First Look

Abstract—The last two decades have witnessed an extraordinary growth of new models of managing and organizing the innovation process, which emphasize users over producers. Large parts of the knowledge economy now routinely rely on users, communities, and open innovation approaches to solve important technological and organizational problems. This view of innovation, pioneered by the economist Eric von Hippel, counters the dominant paradigm, which casts the profit-seeking incentives of firms as the main driver of technical change. In a series of influential writings, von Hippel and colleagues found empirical evidence that flatly contradicted the producer-centered model of innovation. Since then, the study of user-driven innovation has continued and expanded, with further empirical exploration of a distributed model of innovation that includes communities and platforms in a variety of contexts and with the development of theory to explain the economic underpinnings of this still emerging paradigm. This volume provides a comprehensive and multidisciplinary view of the field of user and open innovation, reflecting advances in the field over the last several decades. The contributors—including many colleagues of Eric von Hippel—offer both theoretical and empirical perspectives from such diverse fields as economics, the history of science and technology, law, management, and policy. The empirical contexts for their studies range from household goods to financial services. After discussing the fundamentals of user innovation, the contributors cover communities and innovation; legal aspects of user and community innovation; new roles for user innovators; user interactions with firms; and user innovation in practice, describing experiments, toolkits, and crowdsourcing and crowdfunding.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=42312

Abstract—The link between measures of risk and return within the equity market has been very weak over the past 47 years: in the United States, returns on high-risk stocks have cumulatively fallen short of the returns on low-risk stocks, during a period when the equity market as a whole experienced high returns relative to Treasury bills. In the spirit of Fischer Black’s 1993 article “Beta and Return,” published in this journal, the author takes seriously the idea that this evidence reflects a risk anomaly—a mispricing of risk for behavioral and institutional reasons—and revisits the associated implications for investing and corporate finance, examining asset allocation, high leverage in financial firms, low leverage in industrial firms, private equity, venture capital, and bank capital regulation along the way. Many of these implications fit nicely with Black’s original conjectures, and the author highlights refinements and additions to the original list.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50338

Abstract—We hypothesized that increased post-graduate surgical experience correlates with improved operative efficiency and long-term survival in standard cardiac surgery procedures. Methods: Utilizing a prospectively collected retrospective database, we identified patients who underwent isolated CABG (n=3726), AVR (n=1626), MV repair (n=731), MVR (n=324), and MVR+AVR (n=184) from 1/2002 to 6/2012. After adjusting for patient risk and surgeon variability, we evaluated the impact of surgeon experience on cardiopulmonary bypass and cross-clamp times, and long-term survival. Results: Mean surgeon experience after fellowship graduation was 16.0 ± 11.7 years (1.0–35.2 years). After adjusting for patient risk and surgeon-level fixed effects, learning curve analyses demonstrated improvements in cardiopulmonary bypass and cross-clamp times with increased surgeon experience. There was marginal improvement in the predictability (R2 value) of cardiopulmonary bypass and cross-clamp time for CABG with the addition of surgeon experience; however, all other procedures had marked increases in the R2 following addition of surgeon experience. Cox proportional hazard models revealed that increased surgeon experience was associated with improved long-term survival in AVR (HR=0.85, P<0.0001), MV repair (0.73, p<0.0001), and MVR+AVR (0.95, p=0.006) but not in CABG (HR=0.80, p=0.15), and a trend towards significance in MVR (HR=0.87, p=0.09). Conclusions: In cardiac surgery, not including CABG, surgeon experience is an important determinant of operative efficiency and of long-term survival.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50334

Abstract—This article examines the emergence and development of what became the largest business group in Turkey, the Koç Group. This venture was an important factor in the emergence of modern business enterprise in the new state of the Republic of Turkey from the 1920s. After World War II it diversified rapidly, forming part of a cluster of business groups, which dominated the Turkish economy alongside state-owned firms. This article examines how the founder of the Koç Group, Vehbi Koç, formulated his business model and analyses how his firm evolved into a diversified business group. Although the case supports prevailing explanations of business groups related to institutional voids, government policy, and the importance of contact capabilities, this study builds on and extends the earlier suggestions that entrepreneurship needs incorporating as an explanatory factor. The article shows that Koç acted as both a Kirznerian and Schumpeterian entrepreneur to build his group, both in its formative stages and later in its subsequent growth into a diversified business group.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50341

Abstract—We review the recent literature on the financing of innovation, inclusive of large companies and new startups. This research strand has been very active over the past five years, generating important new findings, questioning some long-held beliefs, and creating its own puzzles. Our review outlines the growing body of work that documents a role for debt financing related to innovation. We highlight the new literature on learning and experimentation across multi-stage innovation projects and how this impacts optimal financing design. We further highlight the strong interaction between financing choices for innovation and changing external conditions, especially reduced experimentation costs.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49008

Abstract—Using newly available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50344

Abstract—No abstract available.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50365

Abstract—We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the U.S. Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model's estimated welfare maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.

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Abstract—Online marketplaces increasingly choose to reduce the anonymity of buyers and sellers in order to facilitate trust. We demonstrate that this common market design choice results in an important unintended consequence: racial discrimination. In a field experiment on Airbnb, we find that requests from guests with distinctively African-American names are roughly 16% less likely to be accepted than identical guests with distinctively White names. The difference persists whether the host is African-American or White, male or female. The difference also persists whether the host shares the property with the guest or not, and whether the property is cheap or expensive. We validate our findings through observational data on hosts’ recent experiences with African-American guests, finding host behavior consistent with some, though not all, hosts discriminating. Finally, we find that discrimination is costly for hosts who indulge in it: hosts who reject African-American guests are able to find a replacement guest only 35% of the time. On the whole, our analysis suggests a need for caution: while information can facilitate transactions, it also facilitates discrimination.

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Abstract—Our research considers how childhood exposure to non-traditional gender role models at home, specifically being raised by an employed mother, relates to men's and women's employment and domestic outcomes. Our analyses rely on national level archival data and individual level survey data collected as part of the International Social Survey Programme in 2002 and 2012 from nationally representative samples of men and women in 24 countries. Adult daughters, but not sons, of employed mothers are more likely to be employed and, if employed, are more likely to hold supervisory responsibility, work more hours, and earn higher wages than women whose mothers stayed home fulltime. At home, sons raised by an employed mother spend more time caring for family members than men whose mothers stayed home fulltime, and daughters raised by an employed mother spend less time on housework than women whose mothers stayed home fulltime. The pattern of results in both fixed effects models and mixed models is consistent with the proposition that employed mothers provide non-traditional gender role models to their children, liberalizing gender attitudes and transmitting life skills for managing competing responsibilities, increasing the likelihood of their daughters' active engagement in the workplace and their sons' active engagement in family care.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=49311

Abstract—When seeking new leaders, business and government organizations alike often need individuals that are less risk averse, or even risk-seeking, in order to improve performance. However, individuals amenable to increased risk-taking may be more likely to engage in misconduct. To study this issue, we explore U.S. political scandals and the implicated politicians’ portfolio choices. We find that a politician allocating all of her portfolio to risky investments has double the odds of being involved in a political sandal compared to a politician allocating all of her portfolio to safe investments. This suggests that those who are more willing to take risks in their personal finances are also more likely to engage in misconduct. We validate portfolio choice as a measure of risk preferences by correlating actual high-stakes investment choices (average $700,000 U.S.) to conventional laboratory lottery choices (average $51 U.S.) of wealthy investors.

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Abstract—A rich body of literature examines the politics of economic management and economic intervention in advanced industrial democracies. While all governments have monetary and fiscal tools, such as the manipulation of interest rates, exchange rates, and government spending, at their disposal to manage and smooth business cycles, they employ these tools in different ways for political reasons. This paper argues that the Chinese Communist Party (CCP) has used the land supply as a key instrument of macro-economic regulation. The article draws on local and central documents to track, first, how, during the 1990s, land became the CCP's central means of macroeconomic management and, second, demonstrate the use of land as an economic policy tool. In particular, the article analyzes key episodes of macroeconomic policymaking to show the causal logic at work. In each instance, the CCP relied on manipulation of the national land supply and local land access to either stimulate economic growth or rein in an overheating economy. China's land institutions share "complementarities" with fiscal and financial institutions and benefit powerful political actors while imposing costs on marginal ones.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50363

The Grommet, an online product launch platform, was at the brink of scaling its business. The Grommet's daily launch and sale of innovative consumer products, using personal videos created by product makers, had led to its initial success. In 2014, the company launched The Grommet Wholesale, a similar platform targeting retailers. Was this the best way to capture more of the value the company created for makers?

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To accelerate Bigbelly's sales growth and its "smart cities" positioning, its CEO planned to shift his company from equipment sales to a subscription service. Jack Kutner hoped to reposition Bigbelly's solar-powered trash compacting stations beyond trash and recycling and use them also to provide public space Wi-Fi, advertising, and urban intelligence sensors. "One year from now we will no longer sell any machines," Kutner planned to tell the company's board of directors. Would they buy his subscription-only pitch? And if they did, would Bigbelly's still-reluctant purchasers?

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