First Look

July 12, 2016

Among the highlights included in new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Rising education costs dampen entrepreneurship

Researcher Gareth Olds finds a connection between rising costs of higher education and declining rate of new business starts in the United States. “I find that a 10 percent increase in the average price of in-state tuition is associated with a 13.9 percent decrease in new business starts of parents with college-age children in the CPS, relative to both non-parents and parents of younger children,” Olds writes. The working paper is titled College Tuition, Public Finance and New Business Starts

The economic implications of biosimilars

Biosimilars are biologic drugs that have been shown to be therapeutically equivalent to an already approved biologic drug. They’ve been in use in the US since only 2015, but for much longer in Europe. Ariel Dora Stern and colleagues use the European market experience to determine how biosimilars may impact competition in the US, where biologic drugs represent 28 percent of drug spending. Read their paper, The Impact of the Entry of Biosimilars: Evidence from Europe.

How to reduce government error in GDP forecasts

When the government forecasts GDP growth, it is often optimistic. Given the importance of these numbers for planning in the public and private sectors, the new working paper Bias in Official Fiscal Forecasts: Can Private Forecasts Help? recommends that private forecasts be used as an input. The research was written by Jeffrey A. Frankel and Jesse Schreger.

A complete list of new research and publications from Harvard Business School faculty follows.

— Sean Silverthorne
 
  • July–August 2016
  • Harvard Business Review

How to Negotiate with a Liar

By: John, Leslie

Abstract—People, including negotiators, lie every day, so when you're trying to make a deal, it's important to defend against deception. The best strategy, says the author, is to focus not on detecting lies but on preventing them. She outlines five tactics that research has shown to be effective: encourage reciprocity. You can build trust and prompt other parties to disclose strategic information by sharing information yourself. Ask the right questions. Negotiators often lie by omission, keeping mum about relevant facts, but if directly asked, they are more likely to respond honestly. Watch for dodging. Don't let your counterparts sidestep your questions—write them down in advance, take notes on the answers, and make sure you get the information you're seeking. Don't dwell on confidentiality. Studies show that the more you reassure others that you'll protect their privacy, the more guarded and apt to lie they become. So be nonchalant when discussing sensitive topics. Cultivate leaks. People often reveal information unwittingly, so listen carefully for any slips and try indirect approaches to gaining information.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51329

  • July–August 2016
  • Harvard Business Review

How to Pay for Health Care

By: Porter, Michael E., and Robert S. Kaplan

Abstract—The United States stands at a crossroads in how to pay for health care. Fee for service, the dominant model in the United States and many other countries, is now widely recognized as perhaps the biggest obstacle to improving health care delivery. A battle is currently raging, outside of the public eye, between the advocates of two radically different payment approaches: capitation and bundled payments. The stakes are high, and the outcome will define the shape of the health care system for many years to come, for better or for worse. In this article, the authors argue that although capitation may deliver modest savings in the short run, it brings significant risks and will fail to fundamentally change the trajectory of a broken system. The bundled payment model, in contrast, triggers competition between providers to create value where it matters—at the individual patient level—and puts health care on the right path. The authors provide robust proof-of-concept examples of bundled payment initiatives in the United States and abroad, address the challenges of transitioning to bundled payments, and respond to critics' concerns about obstacles to implementation.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51325

Abstract—A manufacturer of high-tech streetlights considers an exception to its new subscription model. A fictionalized case study based on the HBS Case 816-005, "Bigbelly," by Mitchell Weiss and Christine Snively. This case is an example of public entrepreneurship.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51306

Abstract—How does the shadow banking system respond to changes in the capital regulation of commercial banks? This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. A key feature of our model is defaultable bank liabilities that provide liquidity services to households. The quality of the liquidity services provided by bank liabilities depends on their safety in case of default. Commercial bank debt is fully insured and thus provides full liquidity. However, commercial banks do not internalize the social costs of higher leverage in the form of greater bankruptcy losses (moral hazard) and are subject to a regulatory capital requirement. In contrast, shadow bank liabilities are subject to runs and credit risk and thus typically less liquid compared to commercial banks. Shadow banks endogenously limit their leverage as they internalize the costs. Tightening the commercial banks' capital requirement from the status quo leads to safer commercial banks and more shadow banking activity in the economy. While the safety of the financial system increases, it provides less liquidity. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20%.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51305

Bias in Official Fiscal Forecasts: Can Private Forecasts Help?

By: Frankel, Jeffrey A., and Jesse Schreger

Abstract—Government forecasts of GDP growth and budget balances are generally more over optimistic than private sector forecasts. When official forecasts are especially optimistic relative to private forecasts ex ante, they are more likely also to be over optimistic relative to realizations ex post. For example, euro area governments during the period 1999–2007 assiduously and inaccurately avoided forecasting deficit levels that would exceed the 3% Stability and Growth Pact threshold; meanwhile, private sector forecasters were not subject to this crude bias. As a result, using private sector forecasts as an input into the government budgeting-making process would probably reduce official forecast errors for budget deficits.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51324

Abstract—A growing public discourse cites the rising cost of education and student debt overhang as a contributor to slow economic growth. A parallel discussion explores the causes of the secular decline in business dynamism and entrepreneurship rates in the United States over the past several decades. This study is an attempt to connect these two narratives. I provide early evidence that the growth of public university tuition over the previous two decades is negatively associated with movement into self-employment. Because labor market and education decisions are often made together, I focus on shocks to in-state tuition among parents of near-college-age children, who may internalize the cost of their children’s education but are less likely to be attending college themselves. Using state budget surpluses and shortfalls as an instrument for in-state tuition in a triple-difference framework, I find that a 10% increase in the average price of in-state tuition is associated with a 13.9% decrease in new business starts of parents with college-age children in the CPS, relative to both non-parents and parents of younger children. A one percentage-point increase in the growth rate of in-state tuition is associated with a 3.8% decline in new firm births. The effect is similar in size and significance when aggregating to the household level and when including a standard battery of covariates. The instrument is orthogonal to private school tuition rates, and the effects are stronger for households with more children and those with children closest to college age. Taken together, the results indicate that the rising cost of higher education may be partially responsible for the decline in new business starts in the United States.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51321

Abstract—I examine the relationship between public health insurance and firm formation. Developing a variant of regression discontinuity, I find the Child Health Insurance Program lowered the child uninsured rate by 40% and increased self-employment by 15%. Monte Carlo evidence suggests the technique significantly reduces bias and Type-1 Error. SCHIP increased incorporated ownership by 36% and business share of household income by 12%, implying higher-quality ventures. The mechanism is a reduction in risk rather than credit constraints, and I find no imbalance in observable characteristics between treatment and control groups. These findings strongly suggest social safety nets have spillover benefits on the supply of firms.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50691

Food Stamp Entrepreneurs

By: Olds, Gareth

Abstract—This paper explores how eligibility for the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamps Program) affects firm formation. Using a variety of identification strategies, I show that expanded SNAP eligibility in the mid-2000s increased enrollment by 3–5 percentage points. Newly eligible households were also 20% more likely to own a business, with larger effects for incorporated firms. I find large increases in labor supply on the extensive and intensive margins, equivalent to 1.1 million additional workers. I also develop a series of falsification checks that use information from unaffected portions of the income distribution to improve RD estimates. This strategy improves balance on observables between treatment and control groups, and Monte Carlo simulations find a significant reduction in Type 1 Error. Finally, I show that the empirical results are driven entirely by newly eligible households that did not enroll, suggesting uninsured risk from leaving wage employment is the primary barrier to entrepreneurship for this population.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50692

Abstract—This paper explores the role of public health insurance in small business ownership among immigrants, a group with high rates of entrepreneurship. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 created a five-year “waiting period” for legal immigrants to receive federal benefits. However, when the State Child Health Insurance Program was passed in the following year, 15 states chose to insure newly arrived immigrant children with local funds. Using a triple-difference identification strategy, I show that these policies made families with foreign-born members 21% less likely to have uninsured children compared to the pre-policy baseline. These households were also 20% more likely to be self-employed and 28% more likely to own an incorporated business. The increase operates mainly through increases in firm birth rates but survival rates are also higher. The increase in firm ownership comes mostly from families whose children were already insured, suggesting public health insurance increases business ownership by reducing the risks of losing coverage.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50693

Abstract—The field of strategy has mounted an enormous effort to understand, define, predict, and measure how organizational capabilities shape competitive advantage. While the notion that capabilities influence strategy dates back to the work of Andrews (1971), attempts to formalize a “capabilities based” approach to strategy only began to take shape in the past twenty years. In particular, the publication of Teece and Pisano (1994), Teece, Pisano, and Shuen (1997), and Eisenhart and Martin (2000) works on “dynamic capabilities” triggered a flood of debate and discussion on the topic. Unfortunately, the literature on dynamic capabilities has become mired in endless debates about definitions and has engaged in an elusive search for properties that make organizations adaptable. This paper argues that the research program on dynamic capabilities needs to be reset around the fundamental strategic problem facing firms: how to identify and select capabilities that lead to competitive advantage. To this end, the paper develops a framework that attempts to connect firms’ capability search strategies with their strategies in product markets. It frames firms’ capability search strategies as choices among different types of capability enhancing investments. The key distinguishing feature of capabilities in this framework is their degree of fungibility: capabilities span a continuum ranging from highly general purpose (e.g., quality management) to highly market specific (e.g., knowing how to manufacture an airplane wing). To illustrate the potential of the framework to shed new light on traditional strategy questions, the paper applies the framework to explore some unexplained features of Penrosian diversification strategies. The paper concludes by suggesting a research agenda for dynamic capabilities.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51323

The Impact of the Entry of Biosimilars: Evidence from Europe

By: Scott Morton, Fiona, Ariel Dora Stern, and Scott Stern

Abstract—Biologic (large-molecule) drugs represent a disproportionate and growing share of all drug spending in the United States, accounting for less than 1% of prescriptions filled but nearly 28% of drug spending. Whereas traditional (small-molecule) drugs have historically faced price competition from generic drugs after patent expiration, biosimilars—biologic drugs that have been shown to be therapeutically equivalent to an already approved biologic drug—have only been approved in the United States since 2015. Europe has had biosimilar entry since 2006. This paper considers how competition from biosimilars may impact the U.S. biosimilar market by examining data from the first eight years of biosimilar competition in 23 European countries. A major contribution of this project is the completion of a detailed survey, allowing us to precisely characterize European biologic drug procurement institutions over time. Using data from three classes of biosimilar drugs, we analyze how market features and public polices predict entry, market prices, and penetration of biosimilars. We find significant heterogeneity across countries and drug classes in all of these outcomes. While we observe that effective buyer institutions (in particular, committed tenders) are associated with increased biosimilar entry and penetration, price patterns are more difficult to glean from the available data. Our estimates can inform ongoing policy discussions on both sides of the Atlantic about the economic implications of biosimilar policies.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51309

  • Harvard Business School Case 715-413

edX: Strategies for Higher Education

In May 2012, Harvard University and the Massachusetts Institute of Technology (MIT) founded edX, a new non-profit joint venture that would provide a platform for massive open online courses (MOOCs). edX did not produce original courses or instructional content—it made a web platform through which Harvard and MIT, and subsequently dozens more "partner" universities, could offer their lecture courses as MOOCs. While the future role of MOOCs in higher education remained a topic of public debate, edX needed to answer concrete managerial and strategic questions. For example, what should edX's scope be? Should edX try to develop a consumer brand of its own or rely on the brands of its partners? And how could edX monetize its services to recoup Harvard and MIT's investments and reward participating universities? This case presented the history of edX and the online education market as background for a discussion about edX's strategic choices.

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https://cb.hbsp.harvard.edu/cbmp/product/715413-PDF-ENG

  • Harvard Business School Case 216-054

Preparing a Concession Bid at TAV Airports Holding

In 2013, TAV Airports Holding prepared a bid for the concession to build and operate the third Istanbul airport. This process involved input from various parts of the firm with operating and financial expertise. Burcu Geriş, the CFO of TAV Airports Holding, and her team created a model to evaluate the opportunity and formulate a bid.

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https://cb.hbsp.harvard.edu/cbmp/product/216054-PDF-ENG

  • Harvard Business School Case 716-456

Orkestra—Basque Institute of Competitiveness

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/716456-PDF-ENG

  • Harvard Business School Case 216-085

The Wealthfront Generation

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/216085-PDF-ENG

  • Harvard Business School Case 716-449

ASOS PLC

Launched in 2000, ASOS was one of the world's largest online fashion specialists in 2016. Focusing on young consumers aged 16–25 years, the company offered over 80,000 items on its websites, many times more than the largest fashion stores, and added several thousand new lines every week. Based in the United Kingdom, ASOS shipped products to 240 countries and territories, and international sales represented more than 50% of total revenues. But when new CEO Nick Beighton took over from founder Nick Robertson in September 2015, he faced some significant challenges. While ASOS was large by online standards, traditional fashion retailers were building their own online sales capabilities, and Amazon was expanding its apparel offering. Meanwhile, new online competitors were emerging at a rapid rate. After ASOS issued several profit warnings in 2014, its growth had slowed to 18% in 2015. Beighton was convinced that ASOS's strategy was right and that the company needed to improve its execution to recapture its historical success. Some analysts were not so sure, and the stock price still had not recovered from its 2014 fall. ASOS' goal was to be "the world's no. 1 fashion destination for 20-somethings." Did this lofty ambition make sense? And did ASOS have the right strategy to achieve it?

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https://cb.hbsp.harvard.edu/cbmp/product/716449-PDF-ENG

  • Harvard Business School Case 716-455

Reinventing Best Buy

On February 25, 2016, Best Buy announced a second year of comparable-store sales increases and a 13.5% increase in online sales. These results were in marked contrast to four years of declining comparable-store sales from 2010 to 2013. CEO Hubert Joly, appointed in August 2012, was now in his fourth year of reinventing Best Buy with his "Renew Blue" strategy. When he took over, Best Buy was losing share to Amazon.com, which was encouraging consumers to view products at Best Buy and other physical stores and then buy them for a lower price online, a practice known as "showrooming." Undaunted, Joly had encouraged the practice, convinced that it presented an opportunity to sell to customers as long as Best Buy's prices were competitive. Joly had committed the company to a multi-channel strategy in North America and exited struggling international operations. Operating margins had increased as a result, but growth was still proving elusive. Had Joly done enough to reinvent Best Buy?

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  • Harvard Business School Case 716-454

Salesforce.com vs. Siebel (Abridged)

Explores the phenomenon of software becoming a service. Salesforce.com has catapulted into the lead for offering a customer relationship management (CRM) solution as a Web-based service. Siebel, the leader in CRM packaged software sales, has to devise a strategy to compete with salesforce.com.

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