First Look

November 16, 2010

Was it financial deregulation that led to the economic crisis or a deregulatory mindset? Harvard Business School economics professor and historian David Moss argues for the latter in a new working paper. As scholars of political economy shifted their focus from market failure to government failure during the last half of the century, "they set the stage for a revolution in both government and markets, the full ramifications of which are still only beginning to be understood." We may need yet another shift in academic thinking as we consider the need for new regulation, Moss writes in "Reversing the Null: Regulation, Deregulation, and the Power of Ideas."

Researchers have long studied the cognitive barriers that cloud our thinking and decision-making. In a recent book chapter, HBS doctoral student Lisa L. Shu and professor Max H. Bazerman look at barriers-interpreting events in a self-serving manner, for example-that can prevent clear decision-making specifically on environmental issues. They also propose ways in which these biases could be put to advantage. Read "Cognitive Barriers to Environmental Action: Problems and Solutions."

Even as the New York Times, Washington Post, and other large websites prepare to charge for content, other companies continue to search for successful funding models that will keep information free. In a new case, professors Anita Elberse and Sunil Gupta approach this question by looking at YouTube, the Google-owned video aggregator that is the largest in the world-but unprofitable. Should it begin charging users? The learning objective of the case is to assess sustainable business models for aggregators of user-generated and professionally produced content in the context of the online video industry.

— Sean Silverthorne


Keiei no Ryugi (The Management Ritual)

An abstract is unavailable at this time.

Joint Evaluation as a Real World Tool for Managing Emotional Assessment of Morality


Moral problems often prompt emotional responses that invoke intuitive judgments of right and wrong. While emotions inform judgment across many domains, they can also lead to ethical failures that could be avoided by using a more deliberative, analytical decision-making process. In this paper, we describe joint evaluation as an effective tool to help decision makers manage their emotional assessments of morality.

Bounded Ethicality in Negotiations


Routine and persistent acts of dishonesty prevail in everyday life, yet most people resist shining a critical moral light on their own behavior, thereby maintaining and oftentimes inflating images of themselves as moral individuals. We overview the psychology that accounts for behaviors inconsistent with ethical beliefs and describe how people reconcile their immoral actions with their ethical goals through the process of moral disengagement. We then examine how the mind selectively forgets information that might threaten this moral self-image. We close with an attempt to identify strategies to close the gap between the unethical people we are and the ethical people that we strive to be.

Truth in Giving: Experimental Evidence on the Welfare Effects of Informed Giving to the Poor


It is often difficult for donors to predict the value of charitable giving because they know little about the persons who receive their help. This concern is particularly acute when making contributions to organizations that serve heterogeneous populations. While we have considerable evidence that donors are more generous if they know their assistance benefits a preferred group, we know little about the demand for such information. To start closing this gap, we study transfers of income to real-world poor people in the context of dictator games. Our dictators can purchase signals about why the recipients are poor. We find that a third of the dictators are willing to pay a dollar to learn more about their recipient. Dictators who devote resources to acquiring information are individuals whose giving is particularly responsive to recipient type. They use the information mainly to withhold resources from "undeserving" types, leading to a drastic decline in aggregate transfers. With endogenous information about recipients, we find that all types of poor subjects are worse off. Our results suggest that the effects of "truth in giving" policies are highly responsive to recipient heterogeneity and biased against more generous giving.

Traveling Agents: Political Change and Bureaucratic Turnover in India


We develop a framework to empirically examine how politicians with electoral pressures control bureaucrats with career concerns as well as the consequences for bureaucrats' career investments. Unique micro-level data on Indian bureaucrats support our key predictions. Politicians use frequent reassignments (transfers) across posts of varying importance to control bureaucrats. High-skilled bureaucrats face less frequent political transfers and lower variability in the importance of their posts. We find evidence of two alternative paths to career success: officers of higher initial ability are more likely to invest in skill, but caste affinity to the politician's party base also helps secure important positions.

Global Shinjidai no Kachi Souzou (Value Creation during a Global Era)

An abstract is unavailable at this time.

How Do Acquirers Retain Successful Target CEOs? The Role of Governance


The resource-based view argues that acquisitions can build competitive advantage partially through retention of valuable human capital of the target firm. However, making commitments to retain and motivate successful top managers is a challenge when contracts are not enforceable. Investigating the conditions under which target CEOs are retained in a sample of mergers in the 1990s, we find greater retention of better-performing and higher-paid CEOs—both measures of valuable human capital. We also show that the performance-retention link is stronger when the acquirer's governance provisions support managers and when the acquirer's CEO owns more equity. While it is not common for acquirers to retain target CEOs, we argue that they are more likely to do so when their governance environment maintains managerial discretion. Based on a joint analysis of retention and governance, our findings are largely consistent with the managerial human capital explanation of retention.

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Working Papers

Reversing the Null: Regulation, Deregulation, and the Power of Ideas


It has been said that deregulation was an important source of the recent financial crisis. It may be more accurate, however, to say that a deregulatory mindset was an important source of the crisis—a mindset that, to a very significant extent, grew out of profound changes in academic thinking about the role of government. As scholars of political economy quietly shifted their focus from market failure to government failure over the second half of the twentieth century, they set the stage for a revolution in both government and markets, the full ramifications of which are still only beginning to be understood. This intellectual sea—change generated some positive effects, but also some negative ones, including (it seems) an excessively negative impression of the capacity of government to address problems in the marketplace. Today, as we consider the need for new regulation, particularly in the wake of the financial crisis, another fundamental shift in academic thinking about the role of government may be required-involving nothing less than a reversal of the prevailing null hypothesis in the study of political economy.

Cognitive Barriers to Environmental Action: Problems and Solutions


We explore interventions at the individual level and focus on recognized cognitive barriers from behavioral decision-making literature. In particular, we highlight three cognitive barriers that impede sound individual decision making that have particular relevance to behaviors impacting the environment. First, despite claiming that they want to leave the world in good condition for future generations, people intuitively discount the future to a greater degree than can be rationally defended. Second, positive illusions lead us to conclude that energy problems do not exist or are not severe enough to merit action. Third, we interpret events in a self-serving manner, a tendency that causes us to expect others to do more than we do to solve energy problems. We then propose ways in which these biases could actually be used to our advantage in steering ourselves toward better judgment. Finally, we outline the key questions on the research frontier from the behavioral decision-making perspective and debunk the myth that behavioral and neoclassical economic perspectives need be in conflict.

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Cases & Course Materials

The International Criminal Court

Rafael Di Tella and Natalie Kindred
Harvard Business School Case 710-060

This Case describes a controversial 2010 decision by the International Criminal Court (ICC) and alludes to some of the broader challenges of building international institutions. The case briefly highlights certain milestones in international relations preceding the ICC's formation; provides an overview of the ICC and its activities as of March 2010; and outlines Kenya's post-election crisis in 2007-2008 and the ICC's decision to intervene. The ICC's involvement was a divisive issue: some argued it would destabilize Kenya, while others claimed it was an important step towards lasting peace. The Kenya scenario presents many aspects for consideration, including the wisdom of the ICC's involvement (given the complex historical, economic, and cultural issues underlying the 2007-2008 crisis), as well as the likelihood that Kenyan officials will cooperate with the ICC. Students can also weigh the broader implications for the ICC as it seeks to establish itself as a legitimate, fair, and just institution.

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YouTube: Time to Charge Users?

Anita Elberse and Sunil Gupta
Harvard Business School Case 510-053

In January 2010, YouTube, the world's largest online video aggregator, was still seeking to become profitable. Was the time right for Google, YouTube's parent company, to charge users seeking to upload content, as some analysts had suggested—and if so, who should be charged how much and for what? Could YouTube charge users for downloading content, a model it was now beginning to test? Or would it be better for the online video giant to continue to pursue an advertising model, but perhaps broaden its services to advertisers? Describes the online video market as of 2010 as well as YouTube's offerings to users, content owners, and advertisers. Provides information on the site's revenues and costs. Also contains detailed data on online video users and usage behavior.

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Family Corporate Governance: A Brief Literature Review

Lena G. Goldberg and David Kiron
Harvard Business School Note 311-055

This note discusses competing theories of governance in family owned firms and focuses on agency theory, stewardship theory, and the sociological concept of embeddedness.

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Gazelle in 2010

Andrei Hagiu and James Weber
Harvard Business School Case 711-446

Gazelle has pioneered a reCommerce intermediation model: it buys used electronics from consumers and resells them on eBay or to wholesalers. Going forward, its two main strategic challenges are 1) deciding how much to rely on partnerships with large retailers for growth and 2) deciding whether to continue as a "merchant," i.e., buying and reselling goods (and thereby taking inventory risk), or to transform itself into a "two-sided platform" connecting sellers and buyers without taking inventory risk.

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Cosmeticos de Espana, S.A. (A)

David F. Hawkins
Harvard Business School Case 111-019

Management must decide which exchange rate to use to consolidate the company's Venezuelan subsidiary.

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Cosmeticos de Espana, S.A. (B)

David F. Hawkins
Harvard Business School Supplement 111-020

in the Cosmeticos de Espana case series. What should management's accounting response be to a devaluation of the Bolivar?

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Cosmeticos de Espana, S.A. (C)

David F. Hawkins
Harvard Business School Supplement 111-021

third case in the Cosmeticos de Espana case series. What should management's accounting response be to a further devaluation of the Bolivar?

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Cosmeticos de Espana, S.A. (D)

David F. Hawkins
Harvard Business School Supplement 111-030

The fourth case in the Cosmeticos de Espana case series. What should management's accounting response be to the imposition of foreign currency controls?

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WildChina: Taking the Road Less Traveled

Mukti Khaire, Daniel J. Isenberg, Victoria Song, and Shirley M. Spence
Harvard Business School Case 811-019

This case deals with supplier difficulties faced by WildChina—a travel service provider in China. WildChina is a classic case of a company that is trying to bring a local, within-country product to a market outside the country (in this case, travelers to China from around the world). In doing so, start-ups have to build competences to deal with local suppliers and global customers. The case describes the operations of WildChina providing detailed information on how they evaluated suppliers to determine their appropriateness, given WildChina's customers. The decision in the case revolves around what the founder should do when faced with a supplier who is trying to bypass WildChina to reach customers directly—a common problem faced by intermediaries.

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Dubai Duty Free

Rajiv Lal and David Kiron
Harvard Business School Case 511-034

In mid-February 2009, Dubai Duty Free Managing Director Colm McLoughlin received the January sales report. He left the report lying on his desk unopened and went to walk around the shops as he did every morning. When he returned, he sat down at his desk, looked at the cover of the report, then called his wife, Breeda, to confirm that they were hosting a dinner party that weekend for some friends from Ireland who were in town for a golf tournament Dubai Duty Free was supporting.

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Harvest: Organic Waste Recycling with Energy Recovery (A)

Deishin Lee, Baris Ata, and Mustafa H. Tongarlak
Harvard Business School Case 611-033

This case describes the waste management industry and a clean technology solution for landfill diversion and renewable energy production. The (A) case focuses on the operational characteristics of waste management and waste to energy, as well as the characteristics of the waste management industry. The intent of the (A) case is to have students perform operational analysis on the organic waste to energy process to evaluate whether a potential new plant is economically feasible and attractive. The (B) case focuses on the sourcing dilemma: pre-processing vs. source separation. To ensure that its waste input fuel is of sufficiently high quality (i.e., low level of inorganic contaminants), the company can either build a pre-processing facility to sort incoming waste to filter out contaminants or work with suppliers to source separate their waste stream.

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Bessemer Trust: Guardians of Capital

Tom Nicholas and David Chen
Harvard Business School Case 811-031

Henry Phipps, Jr. made his fortune in the steel industry alongside one of America's most celebrated entrepreneurs—Andrew Carnegie. His wealth was administered in the form of trusts, which he hoped would provide a stream of income for his family and their descendants into the future. Phipps had a clear vision for the intergenerational disposition of his assets, which required both an efficient organizational structure for the wealth to be administered and leadership on the part of family members to keep his original vision intact. Despite undergoing several significant legal and leadership changes, the trusts survived relatively intact and continued to achieve their express goal of preserving the capital Phipps created and providing income for Phipps family members.

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Grameen Danone Foods Ltd., a Social Business

V. Kasturi Rangan and Katharine Lee
Harvard Business School Case 511-025

Grameen Danone is a joint venture between the Grameen Group (a sister company of Grameen Bank) and Groupe Danone, a $2 billion (revenues) French food company. The company's goal was to provide nutritional yogurt (brand name Shoktidoi) for the nearly 50 million Bangladeshi children using an innovative social business model. The case describes the progress as of 2008 and poses questions regarding how the company might achieve sustainability.

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