Economics →
- 12 Mar 2009
- Working Paper Summaries
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. Key concepts include: A changing covariance between nominal and real variables is of central importance in understanding the term structure of nominal interest rates. Analyses of asset allocation traditionally assume that broad asset classes have a stable structure of risk over time; these new results, however, suggest that in the case of nominal bonds, at least, this assumption is seriously misleading. Closed for comment; 0 Comments.
- 05 Mar 2009
- Working Paper Summaries
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. Key concepts include: When advertisers and ad platforms evaluate payment metrics, it seems they currently focus on effects on parties' incentives. For example, parties recognize that if billing is proportional to the number of measured clicks, then click fraud would expose advertisers to unwarranted advertising expense. With such constraints in mind, parties attempt to balance the various competing incentives. We propose an additional factor advertisers and ad platforms ought to consider: which advertisers are systematically most likely to favor which payment metrics. Averages that fail to condition on advertisers' choices may badly misestimate an advertiser's true characteristics—causing the platform to select ads that later prove to be ill-advised. Readers with suggestions are invited to contact Professor Edelman and Hoan Soo Lee. Closed for comment; 0 Comments.
- 26 Feb 2009
- Research & Ideas
Podcast: Preventing Future Financial Failures
Professor David Moss says we need ongoing federal regulation of the few "systemically significant" institutions whose demise could threaten financial stability. Closed for comment; 0 Comments.
- 23 Feb 2009
- Research & Ideas
Creative Entrepreneurship in a Downturn
Entrepreneurs, take heart. True, the global economic malaise removes opportunities and precious resources—but also adds them in new and interesting ways, argues HBS senior lecturer Bhaskar Chakravorti. In this Q&A he identifies reasons for optimism, and shows how entrepreneurs can think differently about bad news. Key concepts include: There are three fundamental decisions facing any business in good times and bad: where to play, how to deliver, and how to win. Entrepreneurs should systematically identify "downturn needs," including necessities and affordable luxuries, substitutions for previous products and services, and products that deliver value for money. To serve these needs, look for downtime resources that might be available at relatively low cost. Think business model, says Chakravorti. Consider the unintended consequences of cost cutting, and instead focus holistically on the interconnected parts of your entire business model. Closed for comment; 0 Comments.
- 20 Feb 2009
- Working Paper Summaries
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. Key concepts include: Domestic saving is more critical for adopting new technologies in developing rather than developed economies. Familiarity with the technology frontier reduces its cost of adoption. Advanced countries readily adopt the frontier technology, but for countries far from the technology frontier, it is too expensive to adopt such technology without outside help. Entrepreneurs in these countries need to rely on foreign investors. However, domestic entrepreneurs may not deliver on their input contribution unless they have invested sufficient capital in the project. This co-investment is in turn financed out of domestic saving, highlighting the role of domestic saving in economic growth. Closed for comment; 0 Comments.
- 04 Feb 2009
- Working Paper Summaries
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. Key concepts include: Unravelling prevails in certain markets because some employers see a better chance to hire their most-preferred candidates when they contract early than when they wait. Unravelling becomes more likely as firms' preferences over workers grow more similar. This is the case because when firms' preferences are very similar, lower-ranked firms can be matched with their most-preferred workers only by contracting with them early. Despite insufficient information in the first period, it may be worthwhile for lower-ranked firms to bear the risk and contract early. The firms most likely to unravel are those "in the middle"—bad enough to prefer the uncertainty of early contracting, but good enough to be accepted. From a policy standpoint, a mechanism that precludes unravelling is preferable in some circumstances. Closed for comment; 0 Comments.
- 29 Jan 2009
- Working Paper Summaries
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. Key concepts include: Technology adoption decisions by firms are a powerful force in propagating shocks and making their effects very persistent. This explains why shocks that lasted for about three years generated a productivity slowdown over a decade. This same model accounts for economic fluctuations in the U.S. In light of this, a critical factor to predict the macro consequences of the current financial crisis in the U.S. is the persistence of the shocks. Since the current shocks are unlikely to last for three years or so, it is unlikely that the U.S. experiences a "lost decade." Closed for comment; 0 Comments.
- 22 Jan 2009
- Working Paper Summaries
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. Key concepts include: The performance of publicly-traded U.S. firms has become much more volatile over the past three decades. Rising turbulence in sales among U.S. firms has raised their workers' wage volatility, increasing wage risks for many workers. Workers' average pay is more volatile in firms that have experienced higher turbulence in sales. This is true even after controlling for firm characteristics, including average wage, average profits, size, age, or firm-specific fixed effects. Evidence of a correlation between firm and wage volatility does not reflect reorganization within companies. The effect is strong and has grown markedly since the 1980s. This reflects an increasing reliance of compensation schemes that put a larger weight on the firm performance. Closed for comment; 0 Comments.
- 20 Jan 2009
- Research & Ideas
Risky Business with Structured Finance
How did the process of securitization transform trillions of dollars of risky assets into securities that many considered to be a safe bet? HBS professors Joshua D. Coval and Erik Stafford, with Princeton colleague Jakub Jurek, authors of a new paper, have ideas. Key concepts include: Over the past decade, risks have been repackaged to create triple-A-rated securities. Even modest imprecision in estimating underlying risks is magnified disproportionately when securities are pooled and tranched, as shown in a modeling exercise. Ratings of structured finance products, which make no distinction between the different sources of default risk, are particularly useless for determining prices and fair rates of compensation for these risks. Going forward, it would be best to eliminate any sanction of ratings as a guide to investment policy and capital requirements. It is important to focus on measuring and judging the system's aggregate amount of leverage and to understand the exposures that financial institutions actually have. Closed for comment; 0 Comments.
- 26 Nov 2008
- Working Paper Summaries
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. Key concepts include: The connections between states through both economic and social/cultural IGOs are positive and important influences on which states receive FDI from which other states. The network forged by international organizations is massively and increasingly influential in domestic and international governance. The interrelationship between domestic and international governance is more complex than previous accounts have recognized. Closed for comment; 0 Comments.
- 06 Nov 2008
- Op-Ed
Selling Out The American Dream
The American Dream has been transformed from an embodiment of the country's core values into a crass appeal to materialism and easy gratification. One result: the current economic crisis, says professor John Quelch. The federal government isn't helping. Key concepts include: Underpinning the collapse of the housing bubble is a demand-side problem: the American Dream hijacked. Politicians on both sides have been equally culpable in defining the American Dream in material terms. Marketers also took advantage. Citizens who acted responsibly have seen the values of their homes and 401(k) plans collapse. Those who acted irresponsibly have barely been inconvenienced. Closed for comment; 0 Comments.
- 29 Oct 2008
- Research & Ideas
The Next Marketing Challenge: Selling to ’Simplifiers’
The mass consumption of the 1990s is fast fading in the rearview mirror. Now a growing number of people want to declutter their lives and invest in experiences rather than things. What's a marketer to do, asks professor John Quelch. Key concepts include: As the world economy slumps, one consumer segment will grow faster than ever: The Simplifiers. Simplifiers present a challenge to marketers. These are well-off people who value quality over quantity and who do not buy proportionately more goods as their net worth increases. Dining out, foreign travel, and learning a new sport will all prove more resilient than expected in the face of recession. Closed for comment; 0 Comments.
- 23 Oct 2008
- Working Paper Summaries
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. Key concepts include: The general view on immigration overstates the adverse effects of immigration on natives of the host countries in terms of labor market or wage displacement. Immigrants' use of social benefits varies widely across countries, as does the degree of assimilation into or out of the host country's welfare system. Immigration is generally viewed as a large fiscal burden for European public sectors (or as a possible savior if correctly harnessed). Most empirical studies, however, estimate the fiscal impacts of immigration to be relatively small. Closed for comment; 0 Comments.
- 16 Oct 2008
- Working Paper Summaries
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. Key concepts include: This paper's main contribution is in delineating a boundary condition for the emergence of a well-known cognitive bias. Taken together, results suggest that qualitatively different processes are engaged when people encounter information sequentially over time. Closed for comment; 0 Comments.
- 29 Sep 2008
- Research & Ideas
Financial Crisis Caution Urged by Faculty Panel
Dean Jay O. Light and a group of Harvard Business School faculty explored the origins and possible outcomes of the U.S. financial crisis at a recent "Turmoil on the Street" panel. Closed for comment; 0 Comments.
- 23 Sep 2008
- Working Paper Summaries
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. Key concepts include: Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well suited to capturing such "nonlinearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk. Closed for comment; 0 Comments.
- 29 Aug 2008
- Working Paper Summaries
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. Key concepts include: By matching bowl games later, the quality of the matched teams has improved, the likelihood of a championship game has increased, and the television viewership of all bowls in the late-matching consortia has increased. This paper may provide the first direct evidence and measurement of the inefficiency due to early transaction times in a naturally occurring market. Closed for comment; 0 Comments.
- 20 Aug 2008
- Op-Ed
The Time is Right for Creative Capitalism
Bill Gates has it right. Business is the most powerful force for change in the world right now and gives the idea of creative capitalism real power, writes Harvard Business School Professor Nancy F. Koehn. Open for comment; 0 Comments.
- 01 Aug 2008
- Research & Ideas
Does Market Capitalism Have a Future?
Does capitalism have a future? That intriguing topic was the subject of an HBS faculty colloquium led by professor Joe Bower, with fellow faculty members Dutch Leonard, David Moss, and Lynn Pain. Closed for comment; 0 Comments.
Marketing After the Recession
This downturn has likely changed people's buying habits in fundamental ways. Professor John Quelch discusses why marketers must start planning today to reach consumers after the recession. Key concepts include: Marketers must think through how the recession has changed consumer preferences and what they think of your brand. Start preparing today by, among other steps, focusing on high-potential customers, assessing your brands, and developing scenarios. Closed for comment; 0 Comments.