First Look

August 16, 2011

Burrito Or Hacker?

A new paper by Robyn A. LeBoeuf and Michael Norton begins, "Imagine that your computer suddenly crashes: the screen turns black, the power drains away, and you cannot bring it back to life. How might you determine the cause of this event?" Human nature being what it is, they continue, instinct is to pin the cause on something that equates with the outcome. If the result was a small outcome—losing an e-mail that was of no consequence—then we might attribute the crash to a lunch burrito leaking on the keyboard. But if the outcome had serious repercussions—a wedding invitation list lost permanently—then we decide the cause must have been a targeted computer virus. Furthermore, we ratchet up or down our response to the event based in part on where we assess blame. We tend to link cause with outcome because it prevents us from perceiving ourselves to be at the mercy of capricious and arbitrary forces: "What do you mean a leaky burrito ruined my wedding?" Understanding this reaction can help firms plan for the choices made by consumers after a product has failed them. Read "Consequence-Cause Matching: Looking to the Consequences of Events to Infer Their Causes."

The Blessing Of Angel Investors

When it comes to a successful start-up, angel investors can be superior partners for creating a business. In a forthcoming issue of Review of Financial Studies, authors William R. Kerr, Josh Lerner, and Antoinette Schoar offer evidence showing that ventures with two angel backers have improved survival odds, more successful exits, and better financing, among other benefits. The authors suggest that there is more to angels than just money. Look for "The Consequences of Entrepreneurial Finance: Evidence from Angel Financings."

Accounting For Catastrophes

Disasters need to be accounted for in a very real numbers sense. A new case study, "Accounting for Catastrophes: BP PLC and Union Carbide Corporation," shows how BP and Union Carbide must share investor-relevant information after a disaster, given new contingency loss recognition, measurement, and disclosure rules proposed by IASB and FASB. The case was developed by David F. Hawkins and Aldo Sesia.

— Sean Silverthorne


The World Bank and Democratic Accountability: The Role of Civil Society

An abstract is unavailable at this time.


The Consequences of Entrepreneurial Finance: Evidence from Angel Financings


This paper documents that ventures that are funded by two successful angel groups experience superior outcomes to rejected ventures: they have improved survival, exits, employment, patenting, web traffic, and financing. We use strong discontinuities in angel funding behavior over small changes in their collective interest levels to implement a regression discontinuity approach. We confirm the positive effects for venture operations, with qualitative support for a higher likelihood of successful exits. On the other hand, there is no difference in access to additional financing around the discontinuity. This might suggest that financing is not a central input of angel groups.

Read the paper:

Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence


We investigate how the convexity of a firm's incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate experimentally that overconfident employees are more likely to sort into a non-linear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to "sort in" ("sort away") attractive (unattractive) employees; such schemes may also reduce a firm's wage bill.

Consequence-Cause Matching: Looking to the Consequences of Events to Infer Their Causes


We show that people non-normatively infer event causes from event consequences. For example, people inferred that a product failure (computer crash) had a large cause (widespread computer virus) if it had a large consequence (job loss), but that the identical failure was more likely to have a smaller cause (cooling fan malfunction) if the consequence was small-even though the consequences were objectively uninformative about the causes. Across experiments, participants' inferences about event causes were systematically affected by how similar (in both size and valence) those causes were to event consequences. Additional experiments further suggested that this "consequence-cause matching" arises because people are motivated to see the world as predictable, and because matching is an accessible schema that helps them to fulfill this motivation.

Read the paper:

Economic Impacts of Immigration: A Survey


This paper surveys recent empirical studies on the economic impacts of immigration. The survey first examines the magnitude of immigration as an economic phenomenon in various host countries. The second part deals with the assimilation of immigrant workers into host-country labor markets and concomitant effects for natives. The paper then turns to immigration's impact for the public finances of host countries. The final section considers emerging topics in the study of immigration. The survey particularly emphasizes the recent experiences of Northern Europe and Scandinavia and relevant lessons from traditional destination countries like the U.S.

Read the paper: FEP11_ImmSurvey.pdf


Working Papers

The Organization of Firms Across Countries


We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.

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Cases & Course Materials

Accounting for Catastrophes: BP PLC and Union Carbide Corporation (A)

David F. Hawkins
Harvard Business School Case 111-062

The IASB and FASB propose new contingency loss recognition, measurement, and disclosure rules.

Purchase this case:

Accounting for Catastrophes: BP PLC and Union Carbide Corporation (B)

David F. Hawkins and Aldo Sesia
Harvard Business School Supplement 111-074

The BP Mexican gulf oil spill requires BP to recognize or at least disclose investor-relevant information.

Purchase this supplement: