First Look

February 27, 2007

Centralized matching systems are now in play, quite successfully, for everything from public education in New York City and Boston—pairing student choices with appropriate schools—to medical residency programs and even kidney donation. To be efficient, a matching system must bring enough "buyers" and "sellers" together, provide sufficient time and opportunity for the two to interact, and make the process safe and comfortable. A forthcoming article in the University of Chicago Law Review, coauthored by Harvard Business School's Alvin E. Roth, discusses potential solutions for a market in transition—the one for fledgling law clerks, when applicants tend to be hired well before they have completed law school. Also new this week: a chapter on public-private partnerships for better healthcare in developing countries, a case on branding fruit as "Ripe 'n Ready," and another on positioning an ordinary household object—the trash bin—as a designer must-have and objet d'art.
— Martha Lagace

Working Papers

Public Action for Public Goods


This paper focuses on the relationship between public action and access to public goods. It begins by developing a simple model of collective action which is intended to capture the various mechanisms that are discussed in the theoretical literature on collective action. We argue that several of these intuitive theoretical arguments rely on special additional assumptions that are often not made clear. We then review the empirical work based on the predictions of these models of collective action. While the available evidence is generally consistent with these theories, there is a dearth of quality evidence. Moreover, a large part of the variation in access to public goods seems to have nothing to do with the "bottom-up" forces highlighted in these models and instead reflect more "top-down" interventions. We conclude with a discussion of some of the historical evidence on top-down interventions.

Illicit Invention: Tracing Technological Development in the Shadow of the Law


Abstract not available.


Cases & Course Materials

Design: More Than a Cool Chair

Harvard Business School Note 607-026

This introduction to the Design industry includes definitions, and industry statistics, as well as descriptions of geographic clustering, design education, organizational roles of designers, how designers work and get paid, and the growing role of design in management.

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eDonkey-Deciding the Future of File Sharing

Harvard Business School Case 707-482

Sam Yagan, CEO of the upstart MetaMachine, Inc., received a letter from the Recording Industry Association of America, Inc. (RIAA) asking him to shut down eDonkey, MetaMachine's popular file-sharing system. In September 2005, more than 30 million users relied on eDonkey to share digital files, making MetaMachine's software the most popular file-sharing client in the world. But now the end seemed close. Was there a way to save eDonkey? Was it time for Yagan to get out? He had little time to figure out his next move.

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Restructuring Navigator Gas Transport Plc.

Harvard Business School Case 207-092

How should creditors pursue their claims in a multi-jurisdiction bankruptcy? David Butters, Managing Director at Lehman Brothers, negotiates a restructuring of Navigator Gas Transport, a shipping company that is headquartered in Switzerland, incorporated in the Isle of Man, and operates ships that travel around the world. In analyzing the choices he faces, students must consider how the initial capitalization of Navigator contributed to its financial distress, evaluate several restructuring plans from a variety of perspectives, and assess how Butters might resolve the legal inconsistencies that arise in a multi-jurisdiction bankruptcy. In addition, they must determine if Butters has sufficient information about, and control over, operations at Navigator to be confident engaging in a lengthy set of legal proceedings.

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Microsoft Xbox: Changing the Game?

Harvard Business School Case 707-501

In September 1999, the Microsoft Xbox team was wondering which strategic choices would give it the best chance against the upcoming Sony PlayStation 2. Initially called "Project Midway" within Microsoft, the console project was intended to counter the perceived threat to the Windows franchise posed by Sony expanding the original PlayStation into a broad entertainment platform with the PlayStation 2. Seamus Blackley—the chief instigator for the Xbox within Microsoft—and some of his colleagues were on a flight to Austin, Texas, where they had an appointment with Michael Dell, CEO of Dell Computer. The purpose of the visit was to convince Dell to manufacture Xbox videogame consoles running Microsoft software. Indeed, the team intended to produce a machine somewhere between a standalone videogame console and a PC tailored to play videogames. It remained unclear, however, where along the spectrum from dedicated console to PC Microsoft should position the Xbox. Would it be an open platform like the PC in the sense that independent developers could publish games on it with no restrictions and without having to pay royalties? Who would produce consoles and under what arrangements? What features should the console include, and how would it be priced to consumers? The home videogame industry had been born in the 1970s during the Atari "golden age", then collapsed suddenly in 1983. It was reborn at the end of the 1980s under Nintento's leadership, which was then challenged for a few years by Sega, only to be conquered by Sony's original PlayStation. And along the way, some companies such as 3DO had tried unsuccessfully to change the prevalent business models. This tumultuous 25-year history might provide Blackley and his colleagues with some useful tips on how best to enter the market.

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Ripe 'n Ready

Harvard Business School Case 906-404

Stoned fruit has quality variations, reducing consumption. Five independent growers formed a cooperative to provide quality control and a brand name—Ripe 'N Ready—that enabled retailers to differentiate their stores and producers to differentiate the products they supplied. Consumer acceptance has been high. The issue is how to expand the concept without adversely affecting the original users of the product. Also, what new kinds of competition are they creating?

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SUN Brewing (B)

Harvard Business School Case 207-039

In July 2004, Shiv, Nand, and Uday Khemka are discussing their holdings in SUN Interbrew, a leading Russian beer producer that is part of the family's global portfolio of businesses. SUN Interbrew has been operating as a joint venture since 1998, when the Khemka family, who founded its predecessor company SUN Brewing in the early 1990s, decided to partner with Belgian beer giant Interbrew to survive the Russian financial and economic crises. Since then, the family has used Interbrew's capital and beer industry know-how to successfully grow the business. Now several developments prompt the Khemka family to consider a liquidity event. The family's five-year lock-up arrangement with Interbrew has just expired. In March 2004, Interbrew has announced its plans to take a controlling stake in Brazilian giant AmBev, a deal that will create the world's largest brewer. In addition, the Alfa Group, a Russian conglomerate that has become the third largest shareholder in SUN Interbrew, has announced its intention to take part in the company's management and attain a leading position in the Russian beer market. Is there a role for the Khemka family in the future of this company? Should they maintain some stake in the company and continue to participate in its management? Should they auction off their shares to the highest bidder and exit? Or should they play a role in the global beer industry through a stock-for-stock sale to InBev, and if so, at what price?

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Vipp A/S

Harvard Business School Case 607-052

Rapidly growing Vipp sells highly differentiated (and expensive) "designer" versions of a product that most buyers think about in purely functional terms: Trash bins. Examines how the company successfully produces and positions a trash bin so that it is regarded as an "art object" (and which has been displayed as such in the Paris Louvre). Though it is a tangible product, a Vipp bin's price cannot be even remotely justified by its functional features; customers, rather, pay dearly for the intangible aspects of the product, which the firm works very hard to keep integrated with the physical product. Deals with a range of issues confronting creative economy companies, such as how to produce products with very important intangible components, how to assure and manage the design integrity of a family of products, how far to extend a brand, how to manage creative employees, and where to source creative work.

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The New Market for Federal Judicial Law Clerks


In the past, judges have often hired applicants for judicial clerkships as early as the beginning of the second year of law school, for positions commencing approximately two years down the road. In the new hiring regime for federal judicial law clerks, by contrast, judges are exhorted to follow a set of start dates for considering and hiring applicants during the fall of the third year of law school. Using the same general methodology as we employed in a study of the market for federal judicial law clerks conducted in 1998-2000, we have broadly surveyed both federal appellate judges and law students about their experiences of the new market for law clerks. This article analyzes our findings within the prevailing economic framework for studying markets with tendencies toward early hiring—a framework we both draw upon and modify in the course of our analysis. Our data make clear that the movement of the clerkship market back to the third year of law school is highly valued by judges, but we also find that a strong majority of the judges responding to our surveys has concluded that non-adherence to the specified start dates is very substantial—a conclusion we are able to corroborate with specific quantitative data from both judge and student surveys. The consistent experience of a wide range of other markets suggests that such non-adherence in the law clerk market will lead to either a reversion to very early hiring or the use of a centralized matching system such as that used for medical residencies. We suggest, however, potential avenues by which the clerkship market could stabilize at something like its present pattern of mixed adherence and non-adherence, thereby avoiding the complete abandonment of the current system.

Herding, Social Preferences and (Non-)Conformity


We study the role of social preferences and conformity in explaining herding behavior in anonymous risky environments. In an experiment similar to information cascade settings, but with no private information, we find no evidence for conformity. On the contrary, we observe a significant amount of non-conforming behavior, which cannot be attributed to errors.

The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters


We study the formation of beliefs in a squatter settlement in the outskirts of Buenos Aires exploiting a natural experiment that induced an allocation of property rights that is exogenous to the characteristics of the squatters. There are significant differences in the beliefs that squatters with and without land titles declare to hold. Lucky squatters who end up with legal titles report beliefs closer to those that favor the workings of a free market. Examples include materialist and individualist beliefs (such as the belief that money is important for happiness or the belief that one can be successful without the support of a large group). The effects appear large. The value of a (generated) index of "market" beliefs is 20 percent higher for titled squatters than for untitled squatters, in spite of leading otherwise similar lives. Moreover, the effect is sufficiently large so as to make the beliefs of the squatters with legal titles broadly comparable to those of the general Buenos Aires population, in spite of the large differences.

On the Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance


We model the equilibrium price and quantity of risk transfer between firms and financial intermediaries. Value-maximizing firms have downward sloping demands to cede risk, while intermediaries, who assume risk, provide less-than-fully-elastic supply. We show that equilibrium required returns will be "high" in the presence of financing imperfections that make intermediary capital costly. Moreover, financing imperfections can give rise to intermediary market power, so that small changes in financial imperfections can give rise to large changes in price.

We develop tests of this alternative against the null that the supply of intermediary capital is perfectly elastic. We take the U.S. catastrophe reinsurance market as an example, using detailed data from Guy Carpenter & Co., covering a large fraction of the catastrophe risks exchanged during 1970-94. Our results suggest that the price of reinsurance generally exceeds "fair" values, particularly in the aftermath of large events, that market power of reinsurers is not a complete explanation for such pricing, and that reinsurers' high costs of capital appear to play an important role.

Institutional Portfolio Flows and International Investments


We examine the forecasting power of international portfolio flows for local equity markets and attempt to attribute it to either better information about fundamentals on the part of international investors, or to price pressure. Price pressure is a potential explanation because flows have positive contemporaneous price impacts and are strongly positively autocorrelated. We find that cross-border flows forecast both individual country equity market prices and associated U.S. closed-end country fund prices, even after controlling for closed-end fund purchases. Cross-border flows have no discernable impact on the difference, the closed-end fund discount. This fact is consistent with the information story, which says that cross-border inflows predict no change in the discount, but forecast positive changes in both net asset values and closed-end fund prices. This fact also contradicts the price pressure story, which predicts the cross-border inflows increase local country equity prices, thereby increasing the closed-end fund discount. We also use our approach to test for the presence of trend following in cross-border flows based on relative, as well as absolute returns. Like other studies, we find evidence of trend following based on absolute returns. Interestingly, however, we find also that flows are trend reversing based on relative returns. Flows therefore seem to be stabilizing with respect to notions of relative, but not absolute, value.

Health Services for the Poor in Developing Countries: Private vs. Public vs. Private & Public


In much of the developing world, poor health is a major impediment to both quality of life and economic development. The poor are particularly vulnerable to the economic impacts of ill health, as they lack the savings to pay for prevention and treatment, and often rely on their own physical labor for their livelihoods. As a result, long-term illnesses strip families of income and assets. At the same time, the public health systems of most developing countries tend to focus their modest resources on treatment rather than prevention, and often give higher priority to diseases that afflict the wealthy rather than the poor.

This paper discusses ways of addressing these obstacles and meeting the need for healthcare in developing countries. It looks at different types of health interventions and the different actors (government, for-profit companies and non-profits) involved and then discusses three major health problems—heart disease, HIV/AIDS, and childhood illnesses—to show the different levels of private sector involvement in health. We focus in particular on partnerships between public and private sector organizations and on how such partnerships can be most effective.

Exploring Obstacles to and Opportunities for Professional Success among Ethnic Minority Medical Students


This article explores the barriers and facilitators experienced by ethnic minority medical students in achieving personal and professional success.

Cyclical Wages in a Search-and-Bargaining Model with Large Firms


This paper presents a complete general equilibrium model with flexible wages where the degree to which wages and productivity change when cyclical employment changes is roughly consistent with postwar U.S. data. Firms with market power are assumed to bargain simultaneously with many employees, each of whom finds himself matched with a firm only after a process of search. When employment increases as a result of reductions in market power, the marginal product of labor falls. This fall tempers the bargaining power of workers and thus dampens the increase in their real wages. The procyclical movement of wages is dampened further if the posting of vacancies is subject to increasing returns.