First Look

February 20, 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Out of debt—then right back in

Studying the borrowing habits of people in India and the Philippines, Dean Karlan, Sendhil Mullainathan, and Benjamin N. Roth find that borrowers soon relapse into bad habits after having their debt relieved. Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines.

Why Chinese students flood American universities

Chinese students account for 31 percent of all international students enrolled in American universities, up from just 10 percent at the beginning of the twenty-first century. William Kirby explores this phenomenon in a chapter in the new book China Questions: Critical Insights into a Rising Power. Why Do So Many Chinese Students Come to the United States?

Studying how people make decisions

Benjamin Handel and Joshua Schwartzstein look at research methods used to study how people use (or don't) available information in their decision making. Frictions or Mental Gaps: What's Behind the Information We (Don't) Use and When Do We Care?

A complete list of new research and publications from Harvard Business School faculty follows.

— Sean Silverthorne
  • 2018
  • New York: Cambridge University Press

American Fair Trade: Proprietary Capitalism, Corporatism, and the 'New Competition', 1890–1940

By: Phillips Sawyer, Laura

Abstract—American Fair Trade explores the contested political and legal meanings of the term fair trade from the late 19th century through the New Deal era. This history of American capitalism argues that business associations partnered with regulators to create codes of fair competition that reshaped both public and private regulatory power. Rather than viewing the history of American capitalism as the unassailable ascent of large-scale corporations and free competition, American Fair Trade argues that trade associations of independent proprietors lobbied and litigated to reshape competition policy to their benefit. At the turn of the 20th century, this widespread fair trade movement borrowed from progressive law and economics, demonstrating a persistent concern with market fairness—not only fair prices for consumers but also fair competition among businesses. Proponents of fair trade collaborated with regulators to create codes of fair competition and influenced the administrative state’s public-private approach to market regulation. New Deal partnerships in planning borrowed from those efforts to manage competitive markets, yet ultimately discredited the fair trade model by mandating economy-wide trade rules that sharply reduced competition. Laura Phillips Sawyer analyses how these efforts to reconcile the American tradition of a well-regulated society with the legacy of Gilded Age laissez-faire capitalism produced the modern American regulatory state.

Publisher's link:

  • forthcoming
  • Review of Finance

Financial Repression in the European Sovereign Debt Crisis

By: Becker, Bo, and Victoria Ivashina

Abstract—By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.

Publisher's link:

  • 2018
  • The New Era of the CCO: The Essential Role of Communication in a Volatile World

The Trust Imperative

By: Edelman, Richard, Stephen A. Greyser, E. Bruce Harrison, and Tom Martin

Abstract—Successful relationships depend on trust—trust between spouses, trust between parent and child, trust between enterprises and their stakeholders. This chapter focuses on the factors that build trust in organizations, as well as the forces that can diminish or destroy it and the role of enterprise communication in managing these forces. The chapter includes a discussion of the most relevant findings from the annual Edelman Trust Barometer, a bellwether of measuring trust and relationships between a company and its stakeholders. This is explored in detail through a case where General Motors dealt with a serious recall crisis translated these concepts into the reality of managing a global enterprise in a trustworthy manner. BOOK ABSTRACT: The role of the chief communication officer (CCO) in today's enterprise has dramatically changed over the past 30 years. Once focused on getting news out to media outlets, today's CCO has become an integral part of any enterprise-company, corporation, governmental, and nongovernmental entity. Today's CCO is responsible for internal and external communication; with creating and implementing communication strategies that help mold enterprise mission, vision, value, and character; and with building enterprise reputation through stakeholder engagement. As a part of the "C-Suite," the CCO must understand not only the psychology and sociology of the business, but also the role that she has in informing the C-Suite and the CEO what internal and external stakeholders are thinking and how this may affect corporate image in terms of credibility, confidence, trust, relationship, and reputation. In short, the new CCO must understand both the science and the art of communication and apply that knowledge to advancing her enterprise's goals and objectives through a faster and ever-larger-reaching set of media.

Publisher's link:

  • Winter 2018
  • Journal of Economic Perspectives

Frictions or Mental Gaps: What's Behind the Information We (Don't) Use and When Do We Care?

By: Handel, Benjamin, and Joshua Schwartzstein

Abstract—Consumers suffer significant losses from not acting on available information. These losses stem from frictions such as search costs, switching costs, and rational inattention, as well as what we call mental gaps resulting from wrong priors/worldviews, or relevant features of a problem not being top of mind. Most research studying such losses does not empirically distinguish between these mechanisms. Instead, we show that most highly cited papers in this area presume one mechanism underlies consumer choices and assume away other potential explanations or collapse many mechanisms altogether. We discuss the empirical difficulties that arise in distinguishing between different mechanisms as well as some promising approaches for making progress in doing so. We also assess when it is more or less important for researchers to distinguish between these mechanisms. Approaches that seek to identify true value from demand, without specifying mechanisms behind this wedge, are most useful when researchers are interested in evaluating allocation policies that strongly steer consumers towards better options with regulation, traditional policy instruments, and defaults. On the other hand, understanding the precise mechanisms underlying consumer losses is essential to predicting the impact of mechanism policies aimed primarily at reducing specific frictions or mental gaps without otherwise steering consumers. We make the case that papers engaging with these questions empirically should be clear about whether their analyses distinguish between mechanisms behind poorly informed choices and what that implies for the questions they can answer. We present examples from several empirical contexts to highlight these distinctions.

Publisher's link:

  • forthcoming
  • Journal of Financial Economics

Pay Now or Pay Later? The Economics Within the Private Equity Partnership

By: Ivashina, Victoria, and Josh Lerner

Abstract—The economics of partnerships have been of enduring interest to economists, but many issues regarding intergenerational conflicts and their impact on the continuity of these organizations remain unclear. We examine 717 private equity partnerships and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder; (b) that the underprovision of carried interest and ownership—and inequality in fund economics more generally—leads to the departures of senior partners; and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.

Publisher's link:

  • forthcoming
  • Games and Economic Behavior

Strategy-Proofness of Worker-Optimal Matching with Continuously Transferable Utility

By: Jagadeesan, Ravi, Scott Duke Kominers, and Ross Rheingans-Yoo

Abstract—We give a direct proof of one-sided strategy-proofness for worker-firm matching under continuously transferable utility. A new “Lone Wolf” theorem (Jagadeesan et al., 2017) for settings with transferable utility allows us to adapt the method of proving one-sided strategy-proofness that is typically used in settings with discrete transfers.

Publisher's link:

  • 2018
  • The China Questions: Critical Insights into a Rising Power

Why Do So Many Chinese Students Come to the United States?

By: Kirby, William C.

Abstract—Many books offer information about China, but few make sense of what is truly at stake. The questions addressed in this unique volume provide a window onto the challenges China faces today and the uncertainties its meteoric ascent on the global horizon has provoked. In only a few decades, the most populous country on Earth has moved from relative isolation to center stage. Thirty-six of the world’s leading China experts—all affiliates of the renowned Fairbank Center for Chinese Studies at Harvard University—answer key questions about where this new superpower is headed and what makes its people and their leaders tick. They distill a lifetime of cutting-edge scholarship into short, accessible essays about Chinese identity, culture, environment, society, history, or policy. Can China’s economic growth continue apace? Can China embrace the sacrifices required for a clean environment? Will Taiwan reunite with the mainland? How do the Chinese people understand their position in today’s global marketplace? How do historical setbacks and traditional values inform China’s domestic and foreign policy? Some of the essays address issues of importance to China internally, revolving around the Communist Party’s legitimacy, the end of the one-child policy, and ethnic tensions. Others focus on China’s relationship with other nations, particularly the United States. If America pulls back from its Asian commitments, how will China assert its growing strength in the Pacific region? China has already captured the world’s attention. The China Questions takes us behind media images and popular perceptions to provide insight on fundamental issues.

Publisher's link:

  • Summer 2017
  • Journal of Economics & Management Strategy

Copyright Enforcement: Evidence from Two Field Experiments

By: Luo, Hong, and Julie Holland Mortimer

Abstract—Effective dispute resolution is important for reducing private and social costs. We study how resolution responds to changes in price and communication using a new, extensive dataset of copyright infringement incidences by firms. The data cover two field experiments run by a large stock-photography agency. We find that substantially reducing the requested amount generates a small increase in the settlement rate. However, for the same reduced request, a message informing infringers of the price reduction and acknowledging the possible unintentionality generate a large increase in the settlement rate; including a deadline further increases the response. The small price effect, compared to the large message effect, can be explained by two countervailing effects of a lower price: an inducement to settle early, but a lower threat of escalation. Furthermore, acknowledging possible unintentionality may encourage settlement due to the typically inadvertent nature of these incidences. The resulting higher settlement rate prevents additional legal action and significantly reduces social costs.

Publisher's link:

Abstract—Using retail chain data, we study the effects of a tournament incentive plan based primarily on objective performance but incorporating managerial discretion in the selection of winners. In principle, such plans could motivate employees to perform both at a high level, based on objective criteria, and in accordance with company values considered via managerial discretion. However, they could be counterproductive if enough participants (especially those who don’t win) perceive that subjectivity (introduced via discretion) adds unfairness. We show that, on average, the tournament incentive plan was associated with improved store sales. We also find that such plans can be more beneficial for geographically distant participants, where the potential for improving alignment is greater. Lastly, we find some evidence that participants’ resource-constraints (potentially affecting unfairness concerns) impact outcomes under the plan.

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Trade Creditors' Information Advantage

By: Ivashina, Victoria, and Benjamin Iverson

Abstract—Using information on the sales of debt claims for 132 U.S. Chapter 11 bankruptcy cases, we show that large trade creditors’ decisions to sell receivables of a distressed company in bankruptcy are predictive of lower recovery rates, and that in such cases these creditors sell ahead of less informed suppliers and other creditors. This result is especially pronounced for more opaque distressed firms, when trade creditors’ information advantage is likely largest. This evidence shows that suppliers that extend significant amounts of trade credit hold private information about their trade partners. Trade creditors who are geographically closer or in similar industries tend to lend the most, suggesting that these are two channels through which suppliers hold an information advantage.

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Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

By: Karlan, Dean, Sendhil Mullainathan, and Benjamin N. Roth

Abstract—A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, thus being perpetually in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances as well as for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.

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No abstract available.

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  • Harvard Business School Case 818-054

TelePizza (Abridged)

Describes TelePizza, Spain's leading chain of pizza restaurants and delivery services. TelePizza has experienced rapid growth to 500 stores since its creation in 1987. The company went public on the Spanish stock market in late 1996. Franchising has played an important role in the firm's expansion to date. For further growth, the founder and CEO is contemplating three strategies: further expansion in Spain, international expansion, or the creation of new restaurant concepts. Abridged version of HBS No. 899-080.

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  • Harvard Business School Case 618-021

Great Lakes Banking Group: Data Management

In May 2016, Michael Rechtin, an expert in international data center law, advised global financial services firm Great Lakes Banking Group (GLBG) on its plans to upgrade its data centers. The bank’s data processing and storage systems were in need of an update, and since GLBG last made heavy IT investments in the late 1990s, the technology had changed considerably. GLBG sought Rechtin’s advice on whether or not it should build a new data center, pursue a wholesale colocation solution, rent space from a retail colocation provider, or store more data in the cloud.

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  • Harvard Business School Case 916-029

Incentive Systems

This note serves as a supplement to any course on incentive design within organizations. The note focuses on the principal difficulties in designing incentive systems, including the tradeoff between objective and subjective performance metrics, how to design incentive systems in team environments, and the inherent problems with designing incentive systems in environments where workers are involved in multiple activities.

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  • Harvard Business School Case 917-413

Issues in Non-Profit Governance

Non-profit governance at its core is very different from for-profit governance. Certain aspects of non-profit governance are widely pervasive across all non-profits, while all others are idiosyncratic to specific sub-groups of non-profits. After identifying these commonalities, this paper focuses on specific factors which make non-profit governance particularly nuanced and complicated in specific situations.

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  • Harvard Business School Case 718-402

Upwork: Creating the Human Cloud

Stephane Kasriel, the new CEO of Upwork, the leading platform for freelance labor, needs to decide on how to redesign its business model. While the firm has been growing rapidly since the merger of Odesk and eLance, the newly combined firm continues to face problems of clients "circumventing" the Upwork platform after an initial match. This case explores a variety of options for how Kasriel might prevent circumvention and reach his ambitious growth goals.

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  • Harvard Business School Case 317-036

Frank Baker: Siris Capital Group and Titan Systems

Private equity firm, Siris Capital Group, must decide if they should raise their offer to take Titan Telecom private by acquiring its publicly traded stock. Siris’ decision to pay a premium for Titan must be made in the context of their unique (and somewhat complex) investment strategy that focuses on investment targets that have both mission-critical products or services that are approaching obsolescence but producing predictable cash flows as well as new products or services on the horizon with strong growth potential. Further complicating the decision is the fact that Siris is in the midst of raising its second private equity fund and seeking to secure co-investment capital from many of the same investors they are pursuing as limited partners for their new fund.

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  • Harvard Business School Case 118-052

Charity or Bribery?

Filip Kowalski, a senior manager at the pharmaceutical company Healthgen, leads sales for the firm’s Polish division. While pitching Healthgen’s products, he develops a relationship with a director of a regional health fund who also runs a private foundation. After a natural disaster, Healthgen—at the request of the director—donated products to help during the crises. After Healthgen wins an important contract, the media alleges that the donation was made to secure support of the regional health director. Were the efforts to boost company sales and support public health a donation or a bribe?

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  • Harvard Business School Case 218-023

Puerto Rico's COFINA Bonds: Hold or Fold?

No abstract available.

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