First Look

Abstract—This paper investigates whether the religious identity of state legislators in India influences development outcomes, both for citizens of their religious group and for the population as a whole. Using an instrumental variables approach derived from a regression discontinuity, we find that increasing the political representation of Muslims improves health and education outcomes in the district from which the legislator is elected. We find no evidence of religious favoritism: Muslim children do not benefit more from Muslim political representation than children from other religious groups.

Publisher's link: http://www.people.hbs.edu/liyer/BCCI_JEBO_Final_Sept2013.pdf

Abstract—Accounting performance measures are often argued to lead to short-sighted behavior by managers facing intertemporal decisions. We assess the association between different types of performance measures and the time horizon of business unit managers who have profit responsibility. Our results, based on a sample of 105 managers, indicate that accounting return measures direct business unit managers' attention toward longer-term activities. Non-financial measures similarly direct managerial attention toward longer-term activities, although not to the same degree as accounting return measures. We conclude that accounting return measures can balance out potential congruity problems associated with the profit measures by directing managerial attention to activities that have longer-term consequences on firm performance.

Publisher's link: http://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.2012.01178.x/abstract

Abstract—Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm's switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices, and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Publisher's link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572699

Abstract—Reaching for yield-the propensity to buy riskier assets in order to achieve higher yields-is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance but higher volatility of realized returns.

Publisher's link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2065841

Abstract—This research examines how access to information on peer health behaviors affects one's own health behavior. Methods: We report the results of a randomized field experiment in a large corporation in which we introduced walkstations (treadmills attached to desks that enable employees to walk while working), provided employees with feedback on their own and their co-workers' usage, and assessed usage over six months. We report how we determined our sample size, as well as all data exclusions, manipulations, and measures in the study. Results: Walkstation usage declined most when participants were given information on co-workers' usage levels, due to a tendency to converge to the lowest common denominator-their least-active co-workers. Conclusion: This research demonstrates the impact of the lowest common denominator in physical activity: people's activity levels tend to converge to the lowest-performing members of their groups. This research adds to our understanding of the factors that determine when the behavior of others impacts our own behavior for the better-and the worse.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=45468

Abstract—Restaurant hygiene inspections are often cited as a success story of public disclosure. Hygiene grades influence customer decisions and serve as an accountability system for restaurants. However, cities (which are responsible for inspections) have limited resources to dispatch inspectors, which in turn limits the number of inspections that can be performed. We argue that Natural Language Processing (NLP) can be used to improve the effectiveness of inspections by allowing cities to target restaurants that are most likely to have a hygiene violation. In this work, we report the first empirical study demonstrating the utility of review analysis for predicting restaurant inspection results.

Publisher's link: http://people.hbs.edu/mluca/hygiene.pdf

Abstract—Which parts of your innovation processes should you open up to the wider world? To reap the benefits of open innovation, executives must understand what to open, how to open it, and how to manage the resulting problems. According to authors Andrew King of Dartmouth College's Tuck School of Business and Karim R. Lakhani of the Harvard Business School and the NASA Tournament Lab, many organizations "are finding that making open innovation work can be more complicated than it looks."

Publisher's link: http://sloanreview.mit.edu/article/using-open-innovation-to-identify-the-best-ideas/

Abstract—We present a model of standard setting and patent-pool formation. We study the effects of alternative standard-setting and pool-formation rules on technology choice, prices, and welfare. We find three main results. First, we show that allowing patent pools may reduce welfare when standards are negotiated and patent pools need to be ex-post incentive compatible. Second, we show that ranking combinations of standard-setting and pool-formation rules in welfare terms when patent pools need to be ex-post incentive compatible is not possible. Third, we show that allowing firms to sign ex-ante agreements regarding pool participation dominates (in terms of welfare) any other policy rule. This policy does not require the standard-setting organization to have information on patent ownership, the terms of license agreements, or the value added of patents.

Publisher's link: http://escueladeadministracion.uc.cl/images/publicaciones/llanespoblete2.pdf

Abstract—Alan MacCormack, Fiona Murray, and Erika Wagner examine the phenomenon of corporations using innovation contests. They write: "Companies are searching for better ways to identify and exploit novel solutions. Increasingly, they are discovering that many of the very best ideas lie outside their organizations, in an ecosystem of potential innovators who possess wide-ranging skills and knowledge."

Publisher's link: http://sloanreview.mit.edu/article/spurring-innovation-through-competitions/

Abstract—Using detailed publication and citation data for over 50,000 articles from 30 major economics and finance journals, we investigate whether network proximity to an editor influences research productivity. During an editor's tenure, his current university colleagues publish about 100% more papers in the editor's journal, compared to years when he was not editor. In contrast to editorial nepotism, such "inside" articles have significantly higher ex-post citation counts, even when same-journal and self-cites are excluded. Our results thus suggest that despite potential conflicts of interest faced by editors, personal associations are used to improve selection decisions.

Abstract—This paper studies the strategic interaction between firms producing strictly complementary products. With strict complements, a consumer derives positive utility only when both products are used together. We show that value-capture and value-creation problems arise when such products are developed and sold by separate firms. Although the firms tend to price higher for given quality levels, their provision of quality is so low that, in equilibrium, prices are set well below what an integrated monopolist would choose. When one firm can mandate a royalty fee from the complementor producer, we find that the value-capture problem is mitigated to some extent and consumer surplus rises. However, because royalty fees greatly reduce the incentives of the firm paying them to invest in quality, the arrangement exacerbates the value-creation problem and leads to even lower total quality. Surprisingly, this result can reverse with competition. Notably, introducing a competitor opens the door for the possibility of a Pareto-improving outcome in which all firms and consumers are better off.