First Look

Abstract—We analyze the implications of consumer privacy for competition in the marketplace. We consider a market where firms set prices and disclosure levels for consumer information and consumers observe both before deciding which firm to patronize and how much information to provide it with. The provision and disclosure of information presents tradeoffs for all market participants. Consumers benefit from providing information to the firm, as this increases the utility they derive from the service, but they incur disutility from information disclosure. This, in turn, benefits the firm providing an additional source of revenue, but reduces consumer demand for the service. We characterize equilibrium information provision, disclosure levels, and prices and show that competition with privacy has several effects on the marketplace. First, competition drives the provision of services with a low level of disclosure. Second, competition ensures that services with a high level of disclosure subsidize consumers. Third, firms maximize profits at the extensive rather than the intensive margin, outperforming competitors by attracting a larger customer base. And fourth, higher competition intensity need not improve consumer privacy when consumers exhibit low willingness to pay. Our findings are particularly relevant to the business models of Internet firms and contribute to inform the regulatory debate on consumer privacy.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=13-085.pdf

Abstract—We exploit an exogenous process change at two emergency departments (EDs) within a health system to test the theory that increasing capacity in a discretionary work setting increases wait times due to additional services being provided to customers as a consequence of reduced marginal costs for a task. We find that an increase in physicians' capacity for ordering ultrasounds (U/S) resulted in an 11.5 percentage point increase in the probability of an U/S being ordered, confirming that resource availability induces demand. Furthermore, we find that the additional U/S demand increased the time to return other radiological tests due to the higher demand placed on radiologists from the additional U/S. Consequently, the average length of stay (LOS) for patients with an abdominal complaint increased by nearly 30 minutes, and the waiting time to enter the ED increased by 26 minutes. We do not find any indications of improved performance on clinical metrics, with no statistical change in the number of admissions to the hospital or readmissions to the ED within 72 hours. Our study highlights an important lesson for process improvement in interdependent service settings: increasing process capacity at one step in the process can increase demand at that step, as well as for a subsequent shared service, and both can result in an overall negative impact on performance.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=14-033.pdf

Abstract—In this paper, we examine the circumstances under which so-called "independent" directors voice their independent views on public boards in a sample of Chinese firms. First, we ask why independent directors dissent, i.e., how they justify such dissent to public investors. We find that when independent directors dissent, they tend to offer mild, subjective justifications. Overt criticism of the management is rare. Next, we ask when an independent director is more likely to dissent and who is more likely to dissent. Controlling for firm and board characteristics, we find that dissent is significantly correlated with breakdown of social ties between the independent director and the board chair who locates at the center of the board bureaucracy in China. Dissent is more likely to occur when the board chair who appointed the independent director has left the board. Dissent also tends to occur at the end of board "games," defined as a 60-day window prior to departure of the board chair or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board "endgames," which represents only 4% of independent directors' average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accountants, and lawyers are significantly more active in voicing dissent. Lastly, we show that dissent is consequential to both the director and the firm. For directors, dissent significantly increases one's likelihood of exiting the director labor market, which translates to a more-than-10% estimated loss of annual income. For firms, we document an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent. Although the literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.

Download working paper: http://ssrn.com/abstract=2252200

Abstract—Private gatekeeping institutions, from credit rating agencies to supply-chain auditors, are important players in contemporary regulatory regimes. Yet little is known about what influences the decisions of the individual accountants, auditors, analysts, and attorneys who interpret and apply the rules embodied in the regulatory schemes they help to implement. Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, we theorize and investigate the economic incentives and social institutions that shape the gatekeeping decisions of private supply-chain auditors. We find evidence to support the argument that auditors' decisions are influenced by financial conflicts of interest. But we also find evidence that their decisions are shaped by social factors, including an auditor's experience, gender, and professional training; ongoing relationships between auditors and audited factories; and gender diversity on audit teams. By demonstrating the contributions of both economic incentives and social institutions to gatekeeping decisions, our research significantly extends the gatekeeping literature's narrow focus on economic incentives. By providing the first comprehensive and systematic findings on supply-chain auditing practices, our study also suggests strategies for designing private regulatory regimes that will more effectively detect and prevent corporate wrongdoing.

Download working paper: http://ssrn.com/abstract=2343802

Abstract—Corporate codes of conduct are becoming an increasingly important vehicle for promoting and assessing adherence to global labor standards at factories in global supply chains, but little is known about the factors that predict when supplier factories will comply with them. Regulation and governance scholarship suggests that factories' compliance with global labor standards depends on the institutional environments in which they are embedded. However, there are few systematic, comprehensive studies of how different regulatory institutions influence private firms' compliance with global norms. We conduct one of the first large-scale comparative studies using tens of thousands of codes of conduct audits from one of the world's largest social auditors to determine what constellation of international, domestic, civil society, and market institutions promotes compliance with the global labor standards embodied in codes. We find that supplier factories are more likely to comply when they are embedded in states that have highly protective labor regulation and high levels of press freedom; when they serve buyers located in countries where consumers are wealthy and socially conscious; and, among factories in developing countries, those situated in states with more international labor treaty obligations and greater densities of international nongovernment organizations (INGOs). Taken together, these findings suggest the importance of multiple, robust, overlapping, and reinforcing governance regimes to meaningful transnational regulation.

Download working paper: http://ssrn.com/abstract=2178540

Abstract—This paper explores how entrepreneurs' efforts to legitimate a firm and a nascent industry at the same time affect the internal development of the firm. We analyze qualitative data from a three-year study of a new firm in the nascent smart cities industry and find that firm leaders engaged in a set of legitimation activities intended to help external stakeholders understand and appreciate the firm and its industry. Our analysis uncovers three unintended cognitive consequences of legitimation activities for firm employees-constrained attention, overconfidence, and identity commitments-that affected the firm's ability to learn: that is, to attend to, reflect on, and dynamically respond to information and changes in its environment. Our longitudinal research thus reveals a downside of legitimacy building, contributes to the literature on behavioral strategy, and highlights unique challenges of starting a new firm in a nascent industry. Further, by identifying the mechanisms through which legitimation activities affect learning, we develop actionable propositions to help leaders and entrepreneurs manage the tension between the two sets of activities.

Download working paper: http://ssrn.com/abstract=2294928