- 22 May 2007
- Working Paper Summaries
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. Key concepts include: Entrepreneurs from less-trusted groups—in this study, African-Americans—found it more difficult to overcome trust barriers. Trust can act as a barrier to entry for new firms and products because trust makes existing relationships more productive. Trust in current suppliers is a particularly strong deterrent to entry if the product is associated with a less-trusted group. Information from an intermediary organization, in this case a national industry association, can neutralize the negative impact of trust. Trust in institutions is therefore a valuable substitute for interpersonal trust. Closed for comment; 0 Comments.
- 18 May 2007
- Working Paper Summaries
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. Key concepts include: Contrary to some research, the chief privacy concern appears based on data use, not data itself. There is consumer demand for social control that focuses on data use. Sophisticated consumers care about economic context and indirect economic effects. Closed for comment; 0 Comments.
- 18 May 2007
- Working Paper Summaries
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. Key concepts include: The availability of Spanish-language local television news significantly boosts Hispanic voter turnout. Regulatory policies should protect local media. Closed for comment; 0 Comments.
- 17 May 2007
- Working Paper Summaries
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. Key concepts include: Findings were consistent with conventional wisdom: The price and cost of capital in poor countries is high. Given that most countries import the bulk of their machinery equipment from a small number of industrialized countries, investment distortions might be a factor in the observed differences in physical capital intensity across countries. Higher prices might inhibit the diffusion of technologies from rich to poor countries. Closed for comment; 0 Comments.
- 16 May 2007
- Working Paper Summaries
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. Key concepts include: Official reports of deficits dramatically influence policy decisions while diverting attention from fundamental and meaningful measures of fiscal policy. Analyses based on standard fiscal measures and on derivative measures such as disposable income, private asserts, and personal saving represent exercises in linguistics, not economics. Closed for comment; 0 Comments.
- 16 May 2007
- Working Paper Summaries
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. Key concepts include: FDI at the industry level is associated with higher growth in value added. The relation is stronger for industries with higher skill requirements and for industries more reliant on external capital. FDI quality is associated with positive and economically significant growth. More research on the consequences of FDI is needed before promoting FDI. Closed for comment; 0 Comments.
- 15 May 2007
- Working Paper Summaries
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. Key concepts include: Oil-driven bonuses in foreign aid from wealthy Arab oil producers to poor Muslim countries were mostly consumed on imported non-capital goods. The aid crowded out domestic savings and did little to attract foreign investment. Long-term economic growth was unaffected. The popular critique that aid is "wasted" did not jibe with the data. Every component of the domestic economy, including investment, was raised in the short term. Foreign aid may be an effective tool of fiscal policy that can be used to smooth the business cycle in developing countries. But a challenge remains: How can the temporary stimulus be converted into lasting economic growth? Closed for comment; 0 Comments.
- 15 May 2007
- Working Paper Summaries
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. Key concepts include: Consumers spend less and order a higher percentage of "should" items and a lower percentage of "want" items the further in advance of delivery they place a grocery order. Encouraging people to order their groceries up to 5 days in advance of consumption could influence the healthfulness of the foods that people consume. Similarly, asking students in schools to select their lunches up to a week in advance could considerably increase the healthfulness of the foods they elect to eat. Online and catalog retailers that offer a range of goods as well as different delivery options might be able to improve their demand forecasting by understanding these findings. Closed for comment; 0 Comments.
- 13 Apr 2007
- Working Paper Summaries
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. Key concepts include: This model can be used to benchmark retailers' performance in sales, inventory, and gross margin simultaneously. The model can also be used to generate sales forecasts even when sales were managed using inventory and gross margin. Closed for comment; 0 Comments.
- 12 Apr 2007
- Working Paper Summaries
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. Key concepts include: Throughout his career, Clark has brought fresh insights to old questions and opened up new territories of research. He helped to replace Frederick Taylor's scientific management principles with the dynamic concepts of continual learning and learning organizations. Clark showed how product development could be actively managed for greater efficiency and effectiveness. He developed a theory of the embedding of knowledge in organizations, which he used to explain why established firms often fail in the face of "seemingly minor innovations." He showed how changes in the modular structure of products and processes could bring about fundamental change in the structure of industries. Finally, in Clark's later works, he built bridges from design theory to user innovation, transaction- and knowledge-based theories of the firm, and strategy. Closed for comment; 0 Comments.
- 15 Mar 2007
- Working Paper Summaries
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. Key concepts include: A worker's social position is an important condition for their likelihood of initiating important new projects in organizations. Social position is a deciding factor in which types of changes may be made. Within the spectrum of social positions, the characteristics of people who are more likely to initiate such new projects are quite different depending on the type of change project that is considered. Closed for comment; 0 Comments.
- 13 Feb 2007
- Working Paper Summaries
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. Key concepts include: When an enterprise technology is required, so is an electronic hierarchy. Future research could reveal if there is a general pattern in relationship-specific investments and how entities other than powerful incumbent firms can successfully build electronic hierarchies. Future research could also help define the full spectrum of IT-based interactions and the appropriate governance mechanisms for each. Closed for comment; 0 Comments.
- 12 Feb 2007
- Working Paper Summaries
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. Key concepts include: Adding a physical retail store to existing direct sales channels increases firm sales in the long run, as sales from the new store are incremental to sales from direct channels, which show little long term damage from channel competition. Adding channels produces both cannibalizing and complementary effects which operate in tandem and vary over time. Cannibalization occurs in the short term following the addition of a new channel, while complementarity takes time to manifest itself. Retail store openings cannibalize direct channel sales in the short term if physical stores do not already exist in the retail trading area, but produce complementary effects which overcome the losses from cannibalization in the long run. Our results suggest the underlying consumer shopping behavior driving this result. The opening of a retail store may induce some existing direct channel customers to switch their purchases to the retail store; simultaneously, new customers are attracted to the direct channels, perhaps due to a branding effect stemming from the publicity surrounding the new store which makes customers more aware of and more comfortable with the firm's direct channel operations. Use caution extrapolating these results to other retailers. This study involved only store openings by a single retailer with a well established and respected brand into markets where the retailer did not previously have stores. Direct retailers with less established brands may benefit even more than this retailer from branding effects by opening a new store. Closed for comment; 0 Comments.
- 09 Feb 2007
- Working Paper Summaries
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. Key concepts include: KLD ratings for environmental "concerns," such as hazardous waste and regulatory problems, have small but statistically significant effects in predicting future emissions and regulatory violations. KLD ratings for environmental "strengths," such as environmentally beneficial products or pollution prevention, do not predict future environmental outcomes. Most, but not all, of the predictive power of KLD ratings is due to the fact that lagged emissions and regulatory violations predict both lagged KLD ratings and future emissions and regulatory violations. KLD expends substantial resources attempting to measure the quality of companies' environmental management systems. The results suggest that this measurement is difficult to do well. Closed for comment; 0 Comments.
- 08 Feb 2007
- Working Paper Summaries
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. Key concepts include: Supporting firms' focus on best practice, information about successes is typically more useful than information about failures. Past successes can guide future successes, while past failures only point out certain pitfalls. Recording mediocre know-how can be counter-productive by inefficiently reducing employees' incentive to experiment. Larger firms with high turnover potentially gain the most from knowledge systems, but should also be the most selective when encoding information. The framework in this paper can be used to explore other questions on knowledge management. As knowledge management continues to grow in importance, a systematic economic perspective may shed important insights. Closed for comment; 0 Comments.
- 07 Feb 2007
- Working Paper Summaries
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. Key concepts include: Opening up problem information to a large group of outsiders can yield innovative technical solutions, increase the probability of success in science programs, and ultimately boost research productivity. Open source software communities provide a model for improving the process of solving scientific problems. Outsiders can see problems with fresh eyes; in this study, problems were solved by independent scientists with expertise at the boundary of or even outside their field. Achieving true openness and collaboration will require change in the mindsets of both scientists and lab leadership. Closed for comment; 0 Comments.
- 02 Feb 2007
- Working Paper Summaries
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. Key concepts include: Employment protection regulations lead to reductions in firm employment changes. These regulations are also associated with lower firm productivity and entry rates, consistent with the regulations distorting production choices. These results require further verification as the employment growth following the regulations appears implausibly large. Closed for comment; 0 Comments.
- 01 Feb 2007
- Working Paper Summaries
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. Key concepts include: "Stars"—highly cited and specialist inventors—experienced significantly less career mobility once noncompetes began to be enforced. The networks of small companies so crucial to Silicon Valley's growth would be less likely to develop in regions that enforce noncompetes. Policy planners must decide when the interests of incumbent firms outweigh those of individual careers and possibly regional development. Closed for comment; 0 Comments.
- 31 Jan 2007
- Working Paper Summaries
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. Key concepts include: Economic logic lies behind preventable disasters that range from accounting scandals to the many avoidable deaths resulting from the U.S. organ donation system. Creating wise policies in society means updating our understanding of unconscious or unintentional processes in decision making and recognizing how social science today is based on rigorous science. Economic logic plays an important role in the policy-making process, but it should not be used at the expense of other social science knowledge. A smoking gun is not necessary to show that an institution is set up to encourage wrongdoing. For behavior-decision reasons, organizations are likely to prefer a status quo. Too often, when it comes to public policy, the status quo either prevails or inappropriately influences future activity. Closed for comment; 0 Comments.
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. Key concepts include: As economists are more often asked to design practical markets and allocation mechanisms, they will increasingly navigate two-way feedback between theory and design. The paper raises new theoretical questions. It would be helpful to have answers before the next major design or redesign of school matching systems. Closed for comment; 0 Comments.