Government and Politics →
- 22 Jun 2009
- Research & Ideas
“Too Big To Fail”: Reining In Large Financial Firms
Four little words have cost U.S. taxpayers dearly in government bailouts of once-mighty Wall Street firms. Congress can put an end to such costly rescues, says HBS professor David A. Moss, and the Federal Reserve could be a super regulator, adds senior lecturer Robert C. Pozen. But will Congress enact the regulatory cure that is required? From the HBS Alumni Bulletin. Key concepts include: No firm should be too big to fail. The federal government should slap tough new regulations on all firms that pose "systemic risk"—the risk that a failure of one institution could wreak havoc across the entire financial system. The majority of financial firms that pose no systemic risk should face relatively light regulation, ensuring their continued dynamism and innovation. Not everyone on the politically divided Congressional Oversight Panel agrees with Moss's analysis and recommendations. The general concept of regulating systemic risk has gained broad support from a wide range of influential economists, lawmakers, and interest groups. Closed for comment; 0 Comments.
- 18 Jun 2009
- Working Paper Summaries
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. Key concepts include: Politically connected firms with more extensive outsourcing activities had more income-decreasing discretionary accruals in the two calendar quarters immediately preceding the 2004 congressional elections. The use of accounting discretion to manage political costs is potentially more evolved than currently discussed in academic literature. Closed for comment; 0 Comments.
- 15 Jun 2009
- Research & Ideas
GM: What Went Wrong and What’s Next
For decades, General Motors reigned as the king of automakers. What went wrong? We asked HBS faculty to reflect on the wrong turns and missed opportunities of the former industry leader, and to suggest ideas for recovery. Closed for comment; 0 Comments.
- 04 May 2009
- Working Paper Summaries
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. Key concepts include: Ensure financial stability in the future by identifying and regulating systemically significant institutions on an ongoing basis, before crisis strikes. The biggest risk management problem we face today in the financial sector is not commercial banks, but rather systemically significant institutions that pose a threat to the broader financial system (because of their size and interconnectedness) and, as a result, carry implicit federal guarantees. The fifty years of relative financial calm that followed the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, and the Banking Act of 1935 strongly suggest that sound public risk management can make a positive difference. To the extent that systematically significant financial institutions will receive federal support in the event of a general financial crisis, such support should be formalized (and paid for) in advance. Although all government guarantees can generate moral hazard, implicit guarantees are often the worst kind. Closed for comment; 0 Comments.
- 22 Apr 2009
- Working Paper Summaries
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. Key concepts include: An open question is whether the current "pharmacy to the world" of the United States will lose ground to competitors from developing countries, especially India and China. Regulation plays a role in the success and failure of the pharmaceutical industry. The consumer mode that has emerged in the United States has proven easy to manipulate for the industry, as in cases of corporate-financed organizations claiming to be self-organized by patients. The consumer mode in the United States has also driven a focus on disease prevalent in wealthy countries, to the detriment of research into HIV/AIDS, malaria, and other ailments prevalent in the developing world. The combination of public attention to drug prices, health concerns from product withdrawals due to adverse reactions, and criticisms of the failure to deliver medicines to patients in developing countries pose significant challenges to the industry and regulators. The emergence of a consumer model of regulation poses a number of critical, unresolved questions about the longer-term role of government, industry, the medical profession, and citizens. Closed for comment; 0 Comments.
- 20 Apr 2009
- Working Paper Summaries
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. Key concepts include: A majority of World Bank member countries never or rarely get a seat at the table. The Executive Board is used as a platform to channel more or greater Bank loans and grants to the home countries of the directors. Countries receive a large increase in Bank loans and grants during years when they have a seat on the board. On average, a developing country serving on the board can expect a doubling of its normal funding levels. In absolute terms, board membership is rewarded with a nearly $60 million bonus, on average. Finding that countries can take advantage of their position of power has implications for other international appropriations committees like the European Union, International Monetary Fund, regional development banks, and United Nations agencies. Closed for comment; 0 Comments.
- 03 Apr 2009
- Working Paper Summaries
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. Key concepts include: The CDVC framework allows one to outline and analyze the process of care delivery for a medical condition and provide maximize value for patients. The CDVC framework can map the activities associated with HIV/AIDS care delivery in resource-poor settings to illuminate effective linkage and coordination. The CDVC framework allows synthesis of knowledge about the overall system of care delivery and provides a common language for improving it. Closed for comment; 0 Comments.
- 26 Mar 2009
- Working Paper Summaries
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. Key concepts include: Since 2001, incidents of terrorism and associated fatalities have been rising steadily in South Asia. The increasing trend in incidents of terrorism and associated fatalities is observed primarily in the economically lagging regions of South Asia. There is a clear difference in conflict trends in leading and lagging regions. Economic backwardness can have adverse security consequences in the long run. Global events are likely to increase conflict within individual countries. Closed for comment; 0 Comments.
- 24 Mar 2009
- Working Paper Summaries
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. Key concepts include: There is no clear evidence of significant negative impacts on domestic investment or employment due to the overseas activities of firms. Foreign activity by multinational firms does not necessarily displace domestic economic activity. Other factors—such as falling prices of investment goods, and/or trade patterns—may have driven the employment changes that are so worrisome. When policymakers decide the appropriate taxation of multinational firms, they should resist the tempting logic of protectionism. Closed for comment; 0 Comments.
- 11 Mar 2009
- HBS Case
The Energy Politics of Russia vs. Ukraine
A recent Harvard Business School case looks at Russia's decision in 2006 to cut off supply of natural gas to Ukraine's energy company—a move repeated this year. Is Russia just an energy bully? Students of professor Rawi Abdelal learn there is nothing black and white when it comes to Russia's energy politics. From HBS Alumni Bulletin. Key concepts include: The Western notion that Russia uses energy as a weapon is a media oversimplification of very complicated politics. Gazprom is the country's single most important company and biggest taxpayer. Because natural gas is much cleaner than oil or coal, Europe will likely become even more dependent on Russian gas. Energy can be a tool for influence but it's not an effective tool for domination. Russia will be in trouble if Europe decides to stop buying Russian gas. Closed for comment; 0 Comments.
- 04 Mar 2009
- Op-Ed
Credit is Not the Bogey
"As we attempt to jump-start the economy of 2009, we should recognize both the risks and the advantages inherent in a robust credit industry," write HBS lecturer Nicolas P. Retsinas and Eric S. Belsky. The director and executive director, respectively, of Harvard University's Joint Center for Housing Studies, they offer a prescription for making credit neither too easy nor too hard to get. Key concepts include: It is time to recalibrate the country's access to credit. Tight credit threatens to shut the safety valve of the low-wage sector of the economy. At the same time, open lines of credit should no longer be available to students with no income, just as mortgages should not be extended to buyers who cannot afford the payments. 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.
- 26 Feb 2009
- Working Paper Summaries
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. Key concepts include: The new U.S. presidential administration should identify energy policies that make wise tradeoffs across issues. The administration should communicate that decisions will be made to maximize benefits to society rather than to special-interest groups. The administration should seek energy policies that make sense even if climate change is less of a problem than best current estimates suggest. The administration should identify a series of small changes (nudges) that significantly influence the behaviors of individuals and organizations in a positive direction without infringing on personal liberties. When discounting of the future creates an insurmountable barrier to the implementation of wise policies, consider implementation on a mild delay. Closed for comment; 0 Comments.
- 17 Nov 2008
- Research & Ideas
Decoding the Artful Sidestep
Do you notice when someone changes the subject after you ask them a question? If you don't always notice or even mind such conversational transformations, you're not alone. New research by Todd Rogers and Harvard Business School professor Michael I. Norton explores the common occurrence of "conversational blindness." Q&A with Rogers. Key concepts include: In the study, speakers who dodged a question suffered no ill will from their listeners and paid no price. People prefer, trust, and like a question-dodger who is smooth and sounds confident over a question-answerer who is unsmooth and stammers. If you're a listener who wants to avoid conversational blindness on important matters, here's a tip: Remember your question. Closed for comment; 0 Comments.
- 12 Nov 2008
- Research & Ideas
The Marketing of a President
Barack Obama's run for the White House was a model of marketing excellence, argues Professor John Quelch. Here's why it worked so well. Closed for comment; 0 Comments.
- 30 Oct 2008
- Working Paper Summaries
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. Key concepts include: Voters do a better job of holding governments accountable during these emergencies. Voters punish politicians following adverse weather events, but the degree of punishment depends critically on the quality of the ruling party's response: Those distributing greater amounts of relief aid suffer smaller subsequent electoral losses. Closed for comment; 0 Comments.
- 15 Oct 2008
- Working Paper Summaries
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. Key concepts include: Conversational blindness occurs in part because real-world conversations occur as a continuous ebb and flow, leaving little time for people to reflect on how every statement links to each previous statement. A successful dodge occurs when a speaker's answer to the wrong question is so compelling that the listener both forgets the right one, and rates the dodger positively. In some cases, speakers end up better off by answering the wrong question well rather than the right question poorly. These results add to the growing literature on people's surprising unawareness to changes in their environment. Closed for comment; 0 Comments.
- 02 Oct 2008
- What Do You Think?
Workout vs. Bailout: Should Government Take Advantage of the Buffett Effect?
The depth of the global financial crisis is becoming clearer day by day, says HBS professor Jim Heskett. Respondents to this month's column offered creative solutions, and by and large resisted the temptation to venture into the realm of ideology. (Online forum now closed.) Closed for comment; 0 Comments.
- 21 Aug 2008
- Working Paper Summaries
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. Key concepts include: The framework suggests that instituting limits to a politician's power to transfer bureaucrats across posts will favorably affect junior officers' incentives to invest in expertise. In India there is significant political influence on the bureaucracy through frequent transfers of bureaucrats across posts, despite the constitutional insulation provided to them against political pressures. Not all officers face the same odds of being transferred. High-skilled officers are much less likely to be transferred by an incoming politician and have more even career paths. Belonging to the same caste as the politician's party base was a factor that helped officers to secure more important posts. Closed for comment; 0 Comments.
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. Key concepts include: Because losses loom larger than gains psychologically, policies that would create net benefits for society but that would also involve costs may frequently be defeated. This policy bundling technique has the potential to help citizens and legislators who are struggling to pass legislation with salient costs that are outweighed by important benefits. While the behavioral decision research literature has shown it is difficult to fully de-bias human judgment, recent research suggests it is possible to design decision-making contexts in ways that lead to wiser choices. Closed for comment; 0 Comments.