First Look

Publications

Capital Rules: The Construction of Global Finance

Abstract

The rise of global financial markets in the last decades of the twentieth century was premised on one fundamental idea: that capital ought to flow across country borders with minimal restriction and regulation. Freedom for capital movements became the new orthodoxy. In an intellectual, legal, and political history of financial globalization, Rawi Abdelal shows that this was not always the case. Transactions routinely executed by bankers, managers, and investors during the 1990s—trading foreign stocks and bonds, borrowing in foreign currencies—had been illegal in many countries only decades, and sometimes just a year or two, earlier.

How and why did the world shift from an orthodoxy of free capital movements in 1914 to an orthodoxy of capital controls in 1944 and then back again by 1994? How have such standards of appropriate behavior been codified and transmitted internationally? Contrary to conventional accounts, Abdelal argues that neither the U.S. Treasury nor Wall Street bankers have preferred or promoted multilateral, liberal rules for global finance. Instead, European policy makers conceived and promoted the liberal rules that compose the international financial architecture. Whereas U.S. policy makers have tended to embrace unilateral, ad hoc globalization, French and European policy makers have promoted a rule-based, "managed" globalization. This contest over the character of globalization continues today.

Publisher's site:
http://www.hup.harvard.edu/catalog/ADBCAP.html

Career Concerns and Mandated Disclosure

Abstract

This paper examines the effects of mandated disclosure on the design of contracts and induced behavior in the presence of career concerns. We analyze the impact of two key properties of a mandated performance measure that is publicly disclosed: its sensitivity to the agent's effort and its informativeness about the agent's ability. We find that when the mandated measure is highly sensitive to the agent's effort but the measure is relatively uninformative about the agent's ability, the agent's effort (and the firm's output) will be higher and the pay-for-performance sensitivity will be lower relative to a scenario in which the measure is not mandated. In contrast, if the mandated measure's informativeness dominates the measure's sensitivity to effort, then effort is lower and the pay-for-performance sensitivity is higher in the mandated setting. We also characterize settings where a mandated disclosure would be desirable or not; variations arise because mandated disclosures can increase both effort and risk. Our results imply that mandating the public disclosure of performance measures, particularly measures that are relatively informative about ability but are difficult to influence through managerial effort, may have the unintended consequence of generating inefficiencies in firms' employment contracts.

Companies and the Customers Who Hate Them

Abstract

This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.

Why do companies bind customers with contracts, bleed them with fees, and baffle them with fine print? Because bewildered customers, who often make bad purchasing decisions, can be highly profitable. Most firms that profit from customers' confusion are on a slippery slope. Over time, their customer-centric strategies for delivering value have evolved into company-centric strategies for extracting it. Not surprisingly, when a rival comes along with a friendlier alternative, customers defect. Adversarial value-extracting strategies are common in such industries as cell phone service, retail banking, and health clubs. Overly complex product and pricing options, for example, may have been designed to serve various segments. But in fact they take advantage of how difficult it is for customers to predict their needs (such as how many cell phone minutes they'll use each month) and make it hard for them to choose the right product. Similarly, penalties and fees, which may have been instituted to offset the costs of undesirable customer behavior, like bouncing checks, turn out to be very profitable. As a result, companies have no incentive to help customers avoid them. Tactics like these generate bad publicity and fuel customer defections, creating opportunities for competitors. Virgin Mobile USA, for example, has lured millions of angry cell phone customers away from the incumbents by offering a straightforward plan with no hidden fees, no time-of-day restrictions, and no contracts. ING Direct, now the fourth-largest thrift bank in the United States, offers accounts with no fees, no tiered interest rates, and no minimums. In industries where squeezing value from customers is commonplace, companies that dismantle these harmful practices and design a transparent, value-creating offer can head off customer retaliation and spur rapid growth.

Publisher's site:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R0706E&referral=2340

The Emergence of Governance in an Open Source Community

Abstract

We have a good understanding of organizing processes in bureaucratic organizations, but not in community forms. More specifically, we know little about how communities producing collective goods govern themselves. With a multi-method study of one open source software community, we found that members developed a shared basis of formal authority, but limited it with democratic mechanisms that enabled experimentation with shifting conceptions of authority over time. When members settle on a shared conception of authority, it is more expansive than their original design. This finding is reinforced with a statistical test of the predictors of leadership. By blending bureaucratic and democratic mechanisms, the governance system designed was able to evolve with the community's changing conceptions of authority.