canada, China, and India, Assistant Professor Karthik Ramanna analyzes key similarities and differences in the international political dynamics that contribute to countries' responses to IFRS. His framework helps explain and predict countries' decisions on IFRS harmonization, as well as the potential structure and impact of IFRS in the future. Read More

From Counting Risk to Making Risk Count: Boundary-Work in Risk Management

According to previous research, the cycle of risk management includes counting risk through quantification and aggregation; controlling risk until something like a financial crisis occurs; and then calculating new risks in an attempt to avoid similar crises in the future. In this paper, through case studies carried out at several banks, Harvard Business School professor Anette Mikes introduces the idea that this cycle is contingent upon a "calculative culture," which steers organizations toward successful risk management practices. Read More

How Firms Respond to Mandatory Information Disclosure

Companies are facing increasing pressure to reveal information about their operations, including their environmental performance. This research examines which types of organizations are especially likely to reduce their pollution levels once they face mandatory disclosure requirements. Research conducted by Anil Doshi and Michael Toffel of Harvard Business School, and Glen Dowell of the Johnson School of Management at Cornell University compares the responses of companies based on their proximity to headquarters and to corporate siblings, organizational size and the density of their surrounding communities, and whether they are part of publicly- or privately-held firms. Read More

An Exploration of Optimal Stabilization Policy

The researchers explore alternative policy responses to a recession caused by a decline in aggregate demand, the situation affecting the global economy over the last several years. They show that policies that stimulate the economy at the lowest budgetary cost may not be the best policies in terms of well-being, as well-being depends not only on the level of activity but also on the composition of it (due to consumption, investment, and government spending). In their model of the economy, monetary policy is the best response, and if it is sufficient to stop the recession, government spending ought to move in the same direction as private spending. If monetary policy is insufficient or restricted, fiscal policy should try to replicate what monetary policy would do. If that option, too, is restricted, conventional policies that increase government spending are merited. Read More

A Dynamic Perspective on Ambidexterity: Structural Differentiation and Boundary Activities

Firms renew themselves by exploring new business models even as they exploit existing ones. But to conduct "explore and exploit" simultaneously, organizations must reconcile associated internal tensions and conflicting demands. Sebastian Raisch and Michael L. Tushman explore the shifting nature of differentiation and integration in organizations attempting to explore and exploit. Read More

Tax Policy and the Efficiency of US Direct Investment Abroad

The tax policy toward multinational firms has come under increased scrutiny with the rise of global activities of firms and concerns that these activities displace activities at home. This scrutiny has raised the question of whether current tax policy inefficiently subsidizes the foreign activities of firms. Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr. consider this claim by applying the theory of dynamic efficiency to the activities of multinational firms. Specifically, by comparing direct investment abroad with repatriated investment returns over the last sixty years, they conclude that firms are not investing to dynamically inefficient levels, suggesting that current tax policy is not an inefficient subsidy. Read More

To Groupon or Not to Groupon: The Profitability of Deep Discounts

For consumers, online discount vouchers (like those offered by Groupon.com) have obvious appeal: discounts as large as 90 percent. But for retailers offering the deals through the site, does the publicity compensate for the deep hit to profit margins? This paper sets out to help small businesses decide whether it makes sense to offer discount vouchers. Research was conducted by Harvard Business School professor Ben Edelman, Business Economics PhD candidate Scott Duke Kominers, and by Sonia Jaffe of the Harvard University Department of Economics. Read More

Who Is Governing Whom? Senior Managers, Governance and the Structure of Generosity in Large U.S. Firms

Analyzing several Fortune 500 firms over the period of 10 years, Christopher Marquis and Matthew Lee discuss the factors that influence corporate philanthropy, using the subject to theorize about and test how structural features of organizations help senior leaders to shape firm strategy. Read More

The Three Foundations of a Great Life, Great Leadership, and a Great Organization

This is the commencement speech that HBS professor Michael Jensen delivered to the 2011 graduates of the McDonough School of Business at Georgetown University. Drawing from his own experiences, he discusses the three foundations of a great personal life, great leadership, and a great organization. Those three foundations are integrity, authenticity, and being committed to something bigger than oneself. Read More

With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship

While starting a new company usually requires an independent spirit and self-sufficient nature, the decision to jump into entrepreneurship is often influenced by the acts of others. In this paper, Josh Lerner and Ulrike Malmendier explore how the entrepreneurial tendencies of peers affect not only one's decision to start a company, but whether that company will succeed. The researchers use data from a decade of first-year class sections at Harvard Business School. Read More

Corporate Social Responsibility and Access to Finance

Corporate social responsibility may benefit society, but does it benefit the corporation? Indeed it does, according to a new study that shows how CSR can make it easier for firms to secure financing for new projects. Research was conducted by George Serafeim and Beiting Cheng of Harvard Business School and Ioannis Ioannou of the London Business School. Read More

Collaborating Across Cultures: Cultural Metacognition and Affect-Based Trust in Creative Collaboration

Creative solutions often are born when two unrelated ideas come together for the first time. That's more likely to happen when the collaborators come from different ethnic and cultural backgrounds, thus diminishing the likelihood of redundant ideas. In this paper, via a series of studies, Roy Y.J. Chua, Michael W. Morris, and Shira Mor examine the factors that make intercultural creative collaboration happen. Read More

Signaling to Partially Informed Investors in the Newsvendor Model

Why might firms make operational decisions that purposefully do not maximize expected profits? This model looks at the question by developing scenarios using the example of inventory management in the face of an external investor. The research was conducted by Vishal Gaur of Cornell University, Richard Lai of the University of Pennsylvania, and Ananth Raman and William Schmidt of Harvard Business School. Read More

Poultry in Motion: A Study of International Trade Finance Practices

When engaging in international trade, exporters must decide which financing terms to use in their transactions. Should they ask the importers to pay for goods before they are loaded for shipment, ask them to pay after the goods have arrived at their destination, or should they use some form of bank intermediation like a letter of credit? In this paper, Pol Antràs and C. Fritz Foley investigate this question by analyzing detailed data on the activities of a single US-based firm that exports frozen and refrigerated food products, primarily poultry. The data cover roughly $7 billion in sales to more than 140 countries over the 1996-2009 period and contain comprehensive information on the financing terms used in each transaction. Read More

Delegation in Multi-Establishment Firms: Adaptation vs. Coordination in I.T. Purchasing Authority

Scholars have intensely studied the similarities and differences between organizations that are decentralized in their decision making versus those favoring more command-and-control central authority. What leads to a firm following a decentralized approach, and can that approach be predicted? Professor Kristina McElheran advances previous, largely theoretical, research on this subject to explore in the real world the economic determinants affecting how IT purchasing authority in 3,000 multi-establishment companies was allocated between central headquarters and outlying establishments. Read More

Better-reply Dynamics in Deferred Acceptance Games

There's an inherent problem in the market design theory known as mechanism design, in that the players in the market may not understand the design, and thus may make bad choices until they learn to work the system better. This paper explores the issue of learning the design. It focuses on a particular mechanism, the Deferred Acceptance algorithm for two-sided matching markets, which is used in many real-life markets. Research was conducted by Guillaume Haeringer of Universitat Autonoma de Barcelona and Hanna Halaburda of Harvard Business School. Read More

The Surprising Power of Age-Dependent Taxes

Professor Matthew Weinzierl helps initiate a resurgence of interest in the idea of age-dependent taxes—that is, the idea of making the tax rate contingent upon the age of the tax payer. Using optimal tax theory as well as data from the US Panel Study of Income Dynamics, he shows how the administratively simple reform of age dependence can make the tax system substantially more efficient and more equitable. Read More

Search Diversion, Rent Extraction and Competition

Retailers, search engines, shopping malls and other intermediaries often deliberately design their physical layouts or e-commerce sites in order to divert customers' attention away from the products they were initially looking for, with hopes that they'll buy a bunch of other products, too. This paper explores various incentives for so-called "search diversion" in a couple of scenarios—when stores internalize their affiliation decisions with intermediaries, and when competition is introduced among intermediaries. Research was conducted by Andrei Hagiu of Harvard Business School and Bruno Jullien of the Toulouse School of Economics. Read More

The Institutional Logic of Great Global Firms

In practice, many large firms are now realizing the importance of humanism in corporate management. But in academia, much of management theory is still stuck on the ideas of early industrialization - focusing solely on the idea that the only real value is financial value. In this paper, Rosabeth Moss Kanter discusses how social logic guides the practices of many high-performing companies. Kanter suggests that such successful practices should provoke the creation of new economic theory, which will in turn provoke other firms to take note. She puts forth several propositions to make the case. Read More

Inducement Prizes and Innovation

Throughout recent history, many foundations have tried to induce innovation through competition, offering massive cash prizes to inventors who meet the challenge of creating world-changing inventions. For instance, in 1996 the X Prize Foundation offered $10 million to the first non-government organization to launch a reusable, suborbital manned spacecraft twice within two weeks. The prize was awarded in 2004 to a project financed by Microsoft co-founder Paul Allen. The problem is that inventors cannot win these competitions if they cannot come up with funding to realize their inventions, and research and development costs often exceed the amount of the cash prize. So, does the incentive of an eventual prize really induce innovation? In this paper, Liam Brunt, Josh Lerner, and Tom Nicholas look to answer that question, using a data set of prizes awarded by the Royal Agricultural Society of England (RASE) between 1839 and 1939. Read More

The First Deal: The Division of Founder Equity in New Ventures

When starting a company, entrepreneurs must decide how to divide shares among the founders. The simplest way is to split the shares equally, which is what one third of startups decide to do. But that may not be the fairest or most effective way—especially in cases where some founders are doing more for the company than others. In this paper, Thomas F. Hellman (University of British Columbia) and Noam Wasserman (Harvard Business School) examine when and whether teams are likely to divide shares equally among all the founders, and explore whether such an equity split is good for the company. Read More

An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds

The yields on US Treasury Inflation Protected Securities (TIPS) have declined dramatically since they were first issued in 1997. This paper asks to what extent the returns on nominal and inflation-indexed bonds in both the US and the UK can be attributed to differential liquidity and market segmentation or to real interest rate risk and inflation risk. Read More

Accounting for Crises

A key endeavor of modern economic theory is to understand the causes of panics. This paper shows empirically that currency investors are more likely to get spooked unnecessarily when they have too much information. This finding accords well with global games models, which argue that self-fulfilling panics—i.e., panics unrelated to fundamentals—are more likely to occur when the quality of public information available to investors is very high. Research was conducted by Venky Nagar (University of Michigan) and Gwen Yu (Harvard). Read More

Mandatory IFRS Adoption and Financial Statement Comparability

In the past decade, many countries have adopted International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board, which has impelled economists to examine the benefits of the standards. This paper discusses how IFRS adoption affects financial reporting comparability—that is, the properties of financial statements that allow users to identify similarities or differences between the economics of different reporting entities over any given period of time. Research was conducted by Francois Brochet and Edward J. Riedl of Harvard Business School, and Alan Jagolinzer of the University of Colorado at Boulder. Read More

Embracing Paradox

CEOs are often innovation cheerleaders, hoping that new ventures will eventually help reshape the industry for the better. But in tough economic times, the other senior company executives often choose to ignore innovative ventures and focus instead on the traditional core business, which reliably generate cash flow. This leads to a situation in which the CEO turns into more of a broker than a leader—trying to negotiate deals between the heads of the core units and the new units. That's a recipe for failure, according to Michael L. Tushman, Wendy K. Smith, and Andy Binns, who argue that firms can thrive only if the whole senior management team can embrace the tensions between the new and the old. In this paper, they introduce three guiding principles to help executives grow their core businesses while still nurturing their new ones. Read More

The Consequences of Mandatory Corporate Sustainability Reporting

The number of firms reporting sustainability information has grown significantly in the past decade, both due to voluntary actions and to mandates from several national governments and stock exchange authorities. In this paper, London Business School's Ioannis Ioannou and Harvard Business School's George Serafeim investigate whether mandatory sustainability reporting has any effect on a company's tendency to engage in socially responsible management practices. Read More

The Impact of Forward-Looking Metrics on Employee Decision Making

In marketing, the use of the customer lifetime value (CLV) metric encourages a focus on long-term customer relationships over short-term sales. This paper examines a situation in which a European bank introduced CLV data to its customer-facing employees, while still maintaining the incentives linked to short-term profitability; the goal was to discover whether and how these employees would modify their mortgage sales decisions. Research was conducted by Pablo Casas-Arce of Universitat Pompeu Fabra, and F. Asís Martínez-Jerez and V.G. Narayanan of Harvard Business School. Read More

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China, 1880-1930

In deducing why some nations are more developed than others, it makes sense to look at their educational systems. While comparative studies on the subject focus either on developed nations or on differences between developed and developing economies, this paper hones in four of the largest developing nations at the turn of the twentieth century: Brazil, Russia, India, and China (BRIC). Research was conducted by Aldo Musacchio of Harvard Business School, Laktika Chaundhary of Scripps College, Steven Nafziger of Williams College, and Se Yan of Peking University. Read More

How Do Risk Managers Become Influential? A Field Study of Toolmaking and Expertise in Two Financial Institutions

Most organizations have technical experts on staff—accountants, finance professionals, internal auditors, risk managers-but not all experts are listened to at higher levels. To understand how expert influence on strategic thinking can be increased, Matthew Hall, Anette Mikes, and Yuval Millo followed the organizational transformation of risk experts in two large UK banks. One transformation was successful, the other not. Are your experts merely "box-tickers," or are they influential "frame-makers"? Read More

When Smaller Menus are Better: Variability in Menu-Setting Ability and 401(k) Plans

Economists love menus, which can be used to help understand people's choices. For example, do we prefer more choices (larger menu) or fewer (shorter menu)? But the menu itself has to be pre-selected. Research by David Goldreich (Rotman School of Management, University of Toronto) and Hanna Halaburda (Harvard Business School) focuses on the menu setter's decisions about what to include, and how large a menu to construct in the context of 401(k) plan choices. Read More

The Contingent Effect of Absorptive Capacity: An Open Innovation Analysis

Does experience with adopting technology improve a person's capacity for inventing better technology? On the other hand, does invention experience increase the capacity for adoption? This paper explores how adoption and invention affect each other, using data from several programming competitions sponsored by The MathWorks Corporation. Research was conducted by Andrew A. King of the Tuck School of Business at Dartmouth College and Karim R. Lakhani at Harvard Business School. Read More

Top Executive Background and Financial Reporting Choice: The Case of Goodwill Impairment

In the management literature, some theories hold that corporate actions and strategic choices can be partially predicted by knowing the functional background of executives. The authors provide evidence on how CEOs and CFOs who were former investment bankers, auditors, and private equity/venture capital executives managed decisions around goodwill impairments (essentially goodwill charge-offs)—a complex accounting choice involving a high degree of managerial discretion. Research by HBS professor Francois Brochet and doctoral candidate Kyle Welch. Read More

The ‘IKEA Effect’: When Labor Leads to Love

Companies increasingly involve customers in the design and assembly of products, from Converse allowing customers to design their own shoes to IKEA asking customers to assemble their own furniture. In this paper researchers Michael I. Norton (Harvard Business School), Daniel Mochon (University of California at San Diego), and Dan Ariely (Duke) use the "IKEA Effect" to explain the increase in valuation we place on products we build ourselves. The researchers discuss the implications of the IKEA Effect for marketing managers and organizations more generally. Read More

Delay as Agenda Setting

A common business (and life) practice involves delaying a decision in order to avoid immediate commitment. James J. Anton (Fuqua School of Business) and Dennis A. Yao (HBS) discuss ways in which delaying or, alternatively, speeding up commitment can be a valuable tactic, how these tactics influence the actions of other decision makers, and ways in which such actions affect other decisions. Changing the speed at which a decision is made affects how others allocate resources to influence how that and other decisions will eventually be made. The researchers identify two tactics associated with changing decision speed: "pinning" and "focusing." Read More

The Consequences of Financial Innovation: A Counterfactual Research Agenda

While financial innovation is often praised as a positive force for societal growth, it also takes much of the blame for the recent global financial crisis. In this paper, Harvard Business School professors Josh Lerner and Peter Tufano explore financial innovation and discuss how it differs from other types of innovation. Read More

Do Not Trash the Incentive! Monetary Incentives and Waste Sorting

Many cities encourage residents to sort their domestic trash into separate bins, for the sake of recycling some of it and thus reducing the amount of garbage that ends up in landfills. The problem is that sorting waste is not a fun activity, and not everyone is willing to do it. Using data from 95 municipalities in Italy, this paper discusses whether and how monetary incentives can encourage people to sort their trash. Research was conducted by Alessandro Bucciol of the University of Verona and the University of Amsterdam, Natalia Montinari of the University of Padua and the Max Planck Institute of Economics, and Marco Piovesan of Harvard Business School. Read More

The Power of Political Voice: Women’s Political Representation and Crime in India

Protecting the rights of disadvantaged citizens remains a challenge in both developing and developed countries. These individuals often are targets of verbal abuse, discrimination, and violent crime. Using evidence from India, this paper shows that political representation of disadvantaged groups is an important means of giving them a voice in the criminal justice system. Research was conducted by Lakshmi Iyer of Harvard Business School, Anandi Mani of the University of Warwick, and Prachi Mishra and Petia Topalova of the International Monetary Fund. Read More

When Power Makes Others Speechless: The Negative Impact of Leader Power on Team Performance

History has shown that possessing a great deal of power does not necessarily make someone a good leader. This paper explores the idea that power actually has a detrimental effect on leadership, especially with regard to how it affects open communication within a team. Research was conducted by Leigh Plunkett Tost of the University of Washington, Francesca Gino of Harvard Business School, and Richard P. Larrick of Duke University. Read More

What Do CEOs Do?

If time is money, as the old adage goes, then a CEO's schedule is especially important to a firm's financial success. This raises a fair question: What do CEOs do all day? To that end, researchers followed the activities of 94 CEOs in Italy over the course of a pre-specified week, enlisting the CEOs' personal assistants to track their bosses' activities with time-use diaries. Research was conducted by Raffaella Sadun of Harvard Business School, Luigi Guiso of the European University Institute, and Oriana Bandiera and Andrea Prat of the London School of Economics. Read More

Temptation at Work

Among the many distractions that keep office employees from their work, surfing the web is arguably the most irresistible time-waster of all. In order to deal with that problem, many companies either prohibit Internet use during working hours, or closely monitor employees' web activity. This means workers must wait until they get home to get their daily YouTube fix. But does forbidding this distraction actually increase productivity? In this paper, researchers find that the answer is no—and that delaying gratification actually has a negative impact on employee performance. Research was conducted by Alessandro Bucciol of the University of Verona and the University of Amsterdam, Daniel Houser of George Mason University, and Marco Piovesan, a research fellow at Harvard Business School. Read More

Risky Trust: How Multi-entity Teams Develop Trust in a High Risk Endeavor

Work that comes with high risk requires a great deal of trust among the individuals involved, whether it's the financial risk of producing a high-budget film or the personal safety risk of working in a war zone. In this paper, reporting on case study research on a high-risk, multimillion-dollar construction project, HBS doctoral candidate Faaiza Rashid and professor Amy C. Edmondson explore the concept of "risky trust," and examine how colleagues can learn to trust each other in the midst of high-risk work situations. Read More

How Do Incumbents Fare in the Face of Increased Service Competition?

Companies that compete by offering a high level of service are particularly vulnerable to lose customers—even longtime customers—when competitive entrants offer increased service levels, according to new research in the retail banking industry by Ryan W. Buell, Dennis Campbell, and Frances X. Frei, all of Harvard Business School. The good news for providers of high-touch service is that if they can sustain the service advantage over time, they could be rewarded with higher value customers. Read More

Individual Rationality and Participation in Large Scale, Multi-Hospital Kidney Exchanges

As kidney exchange moves from local networks to a national level, a new set of problems arises. One central issue, for example, is how individual hospitals can be motivated to participate. This paper by Itai Ashlagi (Sloan School of Management, MIT) and Alvin E. Roth (Harvard Business School) provides a theoretical framework to study and overcome the kinds of problems that can be anticipated. Read More

Do US Market Interactions Affect CEO Pay? Evidence from UK Companies

CEOs of UK firms receive higher total compensation if their companies have interactions with US product, capital, and labor markets. Moreover, the compensation package is often adopted from American-style arrangements, such as the use of incentive-based pay. Researchers Joseph J. Gerakos (University of Chicago), Joseph D. Piotroski (Stanford), and Suraj Srinivasan (Harvard Business School) analyzed data on the compensation practices of 416 publicly traded UK firms over the period 2002 to 2007. Read More

Platform Competition under Asymmetric Information

Research by Hanna Halaburda (Harvard Business School) and Yaron Yehezkel (Tel Aviv University) shows how pricing, profits, and market efficiency are affected in two-sided markets, such as with smartphone and video game platforms, when users and developers do not know the utility or costs associated with the platform until they join. Read More

Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

Firms dominant in one era are often less successful in new technological eras, despite being able to exploit economies of scope and other incumbent advantages. What leads to this Schumpeterian creative destruction? Researchers Timothy Bresnahan (Stanford), Shane Greenstein (Northwestern), and Rebecca Henderson (Harvard Business School) look to IBM and Microsoft for an answer. Read More

Marketplace Institutions Related to the Timing of Transactions

Certain markets face the problem of "unraveling," in which competition for good talent leads a firm to make job offers earlier and earlier, without sufficient knowledge about any given applicant—and in which applicants are forced to decide whether to accept a job before they really know much about working for that firm. Harvard Business School professor Alvin E. Roth discusses how this issue affects the labor markets for new lawyers and gastroenterology fellows, as well as the market for postseason college football bowls. Read More

Driven by Social Comparisons: How Feedback about Coworkers’ Effort Influences Individual Productivity

Francesca Gino and Bradley R. Staats explore how the valence (positive versus negative), type (direct versus indirect), and timing (one-shot versus persistent) of performance feedback affects an employee's job productivity. Specifically, through field experiments at a Japanese bank, they investigate the extent to which job performance is affected when employees learn where they stand relative to their coworkers. Read More

Accounting Scholarship That Advances Professional Knowledge and Practice

Accounting scholars generally do a fine job of analyzing how we process accounting data, but they ought to spend more time looking at how that data is produced, says Harvard Business School professor Robert S. Kaplan. In this paper—in response to a newly minted professor who sought his advice—Kaplan reminds young scholars that accounting is more of a professional discipline than an academic subject. To that end, he advises them not just to teach their students the common body of accounting knowledge, but also to advance that body of knowledge by bridging the gap between scholarship and practice. Read More

Memory Lane and Morality: How Childhood Memories Promote Prosocial Behavior

Little Damien from The Omen notwithstanding, we generally associate childhood with goodness, purity, and innocence. This paper investigates whether feelings of moral purity can be triggered by reminding adults of their childhoods, and whether this can help to induce kind and philanthropic behavior both in social settings and in the workplace. Research was conducted by Harvard Business School professor Francesca Gino and Sreedhari D. Desai of the Edmond J. Safra Center for Ethics at Harvard University. Read More

From Social Control to Financial Economics: The Linked Ecologies of Economics and Business in Twentieth Century America

No transformation looks more consequential for the history of American higher education than the extraordinary rise of business schools and business degrees in the twentieth century. Marion Fourcade (UC Berkeley) and Rakesh Khurana (HBS) analyze the changing place of economics in American business education as reflected in the teaching of three elite business schools over the course of the twentieth century: the Wharton School (1900-1930), the Carnegie Tech Graduate School of Industrial Administration (post World War II), and the Graduate School of Business at the University of Chicago (1960s-present). Read More

How Firm Strategies Influence the Architecture of Transaction Networks

In business, an "ecosystem" refers to a group of firms that work together through a series of shared transactions to provide a complex product or service. Using data from the disparate Japanese electronics and automotive sectors, this paper tackles the following questions: Do hierarchies of interfirm transaction networks vary across different ecosystems? What practices explain the difference in hierarchy across these two ecosystems? How do firms' strategies influence hierarchy? And what environmental factors explain the differences in the largest firm's strategies in each ecosystem? Research was conducted by Carliss Y. Baldwin of Harvard Business School and Jianxi Luo, Daniel E. Whitney, and Christopher L. Magee of the Massachusetts Institute of Technology. Read More

How Foundations Think: The Ford Foundation as a Dominating Institution in the Field of American Business Schools

What causes institutions to change? This paper adds organizational and exogenous perspective to existing theories by looking at the idea of "dominating institutions"—a class of formal organizations purposively designed to change other institutions. HBS professor Rakesh Khurana and colleagues look at the Ford Foundation and its work reshaping America's graduate schools of management between 1952 and 1965 through funding of "centers of excellence" at a number of schools, including Harvard Business School. Read More

Issuer Quality and Corporate Bond Returns

In research that could help regulators and policymakers tell if credit markets are becoming overheated, HBS professor Robin Greenwood and doctoral candidate Samuel G. Hanson suggest that measures of credit quality are just as important to monitor as the more traditional reviews of credit quantity. They also find that time-varying investor beliefs such as over-optimism, or tastes such as a heightened tolerance for risk, can contribute to fluctuations in credit quantity. Read More

A Behavioral Model of Demandable Deposits and Its Implications for Financial Regulation

Depositors are overconfident of their chances of recovering demandable deposits in a bank run. In a recent research paper, professor Julio J. Rotemberg reviews various government regulations available to be imposed on financial institutions—minimum capital levels, asset requirements, deposit insurance, and compulsory clawbacks—to understand how much they can help protect investors. Read More

Preference Heterogeneity and Optimal Capital Income Taxation

Professor Matthew Weinzierl and coauthors test the idea that savings, which is concentrated among highly skilled workers, ought to be taxed as part of an optimal tax policy. They find that the welfare gains from these taxes would be negligible. Read More

Naivete and Cynicism in Negotiations and Other Competitive Contexts

In business and in life, it's important to strike a smart balance between naïveté and cynicism. Act too naïvely, and someone is bound to take advantage of you. Skew cynical, and you may miss out on new opportunities with good people. This paper discusses the decision errors inherent in leaning too far in either direction. Research was conducted by Chia-Jung Tsay, Lisa. L. Shu, and Max H. Bazerman of Harvard Business School. Read More

Leviathan as a Minority Shareholder: A Study of Equity Purchases by the Brazilian National Development Bank (BNDES), 1995-2003

There is a trend in many developing countries toward governments buying minority stakes in private companies. While there has been ample discussion on the wisdom of such actions, little has been said about how governments can make such interventions work better. This paper aims to fill that void, using data from the Brazilian National Development Bank (BNDES). Research was conducted by Sergio G. Lazzarini of the Insper Institute of Education and Research, and Aldo Musacchio of Harvard Business School. Read More

The Dark Side of Creativity: Original Thinkers Can Be More Dishonest

Anyone who has spent significant time with artists knows that creative genius often comes with a dark side. This paper offers experimental evidence, specifically with regard to the relationship between creativity and unethical behavior. Research involving four experiments with university students was conducted by Francesca Gino of Harvard Business School and Dan Ariely of the Fuqua School of Business. Open for comment; 40 Comments posted.

Sustainable Cities: Oxymoron or the Shape of the Future?

Among the issues looming large in the twenty-first century is a rapid rise in the number of people living in cities and a rapidly growing awareness of our threat to the Earth's environment. In response to both, a number of major corporations and various government bodies have teamed up to explore the idea of "ecocities" —urban communities ideally designed around the idea of environmental sustainability. This paper explores the idea by looking at several ecocities in progress in China, Abu Dhabi, South Korea, Finland, and Portugal. Research by professors Robert G. Eccles and Amy C. Edmondson, doctoral candidate Tiona Zuzul, and HBS research assistant Annissa Alusi. Open for comment; 2 Comments posted.

Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector

In the business world, "gaming" refers to the act of subverting the intent of rules or laws without technically breaking them--a skillful if unsavory way to achieve private gain. Harvard Business School professor emeritus Malcolm S. Salter explores how gaming the system can lead to institutional corruption, citing examples from Enron and early efforts by some banks to game the implementation of the Dodd-Frank financial reform act. Read More

Agglomerative Forces and Cluster Shapes

HBS professor William R. Kerr and doctoral candidate Scott Duke Kominers develop a theoretical model for analyzing the forces that drive agglomeration, or industrial clustering. It is rare that researchers systematically observe the forces like technology sharing, customer/supplier interactions, or labor pooling that lead to firm clustering. Instead, the data only portray the final location decisions that firms make (for example, firms that utilize one type of technology are clustered over 50 miles, while those using another technology are clustered over 100 miles). The researchers' model identifies how these observable traits can be used to infer properties of the underlying clustering forces. Read More

A Brief Postwar History of US Consumer Finance

The growth of the consumer finance sector after World War II provided a bevy of new financial options for Americans. These options led to a "do-it-yourself" approach to consumer finance, and an increase in household risk taking. In this paper, Harvard Business School professors Gunnar Trumbull and Peter Tufano, along with former HBS research associate Andrea Ryan, discuss the major themes that dominated the expansive postwar sector, including some of the factors that set the stage for the recent subprime mortgage crisis. Read More

Conveniently Upset: Avoiding Altruism by Distorting Beliefs about Others

This paper explores the idea that people who can take advantage of a particular situation will tend to believe that others would choose to take advantage of the same situation if given the chance-thus helping to justify the decision to act selfishly. In their research, Harvard Business School professor Rafael Di Tella and Harvard PhD student Ricardo Pérez-Truglia test their hypothesis on a group of well-heeled Argentinean college students, using a modified version of the "dictator game" in which both the "dictators" and the "recipients" are given the chance to make a selfish choice. Read More

Learning from Customers in Outsourcing: Individual and Organizational Effects

In farming out work to an external service provider, companies often count on volume-based learning--the idea that outsourced workers will build experience and improve their productivity if there is a large volume of work for them to do, and that the bigger the volume, the more productive and efficient they'll eventually become. However, there are several factors that challenge that education process. This paper explores whether and how repetition can breed competence in a business setting, using data from a provider of outsourced radiological services. Research was conducted by Harvard Business School professor Robert S. Huckman, Jonathan R. Clark (HBS PhD 2010) of Pennsylvania State University, and Bradley R. Staats (HBS MBA 2002, DBA 2009) of the University of North Carolina at Chapel Hill. Read More

Testing Coleman’s Social-Norm Enforcement Mechanism: Evidence from Wikipedia

Harvard Business School professor Mikolaj Jan Piskorski and doctoral candidate Andreea Gorbatai look to the editing process on Wikipedia to test and validate the well-accepted (but little-verified) theory of sociologist James Coleman that social norm violations decline as network density increases. Support for Coleman's mechanism would alert us to the importance of punishments for norm violations and rewards for such punishments, and thus help us to design social systems in which norms are observed. Open for comment; 4 Comments posted.

Modularity for Value Appropriation--How to Draw the Boundaries of Intellectual Property

Many firms have adopted models of "open innovation," in which they seek ideas from external sources such as university labs, independent entrepreneurs, customers, and other companies. While such a business model has the potential to create value, the inherent intellectual property issues can be sticky. This paper discusses how companies can address these issues by adopting a system of modularity, wherein innovation in one part of a project will not require changes in all the other parts. Research was conducted by Joachim Henkel of Technische Universität München and Harvard Business School professor Carliss Y. Baldwin. Read More

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge

In August 2010, the Security and Exchange Commission announced a highly anticipated rule that would make it easier for investors to nominate new board members and get rid of existing ones. It allowed shareholders to have their board candidates included in the company's proxy materials--if those shareholders had owned at least 3 percent of the firm's shares for at least the prior three years. On October 4, the SEC unexpectedly and indefinitely postponed the implementation of that rule, pending the outcome of a lawsuit aimed at overturning it. This paper gauges the significance of the proxy access rule by measuring whether certain firms gained or lost market value on news of the delay. Research was conducted by Harvard Business School professors Bo Becker, Daniel Bergstresser, and Guhan Subramanian. Read More

The Learning Effects of Monitoring

It's a challenge that all good managers face: How do you strike the right balance between encouraging autonomy among your employees and mitigating the risk that they'll make bad decisions? Using both field and quantitative data from the MGM-Mirage Group, this paper discusses how management controls affect the learning rates of lower-level employees. Research, focusing on hotel casino hosts, was conducted by Dennis Campbell and Francisco de Asís Martinez-Jerez of Harvard Business School and Marc Epstein of Rice University. Read More

The Psychological Costs of Pay-for-Performance: Implications for Strategic Compensation

In studying pay-for-performance-based compensation systems, economic scholars often adhere to agency theory, which hypothesizes that firms should prominently use performance-based compensation—it alleviates the problems of employee "shirking" and ensures highly skilled employees' desire to work for the company. However, firms use performance-based pay far less frequently than agency theory predicts. This paper posits that the psychological costs of pay-for-performance systems often dominate their benefits to firms, and proposes an integrated theory of strategic compensation that takes into account the economic and psychological benefits and costs of pay-for-performance. Research was conducted by Harvard Business School professors Francesca Gino and Ian Larkin, and Lamar Pierce of Washington University. Read More

Cognitive Barriers to Environmental Action: Problems and Solutions

Researchers have long studied the cognitive barriers that cloud our thinking and decision-making. In a recent book chapter, HBS doctoral student Lisa L. Shu and professor Max H. Bazerman look at three barriers that can prevent clear decision-making, specifically on environmental issues. They also propose ways in which these biases could be put to advantage in promoting sound environmental policy and practice. Read More

Regulating for Legitimacy: Consumer Credit Access in France and America

Why have American households consistently borrowed so heavily? And why have their counterparts in France borrowed so little? This comparative historical analysis by HBS professor Gunnar Trumbull traces the roots of these different attitudes. In the United States, early welfare reformers embraced credit "on a business-like basis" as an alternative to expansive welfare states of the sort that were emerging in Europe. In France, early social planners saw consumer credit as a drain on savings that threatened to crowd out industrial investment. Regulatory regimes that emerged in the postwar period in the two countries reflected these different interpretations of the economic and social role of credit in society. Read More

Friends in High Places

Research supports the old adage that says it's not what you know; it's whom you know--especially when it comes to the voting behavior of US politicians. In a National Bureau of Economic Research working paper, Harvard Business School professors Lauren Cohen and Christopher Malloy study the congressional voting record from 1989 to 2008. They show that personal connections among Congress members reliably affect how they will vote on pending legislation. Read More

Decoding Inside Information

Price setters and regulators face a difficult challenge in trying to understand the stock trading activity of corporate insiders, especially when it comes to figuring out whether the activity is a good indicator of the firm's financial future. This National Bureau of Economic Research paper discusses how to distinguish "routine" trades (which predict virtually no information about a firm's financial future) from "opportunistic" trades (which contain a great deal of predictive power). Research was conducted by Harvard Business School professors Lauren Cohen and Christopher Malloy and Lukasz Pomorski of the University of Toronto. Read More

Towards an Understanding of the Role of Standard Setters in Standard Setting

Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards. Read More

Creating Leaders: An Ontological Model

HBS professor emeritus Michael C. Jensen and coauthors have created an ontological approach to creating leaders in which leadership emerges through spontaneous and intuitive natural self-expression. Read More

Reversing the Null: Regulation, Deregulation, and the Power of Ideas

Who's to blame for the recent financial crisis? To some extent, the fault lies with scholars of economics, according to professor David Moss. In this paper, he argues that an academic focus on government failure in the second half of the 20th century led to the general idea that less was always more when it came to regulation--which, in part, contributed to the crisis. To that end, he calls for a fundamental shift in academic research on the government's role in the economy. Read More

Sponsored Links’ or ’Advertisements’?: Measuring Labeling Alternatives in Internet Search Engines

In processing a search for a particular phrase, Internet search engines generally offer two types of results: the algorithmic results, which a search engine selects based on relevance, and the "sponsored links," for which advertisers pay. The latter often occupy prominent screen space. But does the average web surfer realize that they are advertisements? In an online experiment, Harvard Business School professor Benjamin Edelman and doctoral candidate Duncan S. Gilchrist show that "sponsored link" is too vague a term for some users to understand, and that "paid advertisement" is a label that better clarifies the nature of the link. They call on the FTC to compel search engines to improve their disclosures. Read More

The New Face of Chinese Industrial Policy: Making Sense of Anti-Dumping Cases in the Petrochemical and Steel Industry

The researchers set out to explain differences in China's antidumping actions against importers in the petrochemical and steel industries. During the study period, 66 percent of the country's antidumping cases targeted petrochemical imports, while steel imports were targeted only in 5 percent of the cases. Why did China's petrochemical and steel industries behave so differently in seeking trade protection? The answers put forward by researchers Regina Abrami (Harvard Business School) and Yu Zheng (University of Connecticut) point toward the structural nature of the industries themselves, and against arguments that antidumping actions in China have been driven by retaliation or national industrial strategy alone. Read More

Valuation When Cash Flow Forecasts Are Biased

The valuation of forecasted cash flows can be an inaccurate process, especially when the forecasts are created by optimists who neglect to consider worst-case scenarios. In this paper, Harvard Business School professor Richard S. Ruback has developed methods of valuating forecasted cash flow when the predictions are biased upward. Read More

Growth Through Heterogeneous Innovations

Economists have long recognized that innovation is central to economic growth and development. But as a profession, economics is just beginning to model the many types of innovations that exist and the amazing heterogeneity in the firms that conduct research and development--from General Electric to Silicon Valley start-ups. This paper provides theoretical and empirical evidence surrounding how firm size influences the types of R&D undertaken, with particular focus on choices to pursue exploration R&D (capturing new product lines) versus exploitation R&D (refining current product lines internally). From the choices made by individual firms and new entrepreneurs, the model then builds to consider aggregate economic growth. Research was conducted by Ufuk Akcigit of the University of Pennsylvania and William R. Kerr of Harvard Business School. Read More

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

Companies generally pay their sales staff with some combination of salary, commissions, and bonuses for meeting quotas-with sales force costs averaging about 10 percent of sales revenue in the United States. This paper aims to gain insight into the most effective way to design a compensation plan, concentrating on whether bonuses boost sales productivity and whether they should be awarded quarterly or annually. Research, focusing on the sales force of a large office supply company, was conducted by Harvard Business School professor Thomas Steenburgh and Doug J. Chung and K. Sudhir of the Yale School of Management. Read More

Payout Taxes and the Allocation of Investment

The corporate payout that shareholders periodically receive--dividends or repurchases of shares--is subject to taxation in many countries. Such taxes make it cheaper to finance investment out of retained earnings than from equity issues. Using tax data from 25 countries over a 19-year period, this paper discusses whether these taxes have a direct effect on investor behavior, and to what extent. Research was conducted by Bo Becker of Harvard Business School, Marcus Jacob of the European Business School, and Martin Jacob of the Otto Beisheim School of Management. Read More

Network Effects in Countries’ Adoption of IFRS

Between 2003 and 2008, 75 countries adopted, to various degrees, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board. More countries, including the United States and China, are currently engaged in convergence projects. Researchers Karthik Ramanna (Harvard Business School) and Ewa Sletten (MIT Sloan School of Management) report on the role that perceived network benefits play in convincing some countries to shift from local accounting standards to IFRS. Read More

The Unbundling of Advertising Agency Services: An Economic Analysis

From 1982 through 2007, U.S. advertising agencies increasingly "unbundled," or disaggregated, services such as copywriting and media placement, moving away from the industry's traditional one-stop-shop model. At the same time, agencies began to charge clients based on a fee-for-service system, rather than collecting commissions on media placements. The researchers analyze this trend and consider how it may be interpreted by the economic theory of bundling. Read More

How Did Increased Competition Affect Credit Ratings?

When Fitch Ratings took on Standard & Poor's and Moody's as an alternative credit rating agency in the 1990s, there was a general assumption that the increased competition would lead to higher-quality corporate debt ratings from the incumbents. In fact, their ratings quality declined during the 10-year study period, according to Harvard Business School's Bo Becker and Washington University's Todd Milbourn. One possible cause: competition weakens reputational incentives that drive ratings quality. Read More

Making the Numbers? ‘Short Termism’ & the Puzzle of Only Occasional Disaster

Executives at public companies are always under pressure to "meet the numbers" each quarter, often so much so that they sacrifice long-term investments in order to make everything look rosy in the short term. In this paper, Harvard Business School professor Rebecca M. Henderson and Sloan School of Management professor Nelson P. Repenning set out to reconcile the apparently contradictory strategies of short-term results and long-term investments. Read More

The Distinct Effects of Information Technology and Communication Technology on Firm Organization

At what point in the corporate food chain are big decisions made? It depends on technology, according to new research, which finds that information-based software will help to push decisions further down the corporate ladder, whereas communication technologies will push decisions up to the top. Research was conducted by Nicholas Bloom of Stanford University; Assistant Professor Raffaella Sadun of Harvard Business School; and Luis Garicano and John Van Reenen of the London School of Economics. Read More

The Intensive Margin of Technology Adoption

To anyone who observes the world, it's pretty clear that a country's poverty level is at least somewhat related to its adoption of new technologies. Historically, though, this fact has been difficult to quantify. Harvard Business School professor Diego Comin and MIT researcher Martí Mestieri are developing a model to analyze the relationship between economic growth and technology adoption. In their paper, they discuss both "extensive" margins (the length of time it takes a country to adopt any given new technology) and "intensive" margins (the number of technology units--smartphones, PCs, etc.--that the country adopts). Read More

Prosocial Spending and Well-Being: Cross-Cultural Evidence for a Psychological Universal

Can money buy happiness? Apparently it can--if that money is spent on someone else. New research shows that people around the world gain emotional benefits from using their financial resources to benefit others. The research, which included data from 136 countries, was conducted by Lara B. Aknin, Elizabeth W. Dunn, Christopher P. Barrington-Leigh, and John Helliwell, University of British Columbia; Robert Biswas-Diener, Centre of Applied Positive Psychology; Imelda Kemeza, Mbarara University of Science & Technology; Paul Nyende, Makerere University; Claire Ashton-James, University of Groningen; and Michael I. Norton, Harvard Business School. Read More

When Does a Platform Create Value by Limiting Choice?

Platforms such as video games and smartphones need to attract users, and the best way to do so is to offer more and more applications. Is there ever a point where a platform should limit the variety available? Researchers Ramon Casadesus-Masanell and Hanna Halaburda observe that in many situations users enjoy consuming applications together. When such consumption complementarities are present, users may benefit if the platform limits choice. With fewer applications to choose from, it is easier for users to take full advantage from shared consumption. Read More

Financing Risk and Bubbles of Innovation

While start-up firms are key to any technological revolution, they also run a high risk of failure. To that end, investors often provide limited capital in several careful stages, gaining confidence in a firm before doling out another round of funding. However, these investors still face the possibility that other investors won't provide follow-on funding, even when the firm's prospects remain sound. That's a big risk for individual investors who can't afford to fund a new firm all by themselves, and whose investment will flounder if others don't invest, too. Research by HBS professors Ramana Nanda and Matthew Rhodes-Kropf explores why future investors may not fund the project at its next stage even if the fundamentals of the project have not changed. Read More

The Impact of Supply Learning on Customer Demand: Model and Estimation Methodology

"Supply learning" is the process by which customers predict a company's ability to fulfill product orders in the future using information about how well the company fulfilled orders in the past. A new paper investigates how and whether a customer's assumptions about future supplier performance will affect the likelihood that the customer will order from that supplier in the future. Research, based on data from apparel manufacturer Hugo Boss, was conducted by Nathan Craig and Ananth Raman of Harvard Business School, and Nicole DeHoratius of the University of Portland. Read More

A Comparative-Advantage Approach to Government Debt Maturity

Can the government do anything to discourage short-term borrowing by the private sector? HBS Professor Robin Greenwood, Harvard University and Harvard Business School PhD candidate Samuel Hanson, and Harvard University Professor Jeremy C. Stein suggest the government could actively influence the corporate sector's borrowing decisions by shifting its own financing between T-bills and bonds. Read More

Reversing the Queue: Performance, Legitimacy, and Minority Hiring

While there has been a steady rise in the number of black executives in corporate America, the fact remains that white males have a persistent advantage in terms of access to managerial positions. This paper sets out to find out how a company's performance influences the hiring of minorities into management positions, and whether the presence of minorities in senior management positions affects the racial composition of the subordinate management team. Research, which focused on the corporate structure of the National Football League, was conducted by Harvard Business School doctoral candidate Andrew Hill and professor David Thomas. Read More

Employee Selection as a Control System

One of the most powerful tools that an organization has to achieve its goals is the ability to hire employees with complementary values and capabilities. Reviewing personnel and lending data from a financial services organization undergoing a major decentralization process, Dennis Campbell offers the first direct empirical evidence establishing a link between employee selection and better alignment with organizational performance goals. Read More

Crashes and Collateralized Lending

This paper presents a framework for understanding the contribution of systematic crash risk to the cost of capital for a variety of different types of securities. The framework isolates the systematic crash risk exposure of different collateral types (equities, corporate bonds, and CDO tranches), and provides a simple mechanism for allocating the cost of bearing this risk between a financing intermediary and investor. Research was conducted by Jakub W. Jurek (Bendheim Center for Finance, Princeton University) and Erik Stafford (Harvard Business School). Read More

The Profits of Power: Commercial Realpolitik in Eurasia

The concept of good old-fashioned realpolitik-politics primarily shaped by practicality and power-has returned to Europe, clashing with the traditional ideologies of the European Union, says Harvard Business School professor Rawi Abdelal. Citing supporting evidence from the Russian gas giant Gazprom, he argues that scholars need to pay better attention to the role of large corporations in international relations. Read More

Using What We Know: Turning Organizational Knowledge into Team Performance

An organization's captured (and codified) knowledge--white papers, case studies, documented processes--should help project teams perform better, but does it? Existing research has not answered the question, even as U.S. companies alone spend billions annually on knowledge management programs. Looking at large-scale, objective data from Indian software developer Wipro, researchers Bradley R. Staats, Melissa A. Valentine, and Amy C. Edmondson found that team use of an organization's captured knowledge enhanced productivity, especially for teams that were geographically diverse, relatively low in experience, or performing complex work. The study did not find effects of knowledge use on the quality of the team's work, except for dispersed teams. Read More

A Positive Approach to Studying Diversity in Organizations

Considering that the topic of workplace diversity often garners unhappy discussions of prejudice, isolation, and conflict, it's not surprising that many researchers avoid the topic altogether. Only 5 percent of articles published in management journals from 2000-2008 included race or gender in their keywords. In this paper, Harvard Business School professors Lakshmi Ramarajan and David Thomas propose a positive approach to studying diversity, with hopes that this will lead managers to feel more positive about adopting diversity policies in the workplace. Read More

Does Mandatory IFRS Adoption Improve the Information Environment?

Created by the International Accounting Standards Board, the International Financial Reporting Standards (IFRS) comprise several principles designed to help public companies increase transparency in their financial reports. But are they worth the hefty compliance costs associated with them? This paper investigates whether adopting the IFRS improves the information environment for firms in which the standards are legally required. Research was conducted by Joanne Horton at the London School of Economics, George Serafeim at Harvard Business School, and Ioanna Serafeim at the Greek Capital Market Commission. Read More

Medium Term Business Cycles in Developing Countries

Business cycle fluctuations in developed economies tend to have very strong effects on developing countries, says a new study by Harvard Business School professor Diego Comin, Norman Loayza and Luis Serven of the World Bank, and Farooq Pasha of Boston College. The researchers have developed a quantitative model capable of explaining the amplitude and persistence of the effect that U.S. shocks have on Mexico's macroeconomic variables. The model is then used to provide an account of the drivers of business fluctuations in developing economies. Read More

The Task and Temporal Microstructure of Productivity: Evidence from Japanese Financial Services

Boredom and fatigue often hamper the productivity of workers whose jobs consist of repeating the same tasks. This paper explores ways in which companies can combat this problem, introducing the idea of the "restart effect" - a deliberate disruption that kindles productivity. Research, which focused on a loan-application processing line at a Japanese bank, was conducted by HBS professor Francesca Gino and Kenan-Flagler Business School assistant professor Bradley R. Staats. Read More

From Bench to Board: Gender Differences in University Scientists’ Participation in Commercial Science

Does gender affect whether a university scientist will be invited to work with for-profit companies? Indeed it does. A new paper finds that male professors receive more opportunities than their female counterparts to join scientific advisory boards and start new companies. Research, focusing on the biotechnology field, was conducted by Haas School of Business professor Waverly W. Ding, MIT Sloan professor Fiona Murray, and HBS professor Toby E. Stuart. Read More

The Impact of Corporate Social Responsibility on Investment Recommendations

Security analysts are increasingly awarding more favorable ratings to firms with corporate socially responsible (CSR) strategies, according to this paper by Ioannis Ioannou and HBS professor George Serafeim. Their work explores how CSR strategies can affect value creation in public equity markets through analyst recommendations. Read More

Boundary Spanning in a For-Profit Research Lab: An Exploration of the Interface Between Commerce and Academe

In science-based industries, innovation requires bridging the boundary between universities and companies. As entrepreneurial faculty venture into the world of commerce by building relationships and reputations in industry, company researchers and dealmakers seek access to the distributed knowledge base that resides within the community of scholars. But what happens within organizations when scientists venture deeply into the world of academe? In this look at one influential life sciences company, Christopher C. Liu of the Rotman School of Management and Toby E. Stuart of Harvard Business School find important connections between publishing, the allocation of rewards within the company, and the structure of the communication network inside and beyond the borders of the organization. Read More

Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide

Women and ethnic minorities are frequently discriminated against in the labor markets of both developed and emerging economies, particularly in opportunities for management positions. Multinationals entering such markets must decide whether to aggressively hire and promote the excluded group, thus reaping the benefits of their underutilized talent, or conform to local practice and avoid provoking some bigoted policymakers, executives, purchasers, and/or supply agents. In this paper, HBS professor Jordan Siegel, Lynn Pyun, and B.Y. Cheon find that multinationals gain significant competitive opportunities by scanning the host-market social landscape, identifying social schisms in the labor market, and exploiting such schisms by actively hiring and promoting members of the excluded group to positions of management responsibility. Read More

Managerial Practices That Promote Voice and Taking Charge among Frontline Workers

How can front-line workers be encouraged to speak up when they know how to improve an organization's operation processes? This question is particularly urgent in the US health- care industry, where problems occur often and consequences range from minor inconveniences to serious patient harm. In this paper, HBS doctoral student Julia Adler-Milstein, Harvard School of Public Health professor Sara Singer, and HBS professor Michael W. Toffel examine the effectiveness of organizational information campaigns and managerial role modeling in encouraging hospital staff to speak up when they encounter operational problems and, when speaking up, to propose solutions to hospital management. The researchers find that both mechanisms can lead employees to report problems and propose solutions, and that information campaigns are particularly effective in departments whose managers are less engaged in problem solving. Read More

The Role of Organizational Scope and Governance in Strengthening Private Monitoring

Governments have long debated which tasks should be outsourced to the private sector. Although often justified on the basis of the cost-efficiencies of market competition, outsourcing to private firms carries its own risks, which can reduce the quality of services provided. In addition to more conventional services such as garbage and recycling collection, some governments outsource the enforcement of laws and regulations. This paper by Olin Business School's Lamar Pierce and HBS professor Michael W. Toffel examines the automobile emissions testing market in one state where this form of regulatory enforcement has been outsourced to the private sector. Their analysis illustrates the importance of considering organizational scope and private governance mechanisms such as monitoring provided by corporate headquarters and independent third-parties in efforts to assure the reliability of firms that provide outsourced services. Read More

The Influence of Prior Industry Affiliation on Framing in Nascent Industries: The Evolution of Digital Cameras

Firms entering a new product market face tremendous ambiguity and competitive uncertainty, particularly when the new market is sparked by radical technological change. Potential customers have little or no experience with products, and during this period of turbulence, firms experiment with alternative product configurations, functions, and technologies. By studying the emergence of the consumer mass market for digital cameras, Carlson School of Management professor Mary J. Benner and HBS professor Mary Tripsas explore what factors influence a firm's initial introduction of product features during the nascent stage of a product market, and how the process of convergence on a standard set of features unfolds. In particular, they assess how a firm's prior industry affiliation influences its conceptualization of the product. Read More

The Effect of Market Leadership in Business Process Innovation: The Case(s) of E-Business Adoption

The connection between market leadership and the adoption of new technologies is central to understanding how firms maintain or gain competitive advantage over time. One key determinant of firm openness to either product or process innovation is how radical or incremental a particular change is for the organization. Using the context of IT-enabled business processes for e-buying and e-selling, a setting that offers a complementary view to studies that have focused on R&D expenditure and patents as measures of innovation, HBS professor Kristina McElheran sheds light on whether, when, and why market leaders might be more likely to adopt new innovations. This study represents the first robust, multi-industry evidence that market leaders are far more likely to adopt incremental rather than radical business process innovations. Read More

Disagreement about the Team’s Status Hierarchy: An Insidious Obstacle to Coordination and Performance

What happens when team members disagree about how much status each of the other members actually deserves? Does it matter that members might not even be aware that they disagree with one another? Published research on status conflict has so far focused primarily on the effects of overt status challenges, often originating from high-status members jockeying for top positions to attain valuable resources such as power, credit, and a better reputation. Yet new research by HBS professor Heidi K. Gardner explores how small differences, even latent ones, in team members' perceptions about their group's status hierarchy can undermine group collaboration, heighten team conflict, and lower performance. Read More

Business Model Innovation and Competitive Imitation

When and why should an entrant adopt a new business model when the innovation could be imitated by an incumbent? In this paper, HBS professor Ramon Casadesus-Masanell and University of Southern California professor Feng Zhu examine the desirability, or lack thereof, of business model innovations when they cannot be protected, opening the door to competitive imitation. Issues of competing through new business model design become more important given the increasing number of opportunities for business model configurations enabled by technological progress, new customer preferences, and deregulation. Read More

Foreign Entry and the Mexican Banking System, 1997-2007

What are the effects of foreign bank entry in developing economies? In recent years, governments around the world have been opening up their banking systems to foreign competition. In Mexico, for example, the market share of foreign ownership of banks increased fivefold between 1997 and 2007. In this paper, Stanford professor Stephen Haber and HBS professor Aldo Musacchio describe their detailed study of the impact of foreign entry in Mexico during that period. Overall, results suggest that while foreign entry in Mexico is associated with greater stability of the banking system, it has not increased the availability of credit, and foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Read More

Trade Policy and Firm Boundaries

What is the impact of trade policies on firms' ownership structures? Drawing on analysis based on a unique database from Dun and Bradstreet that contains both listed and unlisted plant-level observations in more than 200 countries, HBS professor Laura Alfaro and coauthors describe a simple model in which firms' boundaries depend on the prices of the products they sell: The higher the prices, the more integrated firms will be. More generally, when equilibrium prices converge across economies, so do ownership structures. The reason behind these predictions is that integration, although more productive than non-integration because of its comparative advantage in the coordination of firms' operating decisions, also imposes higher private costs on enterprise managers. At low prices, the productivity gains from integrating have little value, and managers choose non-integration. As prices rise, the relative value of coordination increases, favoring integration. Read More

From Russia with Love: The Impact of Relocated Firms on Incumbent Survival

The relocation of the machine tool industry from the Soviet-occupied zone of postwar Germany to western regions is a unique laboratory for studying the impact of industrial structures on incumbent survival. Typically, geographic agglomerations of similar firms offer benefits to each member firm by reducing the transportation costs for material goods, specialized workers, and industry knowledge among the firms. Of course, tight geographic concentration comes with countervailing costs as firms compete for local inputs. In this paper, HBS professor William R. Kerr and coauthors study the impact of increased local concentration on incumbent firms by considering postwar Germany, when the fear of expropriation (or worse) in the wake of World War II prompted many machine tool firm owners to flee to western Germany, where they reestablished their firms. Read More

The Limits of Nonprofit Impact: A Contingency Framework for Measuring Social Performance

The social sector is in the midst of a search for metrics of impact. Over the past 20 years, there has been an explosion in methodologies and tools for assessing social performance and impact, but with little systematic analysis and comparison across these approaches. In this paper, HBS professors Alnoor Ebrahim and V. Kasturi Rangan provide a synthesis of the current debates and, in so doing, offer a typology and contingency framework for measuring social performance. Their contingency approach suggests that—given the varied work, aims, and capacities of social sector organizations—some organizations should be measuring long-term impacts, while others should stick to measuring shorter-term results. The researchers provide a logic for determining which kinds of measures are appropriate, as driven by the goals of the organization and its operating model. Read More

Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance

In 2008 and 2009 the world economy suffered the deepest global financial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade, and world trade volume plummeted by more than 40 percent in the second half of 2008. Using a new dataset that reports operational activities of over 12 million establishments worldwide before and after 2008, HBS professor Laura Alfaro and George Washington University professor Maggie Chen study how multinationals around the world responded to the crisis relative to local firms, and the underlying mechanisms of those differential responses. By taking into account establishments both at the epicenter and on the periphery of the crisis, their analysis also considers multinationals' role as an international linkage in transmitting economic shocks. Read More

Cyclicality of Credit Supply: Firm Level Evidence

Bank lending falls in economic recessions. In particular, it shrank considerably during the recent economic downturn. Does such cyclicality of bank lending reflect a decline in banks' willingness to lend (the "loan supply" effect) or reduced demand for loans from firms (the "loan demand" effect)? The considerable attention that is given to banks' financial health by the Federal Reserve, Congress, and other branches of government is only warranted if the answer is supply. Focusing on U.S. firms that raised new debt financing between 1990 and 2009, HBS professors Bo Becker and Victoria Ivashina demonstrate that many large U.S. firms turn to the bond market when banks are in poor financial health. When times are better, the same firms get bank loans. Becker and Ivashina argue that the substitution between bonds and loans at the firm-level is a good economic proxy for the bank credit supply. Read More

The Empire Struck Back: The Mexican Oil Expropriation of 1938 Reconsidered

The Mexican petroleum expropriation of 1938 looms large as the beginning of Latin American resource nationalism and the apogee of America's "Good Neighbor" policy. In Mexico, the expropriation is viewed as a patriotic triumph, in which the federal government seized control of the country's most valuable natural resource. In the U.S., the temperate reaction of the Roosevelt Administration is seen as the decisive break with Washington's imperial relationship towards Latin America. Washington "curbed its finance capital," it is said, and downgraded the protection of American overseas private investments. In this paper, HBS professor Noel Maurer explains how the actual historical record diverges substantially from the accepted view. Read More

“An Unfair Advantage”? Combining Banking with Private Equity Investing

Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns? Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers? INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers. Read More

The Role of Institutional Development in the Prevalence and Value of Family Firms

Family firms dominate economic activity in most countries, and are significantly different from other companies in their behavior, structural characteristics, and performance. But what explains the significant variation in the prevalence and value of family firms around the world? The two leading explanations are legal investor protection and institutional development, but cross-country studies are unable to rule out the alternative explanation that cultural norms are what account for these differences. In contrast, China provides an excellent laboratory for addressing this question because it offers great variation in institutional efficiency across regions, yet the country as a whole shares cultural and social norms together with a common legal and regulatory framework. In this paper, HBS professor Belén Villalonga and coauthors study ownership data from a sample of nearly 1,500 publicly listed firms on the Chinese stock market. They conclude that institutional development plays a critical role in the prevalence and value of family firms, and that the differences observed across regions are not attributable to cultural factors. Read More

When Do Analysts Add Value? Evidence from Corporate Spinoffs

The impact of financial analysts on capital market efficiency has been much debated in academia and in practice. A large body of academic research finds that analysts act as important information intermediaries who contribute to the overall efficiency of capital markets. Other research, however, has identified contexts in which the value of analyst coverage may be relatively more limited, such as when analysts face possible conflicts of interest, or when the company or situation they are presented with is especially complex. Still other research questions the informativeness of analyst recommendations in light of regulatory changes. In this paper, HBS doctoral graduate Emilie Rose Feldman and professors Stuart C. Gilson and Belén Villalonga examine 1,793 analyst reports written at the time of corporate spinoffs to determine how much value analysts create as information intermediaries in this setting. Spinoffs provide an interesting context for this purpose because the degree of information asymmetry between corporate insiders and investors is especially high. The paper is one of the first to provide very fine-grained detail on the quantity and types of analyses included in analyst reports. Read More

Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2008-2009 Financial Crisis

The global financial crisis of 2008-2009 has led academics and practitioners to question many widely held beliefs about business and economics. One such belief relates to the value of corporate diversification. Popular views about diversification have swung like a pendulum over the past half-century, from a generally positive view in the 1960s and 1970s, when many large conglomerates were formed, to a generally negative view in the 1980s and early 1990s, when many such conglomerates were dismantled or at least fell out of the stock market's favor. In 2009, in the wake of the global financial crisis, a new view seems to be emerging that conglomerates are ready for a comeback. In this paper, HBS doctoral candidate Venkat Kuppuswamy and professor Belén Villalonga examine whether and why conglomerates have become more valuable during the 2008-2009 financial crisis. They find that they have, and that the increase does not simply reflect changes in investor perceptions but real differences in corporate finance and investment. Read More

Corporate Governance and Internal Capital Markets

What is the impact of corporate ownership on corporate diversification and on the efficiency of firms' internal capital markets? Corporate governance and internal capital markets are two topics closely intertwined in theoretical research; for example, agency problems—which corporate governance mechanisms seek to mitigate in a variety of ways—are at the heart of every theory of inefficient internal capital markets. Yet surprisingly few empirical studies have looked into the actual link between corporate governance and internal capital markets. This paper by University of Amsterdam professor Zacharias Sautner and HBS professor Belén Villalonga seeks to fill the gap by taking advantage of a natural experiment provided by a tax change in Germany in 2002. The researchers provide direct evidence of the effect of governance structures on how markets work, as well as new evidence about the benefits and costs of ownership concentration. Read More

Agency Costs, Mispricing, and Ownership Structure

Under what circumstances do firms access capital markets when the potential for agency costs is high? The prevailing view holds that controlling shareholders sell shares to outsiders only when internal capital is inadequate to fund attractive investment opportunities. While the role of market efficiency in corporate finance has attracted considerable research attention, the interaction of stock market mispricing with agency problems is not well understood. HBS doctoral graduate Sergey Chernenko and professors C. Fritz Foley and Robin Greenwood propose a new explanation—based on stock market mispricing—for why firms with a controlling shareholder raise outside equity, even when firms cannot commit not to expropriate minority shareholders. Read More

Platforms and Limits to Network Effects

Why do platforms that restrict choice and charge higher prices seem to prosper alongside platforms offering cheap or free unlimited choice? In the online dating market, for example, eHarmony deliberately limits the number of candidates available to its customers. Headhunters show only a few candidates to the companies, and even fewer companies to the candidates. In the housing market, brokers limit the number of houses they show to potential buyers and sellers. In this paper, HBS professors Hanna Halaburda and Mikolaj Jan Piskorski challenge conventional understanding of platform competition and network effects by describing a two-sided matching environment and studying the indirect network effects in this environment. They show that the interplay between more choice and more competition influences the strength of network effects and attractiveness of a platform. Some agents may opt for a platform with few choices to avoid higher levels of competition. The researchers' model helps explain why platforms that limit their choice set coexist (and thrive) alongside platforms that offer greater choice. Read More

Unraveling Results from Comparable Demand and Supply: An Experimental Investigation

In many professional labor markets, most entry-level hires begin work at around the same time: for example, soon after graduating from college or graduate or professional school. Despite a common start time, offers can be made and contracts can be signed at any time prior to the start of employment, sometimes well over a year before employment will begin. "Unraveling" happens in markets in which competition for the elite firms and workers is fierce, but the quality of workers may not be reliably revealed until after a good deal of hiring has already been completed. Thus unraveling is sometimes a cause of market failure, particularly when contracts come to be determined before critical information is available. In this paper Muriel Niederle of Stanford, Alvin E. Roth of HBS, and M. Utku Ünver of Boston College consider conditions related to supply and demand that tend to facilitate or mitigate unraveling. Read More

The Job Market for New Economists: A Market Design Perspective

How should the most appropriate employers and job candidates find each other? Newly minted economists typically send applications to an average of 80 potential employers, and as a result, many employers receive hundreds of applications. It is extremely time-consuming to sort through all the applications, and as the process unfolds, there is a risk of coordination failure, in which employers and candidates who would be well-suited do not manage to create a match. In this paper, HBS professors Peter A. Coles and Alvin E. Roth and colleagues provide an overview of the market for new PhD economists and describe new mechanisms to improve the matching process. They conclude by discussing the emergence of platforms for transmitting job market information, and other design issues that may arise in the market for new economists. Read More

Just Say No to Wall Street: Putting A Stop to the Earnings Game

Over the last decade, companies have struggled to meet analysts' expectations. Analysts have challenged the companies they covered to reach for unprecedented earnings growth, and executives have often acquiesced to analysts' increasingly unrealistic projections, adopting them as a basis for setting goals for their organizations. As Monitor Group cofounder Joseph Fuller and HBS professor emeritus Michael C. Jensen write, improving future relations between Main Street and Wall Street and putting an end to the destructive "earnings game" between analysts and executives will require a new approach to disclosure based on a few simple rules of engagement. (This article originally appeared in the Journal of Applied Corporate Finance in the Winter 2002 issue.) Read More

Introductory Reading For Being a Leader and The Effective Exercise of Leadership: An Ontological Model

Effective leadership does not come from mere knowledge about what successful leaders do; or from trying to emulate the characteristics or styles of noteworthy leaders; or from trying to remember and follow the steps, tips, or techniques from books or coaching on leadership. And it certainly does not come from merely being in a leadership position or in a position of authority or having decision rights. This paper, the sixth of six pre-course reading assignments for an experimental leadership course developed by HBS professor emeritus Michael C. Jensen and coauthors, accompanies a course specifically designed to provide actionable access to being a leader and the effective exercise of leadership as one's natural self-expression. Read More

The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930

In 1890, with only 15 percent of the population literate, Brazil had the lowest literacy rate among the large economies in the Americas. Yet between 1890 and 1940, Brazil had the most rapid increase in literacy rates in the Americas, catching up with and even surpassing some of its more educated peers such as Mexico, Colombia, and Venezuela. This jump in literacy was simultaneously accompanied by a brisk increase in the number of teachers, number of public schools, and enrollment rates. Why were political elites in Brazil willing to finance this expansion of public education for all? André Martínez-Fritscher of Banco de México, Aldo Musacchio of HBS, and Martina Viarengo of the London School of Economics explain how state governments secured funds to pay for education and examine the incentives of politicians to spend on education. They conclude that the progress made in education during these decades had mixed results in the long run. Read More

Environmental Federalism in the European Union and the United States

Under what circumstances will individual states take the lead in passing the most stringent environmental regulations, and when will the federal government take the lead? When a state takes a leadership role, will other states follow? HBS professor Michael Toffel and coauthors describe the development of environmental regulations in the U.S. and EU that address automobile emissions, packaging waste, and global climate change. They use these three topics to illustrate different patterns of environmental policymaking, describe the changing dynamics between state and centralized regulation in the United States and the EU. Read More

Audit Quality and Auditor Reputation: Evidence from Japan

High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Read More

Why Do Firms Use Non-Linear Incentive Schemes? Experimental Evidence on Sorting and Overconfidence

The use of "non-linear" performance-based incentive contracts is very common in many business environments. The most well-known example is salesperson compensation, though many other types of performance-based pay, including stock options, bonus systems based on defined metrics, and pay based on subjective performance, often exhibit non-linear characteristics. Research has demonstrated that non-linear incentives are highly distortionary because employees manipulate their work in order to maximize their pay. While some scholars have recommended that companies stop using non-linear incentives, little research has been done to investigate the possible benefits of non-linear schemes. In this paper, HBS professor Ian Larkin and Ross School of Business professor Stephen Leider (HBS PhD '09) explore the role that the behavioral bias of overconfidence may play in explaining the prevalence of non-linear incentive schemes. They conclude that the linearity or non-linearity of an incentive system could play an important role in sorting employees according to their level of confidence; in addition, there may be three possible benefits to having overconfident employees. Read More

The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis

What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Read More

The Economic Crisis and Medical Care Usage

The global economic crisis has taken a historic toll on national economies and household finances around the world. What is the impact of such large shocks on individuals and their behavior, especially on their willingness to seek routine medical care? In this research, Annamaria Lusardi of Dartmouth College, Daniel Schneider of Princeton University, and Peter Tufano of Harvard Business School find strong evidence that the economic crisis—manifested in job and wealth losses—has led to large reductions in the use of routine medical care. Specifically, more than a quarter of Americans reported reducing their use of such care, as did between 5 and 12 percent of Canadian, French, German, and British respondents. Read More

Multinational Strategies and Developing Countries in Historical Perspective

HBS professor Geoffrey Jones offers a historical analysis of the strategies of multinationals from developed countries in developing countries. His central argument, that strategies were shaped by the trade-off between opportunity and risk, highlights how three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third was competition from local firms. Jones explores the impact of these factors on corporate strategies during the three eras in the modern history of globalization from the nineteenth century until the present day. He argues that the performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. The paper highlights in particular the changing nature of political risk faced by multinationals. The era of expropriation has, for the moment, largely passed, but multinationals now experience new kinds of policy risk, and new forms of home country political risk also, such as the Alien Tort Claims Act in the United States. Read More

Location Strategies for Agglomeration Economies

Locations thick with similar economic activity expose firms to pools of skilled labor, specialized suppliers, and potential inter-firm knowledge spillovers that can provide firms with opportunities for competitive advantage. While certainly attractive, the lure of these agglomeration economies varies. Some firms should be wary of aiding their competitors by co-locating with them, for example, because each "agglomeration economy" differs in how readily competitors can leverage contributions made by others. HBS professor Juan Alcácer and Wilbur Chung of the University of Maryland develop a framework to better understand how firms respond to agglomeration economies. Read More

When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge

Entrepreneurial firms rich in knowledge but poor in other resources can use superior architectural knowledge of a technical system to gain strategic advantage over larger and better endowed rivals. This paper presents a model and provides examples showing that architectural knowledge can be applied strategically to change a firm's scope and boundaries, make innovations more or less autonomous, and change the span of problems it must solve. Read More

Local R&D Strategies and Multi-location Firms: The Role of Internal Linkages

While geographic co-location has obvious benefits for firm innovation, it can also have serious drawbacks. HBS professor Juan Alcácer and Ross School of Business professor Minyuan Zhao explore how firms tap into the rich resources of technology clusters while protecting the value of their innovations. To understand R&D dynamics in a cluster, the scholars argue, we must recognize that a firm located in a particular cluster may also be part of an extended network, with its operations strategically integrated across multiple locations and multiple business lines. Read More

Fiduciary Duties and Equity-Debtholder Conflicts

Managerial decisions influence the distribution of value between different parties. This can lead to conflicting interests among financial claimants, such as holders of equity and debt. The Credit Lyonnais v. Pathe Communications bankruptcy ruling of 1991 before the Delaware court—a case widely perceived to have created a new obligation for directors of Delaware‐incorporated firms—provides an interesting opportunity to assess whether and how equity-debt conflict affects firm behavior. HBS professor Bo Becker and Stockholm School of Economics professor Per Strömberg outline important changes in behavior after Credit Lyonnais. Read More

Matching Firms, Managers, and Incentives

Do different kinds of firm ownership drive the adoption of different managerial practices? HBS professor Raffaella Sadun and coauthors focus on the difference between the two most common ownership modes, family firms and firms that are widely held, namely that have no dominant owner. They find that the greater weight attached by family firms to benefits from control induces a conflict of interest between family-firm owners and high-ability, risk-tolerant managers. Read More

Conceptual Foundations of the Balanced Scorecard

This article documents the precursors of the Balanced Scorecard (BSC) strategic performance management tool and describes the evolution of the BSC since its introduction in 1992 in the Harvard Business Review. During the last 15 years, the BSC has been adopted by thousands of private, public, and nonprofit enterprises around the world. HBS professor Robert S. Kaplan, who created the concept and tool with David Norton, explains the roots and motivation for their original article as well as subsequent innovations that connect it to a larger management literature. Read More

The Many Faces of Nonprofit Accountability

Nonprofit leaders face multiple, and sometimes competing, accountability demands: from numerous actors (upward, downward, internal), for varying purposes (financial, governance, performance, mission), and requiring differing levels of organizational response (compliance and strategic). Yet is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. HBS professor Alnoor Ebrahim provides an overview of the current debates on nonprofit accountability, while also examining the tradeoffs inherent in a range of accountability mechanisms. Read More

A Reexamination of Tunneling and Business Groups: New Data and New Methods

"Tunneling" refers to efforts by firms' controlling owner-managers to take money for themselves at the expense of minority shareholders. Looking at emerging economies in general and at India in particular, HBS professor Jordan I. Siegel and doctoral student Prithwiraj Choudhury argue for a simultaneous analysis of corporate governance and strategic activity differences in order to reveal the quality of firm-level corporate governance. The development of rigorous methodology in corporate governance is not merely an academic issue but has enormous real-world consequences. It is critical that scholars gain deeper empirical and theoretical insights into the question of whether these business groups serve primarily as theft devices for the controlling owners, or whether they serve primarily as a positive force that enables the creation of scale and scope efficiencies. Read More

Will I Stay or Will I Go? Cooperative and Competitive Effects of Workgroup Sex and Race Composition on Turnover

Inequalities in the senior ranks by sex and race remain rampant in up-or-out knowledge organizations such as consulting firms, law firms, and universities. HBS professor Kathleen L. McGinn and Wharton School professor Katherine L. Milkman focus on patterns of voluntary and involuntary turnover over six years in one such organization to untangle the multiple ways in which social identity influences career mobility. Predicting that higher proportions of demographically similar supervisors will reduce the likelihood of subordinate turnover, while higher proportions of demographically similar peers will increase the likelihood of turnover, the researchers find evidence of the hypothesized effects. They suggest that integrating research about social cohesion and social comparison enhances understanding of racial and gender inequality within organizations and facilitates organizations' ability to reduce that inequality. Read More

The Determinants of Individual Performance and Collective Value in Private-Collective Software Innovation

Why do people expend personal time and effort toward creating a public good? Over the past decade, collaborative, community-based approaches to developing knowledge-intensive products like encyclopediae, music, and software have gained prominence in both practice and scholarly analysis. "Open source software development," for example, is distinguished by self-selection of distributed participants into tasks, free revealing of knowledge, collective creation of shared software artifacts, and participants' ability to generate new innovations by reinterpreting and repurposing knowledge and artifacts created by others. The MathWorks' Ned Gulley and HBS professor Karim R. Lakhani study the determinants of individual performance and collective value in software innovation by analyzing 11 programming competitions that mimic the working of the open source software community. Read More

Accelerating Innovation In Energy: Insights from Multiple Sectors

How should the energy sector best respond to the threat of climate change? In this introductory chapter to a forthcoming book, Harvard Business School's Rebecca M. Henderson and Richard G. Newell of Duke University frame the discussion by highlighting the volume's contributions concerning four particularly innovative sectors of the U.S. economy: agriculture, chemicals, life sciences, and information technology. These four sectors have been extraordinarily important in driving recent economic growth. Henderson and Newell describe why accelerating innovation in energy could play an important role in shaping an effective response to climate change. Read More

The Evolution of Science-Based Business: Innovating How We Innovate

Science has long been connected to innovation and thus to the business enterprise. However, the nature of the connection between science and business in recent decades has begun to change in important ways. On the one hand, we have witnessed the decline of corporate industrial laboratories. At the same time, we have seen the emergence of a new class of entrepreneurial firms that are deeply immersed in science in sectors like biotech, nanotech, and more recently energy. HBS professor Gary P. Pisano examines the changing nature of the science-business intersection and describes the emergence of a science-based business as a novel organizational form. He also describes the institutional and organizational challenges created by this convergence. Read More

The Mirroring Hypothesis: Theory, Evidence and Exceptions

In its simplest form, the mirroring hypothesis suggests that the organizational patterns of a development project, such as communication links, geographic collocation, and team and firm membership, correspond to the technical patterns of dependency in the system under development. According to the hypothesis, independent, dispersed contributors develop largely modular designs, while richly interacting, collocated contributors develop highly integral designs. Yet many development projects do not conform to the mirroring hypothesis. HBS doctoral graduate Lyra Colfer and professor Carliss Y. Baldwin synthesize observations from a large number of cases that violate the hypothesis to explain when and how development organizations can "break the mirror." Read More

The Architecture of Complex Systems: Do Core-periphery Structures Dominate?

All complex systems can be divided into a nested hierarchy of subsystems. However, not all these subsystems are of equal importance: Some subsystems are core to system performance, whereas others are only peripheral. In this study, HBS professor Carliss Y. Baldwin and coauthors developed methods to detect the core components in a complex software system, establish whether these systems possess a core-periphery structure, and measure important elements of these structures. The general patterns highlight the difficulties a system architect faces in designing and managing such systems. Results represent a first step in establishing stylized facts about the structure of real-world systems. Read More

Investing in Improvement: Strategy and Resource Allocation in Public School Districts

The operating environments of public school districts are largely void of the market forces that reward a company's success with more capital and exert pressure on it to eventually abandon unproductive activities. Stacey Childress describes the strategic resource decisions in 3 of the 20 public school districts that she and colleagues have studied through the Public Education Leadership Project at Harvard. The stories in San Francisco, New York City, and Maryland's Montgomery County occurred largely before the districts faced dramatic decreases in revenues, though they show the superintendents facing budget concerns near the end of the narratives. Even so, the situations share common principles that superintendents and their leadership teams can use to make differentiated resource decisions—reducing spending in some areas and increasing it in others with a clear rationale for why these decisions will produce results for students. Read More

Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results

The need for organizations to both exploit current resources and explore new opportunities is a central and long-standing theme in the literature of organizations. The challenge, of course, is that these two imperatives require very different structures and skills. Exploitation demands a focus on efficiency and effectiveness in executing preset plans and procedures. Exploration requires the ability to step outside these routines by emphasizing experimentation, creativity, and novelty. In this study, HBS professor Robert L. Simons focuses on the relationship between two organization design variables—span of control and span of accountability. Using data from 102 field studies, he illustrates how these variables can be manipulated by managers to tilt the balance toward either exploration or exploitation in response to different tasks, different organizational contexts, and changing competitive environments. Read More

Does Product Market Competition Lead Firms To Decentralize?

There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. Nicholas Bloom, HBS professor Raffaella Sadun, and John Van Reenen assembled a new data set on about 4,000 firms across 12 countries in Europe, North America, and Asia, and then measured the delegation of authority from central headquarters to local plant managers. Read More

Labor Regulations and European Private Equity

Recent theoretical models predict that countries with stricter labor policies will specialize in less innovative activities due to the higher worker turnover frequently associated with rapidly changing sectors. HBS visiting scholar Ant Bozkaya and HBS professor William R. Kerr examine how differences in labor regulations across European countries influence the development of private equity markets, comprised of venture capital and buy-out investors. In so doing, the researchers provide the first empirical evidence for this theoretical prediction at the industry level in the entrepreneurial finance literature. They also make a methodological contribution by demonstrating how jointly modeling the different policies for providing worker insurance delivers more consistent results than their individual relationships would indicate by themselves. Read More

Competing Ad Auctions

Joining ad platforms can attract substantial regulatory attention: In November 2008, the Department of Justice planned to file antitrust charges to stop the proposed Google-Yahoo transaction. More recently, in September 2009, the Department of Justice sought additional information from Microsoft and Yahoo about their proposed partnership. At first glance it might seem paradoxical to claim that the Google-Yahoo transaction is undesirable, for advertisers and for the economy as a whole, while the Microsoft-Yahoo transaction offers net benefits. But that conclusion is entirely possible. HBS professor Benjamin G. Edelman and doctoral candidates Itai Ashlagi and Hoan Soo Lee explore competition among ad platforms that offer search engine advertising services. In addition, the authors evaluate possible transactions among ad platforms—building tools to predict which transactions improve welfare and which impede it. Read More

Going Through the Motions: An Empirical Test of Management Involvement in Process Improvement

How can managers better lead their organizations to improve work processes? Describing their study of hospitals over an 18-month period, HBS professor Anita L. Tucker and Harvard School of Public Health professor Sara J. Singer detail how and why managers' taking action was more effective than their communicating about actions taken. Findings suggest, first, that taking action on known problems in specific work areas on at least a quarterly basis may improve the organizational climate for improvement. Second, the study indicates that managers would be well advised to take action-preferably substantive and intense action-in response to frontline workers' communications about problems. Overall, the research provides insight for senior managers who want to improve their organization's climate for process improvement. Read More

Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions

Reserve prices may have an important impact on search advertising marketplaces. But the effect of reserve prices can be opaque, particularly because it is not always straightforward to compare "before" and "after" conditions. HBS professor Benjamin G. Edelman and Yahoo's Michael Schwarz use a pair of mathematical models to predict responses to reserve prices and understand which advertisers end up paying more. Read More

Private Equity and Industry Performance

In response to the global financial crisis that began in 2007, governments worldwide are rethinking their approach to regulating financial institutions. Among the financial institutions that have fallen under the gaze of regulators have been private equity (PE) funds. There are many open questions regarding the economic impact of PE funds, many of which cannot be definitively answered until the aftermath of the buyout boom of the mid-2000s can be fully assessed. HBS professor Josh Lerner and coauthors address one of these open questions, by examining the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. In particular, they look at the relationship between the presence of PE investments and the growth rates of productivity, employment, and capital formation. Read More

International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination

Are small headquarters more nimble and efficient than large ones? Not necessarily, according to HBS adjunct professor David Collis and coauthors David Young and Michael Goold. Even within a single industry in one country, the variance can be enormous: In Germany in the late 1990s, for instance, Hoechst, the chemical and pharmaceutical manufacturer, had only 180 people in the headquarters function at the same time that Bayer had several thousand. This paper seeks to fill gaps in the research by using a unique database of over 600 companies in seven countries to determine whether systematic differences in the size and roles of corporate headquarters between countries actually exist, and if so, how they differ. In particular, the authors examine whether there is a systematic difference between market- and bank-centered economies, and between developed and developing countries. Read More

The Global Agglomeration of Multinational Firms

(Paper formerly titled "The Global Networks of Multinational Firms.") When and why do multinationals group together overseas? Do they agglomerate in the same fashion abroad as they do at home? An answer to these questions is central to the long-standing debate over the consequences of foreign direct investment (FDI). It is critical to understand interdependencies of multinational networks and how multinationals influence one another in their activities at home and overseas. HBS professor Laura Alfaro and George Washington University professor Maggie Chen examine the global network of multinationals and study the significance and causes of multinational agglomeration. Their results provide further evidence of the increasing separation of headquarters services and production activities within multinational firms. The differential specialization of headquarters and subsidiaries leads to distinct patterns of agglomeration. Read More

Integrity: Without It Nothing Works

"An individual is whole and complete when their word is whole and complete, and their word is whole and complete when they honour their word," says HBS professor Michael C. Jensen in this interview that appeared in Rotman: The Magazine of the Rotman School of Management, Fall 2009. Jensen (and his coauthors, Werner Erhard and Steve Zaffron) define and discuss integrity ("a state or condition of being whole, complete, unbroken, unimpaired, sound, in perfect condition"); the workability that integrity creates for individuals, groups, organizations, and society; and its translation into organizational performance. He also discusses the costs of lacking integrity and the fallacy of using a cost/benefit analysis when deciding whether to honor your word. Read More

The End of Chimerica

For the better part of the past decade, the world economy has been dominated by a unique geoeconomic constellation that the authors call "Chimerica": a world economic order that combined Chinese export-led development with U.S. overconsumption on the basis of a financial marriage between the world's sole superpower and its most likely future rival. For China, the key attraction of the relationship was its potential to propel the Chinese economy forward by means of export-led growth. For the United States, Chimerica meant being able to consume more, save less, and still maintain low interest rates and a stable rate of investment. Yet, like many another marriage between a saver and a spender, Chimerica was not destined to last. In this paper, economic historians Niall Ferguson of HBS and Moritz Schularick of Freie Universität Berlin consider the problem of global imbalances and try to set events in a longer-term perspective. Read More

State Owned Entity Reform in Absence of Privatization: Reforming Indian National Laboratories and Role of Leadership

Is privatization necessary? In India and across emerging markets, state-owned entities (SOEs) continue to make up a large proportion of industrial sales, yet they lag behind private counterparts on performance measures. But SOEs may be able to significantly improve performance even in the absence of property rights, according to HBS doctoral candidate Prithwiraj Choudhury and professor Tarun Khanna. As they document, 42 Indian state-owned laboratories started from a base of negligible U.S. patents, yet in the period 1993-2006 (during which the Indian government launched an ambitious privatization program), the labs were granted more patents than all domestic private firms combined. The labs then licensed several of these patents to multinationals, and licensing revenue increased from 3 percent to 15 percent as a fraction of government budgetary support. Findings are relevant to firms and R&D entities around the world that depend on varying degrees of government budgetary support and government control, especially in emerging markets like India, where SOEs control up to one-third of all industrial activity. Read More

Mental Health in the Aftermath of Conflict

Wars are detrimental to the populations and the economy of affected countries. Over and above the human cost caused by deaths and suffering during a time of conflict, survivors of conflict are often left in poor economic circumstances and mental-health distress even after the conflict ends. How large are these costs? How long does it take for conflict-affected populations to recover from the mental stress of conflict? What policies are appropriate to assist mental health recovery? While considerable attention has been paid to post-war policies with regard to recovery in physical and human capital, mental health has received relatively less attention. The World Bank's Quy-Toan Do and HBS professor Lakshmi Iyer review the nascent literature on mental health in the aftermath of conflict, discuss the potential mechanisms through which conflict might affect mental health, and illustrate the findings from their study of mental health in a specific post-conflict setting: Bosnia and Herzegovina. Read More

Walking the Talk in Multiparty Bargaining: An Experimental Investigation

Talk can unite, but it can also divide. In multiparty bargaining, communication can focus parties on a fair distribution of resources, but it can also focus parties on a competitive distribution of resources. As HBS professor Kathleen L. McGinn and coauthors Katherine L. Milkman and Markus Nöth show through experiments, at the onset of interaction the dominant logic in discussions—be it fairness or competition—strongly influences the equality of payoffs even in complex, full-information multiparty bargaining. Increases in the relative frequency of talk about fairness are associated with payoffs closer to an equal split. Talk about competitive reasoning has the opposite effect, driving payoffs away from an equal division, though these effects are less consistent than fairness talk effects. The researchers' results add critical insights to our understanding of the role of communication in multiparty bargaining. Read More

Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation

We are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. In addition to the model of producer-based design—the idea that most important designs for innovations would originate from producers and be supplied to consumers via goods and services that were for sale—two increasingly important models are innovations by single user firms or individuals, and open collaborative innovation projects. Each of these three models represents a different way to organize human effort and investments aimed at generating valuable new innovations. HBS professor Carliss Y. Baldwin and MIT Sloan School of Management professor Eric von Hippel analyze the three models in terms of their technological properties, specifically their design costs and architectures, and their communication requirements. The researchers argue that as design and communication costs decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. These two models will present an increasing challenge to the traditional paradigm of producer-based design—but, when open, they are good for social welfare and should be encouraged by policymakers. Read More

The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making

Gandhi once wrote that "a certain degree of physical harmony and comfort is necessary, but above a certain level it becomes a hindrance instead of a help." This observation raises interesting questions for psychologists regarding the effects of luxury. What psychological consequences do luxury goods have on people? In this paper, the authors argue that luxury goods can activate the concept of self-interest and affect subsequent cognition. The argument involves two key premises: Luxury is intrinsically linked to self-interest, and exposure to luxury can activate related mental representations affecting cognition and decision-making. Two experiments showed that exposure to luxury led people to think more about themselves than others. Read More

From Strategy to Business Models and to Tactics

Drivers such as globalization, deregulation, or technological change, just to mention a few, are profoundly changing the competitive game. Scholars and practitioners agree that the fastest-growing firms in this new environment appear to have taken advantage of these structural changes to compete "differently" and innovate in their business models. However, there is not yet agreement on what are the distinctive features of superior business models. This dispute may have arisen, in part, because of a lack of a clear distinction between the notions of strategy, business model, and tactics. HBS professor Ramon Casadesus-Masanell and Joan Enric Ricart present an integrative framework to distinguish and relate the concepts of business model, strategy, and tactics. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

“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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

The Impact of Private Equity Ownership on Portfolio Firms’ Corporate Tax Planning

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

Fluid Teams and Fluid Tasks: The Impact of Team Familiarity and Variation in Experience

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

Performance Pressure as a Double-Edged Sword: Enhancing Team Motivation While Undermining the Use of Team Knowledge

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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 US 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. Read More

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. Read More

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). Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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." Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

The Artful Dodger: 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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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 other 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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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). Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

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. Read More

“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 u