First Look

September 30, 2008

It may seem costly to increase staffing levels in retail stores, but is it also smarter and more profitable over time? Yes, according to HBS professor Zeynep Ton. Ton found that bumping up labor in a store is associated with higher profitability because employees are better able to carry out their tasks. Service quality also increases, yet findings suggest there is no direct relationship between service quality and profitability. Ton based her results on observations of stores owned and operated by the same company over four years. Her findings have both operational and strategic implications: Operationally, managers may be thinking about labor too much in terms of cost rather than profit. Strategically, the ability of employees to carry out their duties-known as conformance quality—in certain service settings may have more impact on profitability than service quality itself.

A working paper about the research, "The Effect of Labor on Profitability: The Role of Quality," may be downloaded here.

Other faculty research of note this week includes a case study of global talent management at Novartis: Can the same system take hold in China? And an article on how firms make cross-border decisions for operations, financing, and investments.

— Martha Lagace

Working Papers

Parallel Search, Incentives and Problem Type: Revisiting the Competition and Innovation Link


This paper presents econometric evidence of two independent effects of adding more competitors on innovation: 1) a competition effect whereby increasing rivalry shapes, and often decreases, incentives to expend effort and invest in innovation; and 2) a parallel search effect whereby adding greater numbers of "searchers" benefits innovation by broadening the search for solutions. We further show the importance of these effects depends on the nature of the innovation problem being solved. The analysis uses data from TopCoder's software contest platform, on which elite software developers were assigned different problems to solve within assigned groups of direct competitors. Econometric relationships are identified by exploiting random assignment and a separate instrumental variables procedure.

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Welfare Payments and Crime


This paper tests the hypothesis that the timing of welfare payments affects criminal activity. Analysis of daily reported incidents of major crimes in twelve U.S. cities reveals an increase in crime over the course of monthly welfare payment cycles. This increase reflects an increase in crimes that are likely to have a direct financial motivation like burglary, larceny-theft, motor vehicle theft, and robbery, as opposed to other kinds of crime like arson, assault, homicide, and rape. Temporal patterns in crime are observed in jurisdictions in which disbursements are focused at the beginning of monthly welfare payment cycles and not in jurisdictions in which disbursements are relatively more staggered.

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Attitude-Dependent Altruism, Turnout and Voting


This paper presents a goal-oriented model of political participation based on two psychological assumptions. The first is that people are more altruistic towards individuals that agree with them and the second is that people's well-being rises when other people share their personal opinions. The act of voting is then a source of vicarious utility because it raises the well-being of individuals that agree with the voter. Substantial equilibrium turnout emerges with nontrivial voting costs and modest altruism. The model can explain higher turnout in close elections as well as votes for third-party candidates with no prospect of victory. For certain parameters, these third-party candidates lose votes to more popular candidates, a phenomenon often called strategic voting. For other parameters, the model predicts "vote-stealing" where the addition of a third candidate robs a viable major candidate of electoral support.

Download the paper from SSRN ($5):

The Effect of Labor on Profitability: The Role of Quality


Determining staffing levels is an important decision in retail operations. While the costs of increasing labor are obvious and easy to measure, the benefits are often indirect and not immediately felt. One benefit of increased labor is improved quality. The objective of this paper is to examine the effect of labor on profitability through its impact on quality. Since employees at retail stores perform both production-related activities and customer-service activities, I examine both conformance quality and service quality. Using longitudinal data from stores of a large retailer, I find that increasing the amount of labor at a store is associated with an increase in profitability through its impact on conformance quality but not its impact on service quality. While increasing labor is associated with an increase in service quality, in this setting there is no significant relationship between service quality and profitability. My findings highlight the importance of attending to process discipline in certain service settings. They also show that too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability.

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Cases & Course Materials

Global Talent Management at Novartis

Harvard Business School Case 708-486

This case tackles the topic of global talent management. It can be used to analyze the performance measurement, incentive, and talent development system used at a major multinational company. This case can also be used to analyze the extent to which this system should or should not be adapted for China and other emerging economies.

Purchase this case: b01/en/common/item_detail.jhtml?id=708486

Power Across Latin America: Endesa de Chile

Harvard Business School Case 799-015

Endesa, a privatized Chilean electricity generator, has made significant investments in the privatization of Argentina's electricity sector and is now contemplating an even larger privatization opportunity in Peru. In deciding how much to bid in Peru, Endesa must account for the political context in which privatization is being undertaken, as well as a host of other uncertainties.

Purchase this case: /b01/en/common/item_detail.jhtml?id=799015



Optimal Reserve Management and Sovereign Debt


Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why don't sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, we find the optimal policy is not to hold reserves at all. This finding is robust too considering interest rate shocks, sudden stops, contingent reserves, and reserve dependent output costs.

Multinational Firms, FDI Flows and Imperfect Capital Markets


This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing, and investment decisions of firms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational firm activity, increase the reliance on FDI flows, and alter the decision to deploy technology through FDI as opposed to arm's length technology transfers. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.

The Influence of Ownership on Accounting Information Expenditures


This paper analyzes the association between ownership, top management incentives, and expenditures on accounting information. We argue that organizations with privately appointed boards of directors such as for-profit and non-governmental nonprofit organizations use incentive pay practices which encourage managers to use accounting information to improve performance. In contrast, government organizations are publicly governed and are constrained in their compensation practices because hospital CEOs are administrators of government-provided services. However, these hospitals must prove their efficiency to continue to receive adequate budgetary funding. Therefore government hospitals are more likely to use accounting information to gain legitimacy with stakeholders and regulators. Accordingly, we predict a positive relationship between expenditures on accounting information and contracting intensity in privately governed organizations, whereas we expect no such association for publicly governed organizations. We analyze data from California hospitals to determine differences in these roles across ownership types. We find a positive association between contracting intensity and expenditures on accounting information in privately governed hospitals but no relation in publicly governed hospitals. Finally, we find differences in the use of accounting information within the privately governed hospitals, based on ownership. While for-profit hospitals expend resources on accounting information that helps improve their revenue positions, nonprofit hospitals expend resources on accounting information that facilitates decision-making related to operating efficiency and cost containment.

Can Nanotechnology Improve the Sustainability of Biobased Products? The Case of Layered Silicate Biopolymer Nanocomposites


Recent developments in nanotechnology, especially in the area of nanoclay composites, are improving the technical performance of biobased polymers and moving them toward technical and economic competitiveness with petroleum-based polymers and conventional composites. We assess whether these developments also improve the environmental sustainability of biopolymers, by using a life cycle approach. We estimate energy use and emissions from the nanoclay production process and compare these with prior life cycle data for biopolymers as well as other fibers, and we find that nanoclay production results in lower energy use and greenhouse gas emissions than production of many common biopolymers and glass fibers. Nanoclay composites hence can improve the life cycle environmental performance of several common biopolymers. However, for some biopolymers the relative performance depends on the functional unit.

Management Accounting in India


This chapter surveys the history, evolution, and current status of accounting systems and practices in India. Tracing the roots of Indian accounting systems to the ancient civilization of the Indus Valley, we discuss the accounting contributions of historical writings such as the Smritis and the Arthashatra. We also discuss the accounting system used by the East India Company. Next we provide an overview of contemporary Indian accounting systems institutions as well as accounting education and curricula. We discuss the prevalence of modern management accounting practices in Indian companies. We conclude with a discussion of future research opportunities provided by India's current status as an emergent economic power.

Rewriting History


We document widespread ex-post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.