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HBS Working Papers: 2006-2007

All HBS Working Papers are copyrighted by their authors. For permission to reproduce or to request a copy, contact an author directly.

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This paper empirically explores the contingencies that drive cannibalizing and complementary effects across channels to provide sales forecasting, promotion planning, and customer relationship management guidance to multichannel managers. We investigate three contingencies in a sales analysis of a leading U.S. retailer who adds a new retail store channel to existing catalog and online channels. We show that the emergence and strength of cannibalizing and complementary effects varies over time, across type of channel, and by type of customer, and provide insight into when and where managers can expect these effects to dominate and how to counter cannibalization and promote complementarity across channels.

We find that opening retail stores cannibalizes sales in the catalog and online channels in the short term, but produces complementary effects in both channels in the long term; cannibalization is magnified in the catalog channel, while complementarity is magnified in the online channel. Customer analysis suggests that opening retail stores paves the way for higher rates of customer acquisition and higher rates of repeat purchasing among existing customers in the direct channels in the long term.

Keywords:
Multichannel Retailing, Channels of Distribution, Direct Marketing, E-commerce, Channel Management
37 pages

In this paper, we seek to use quantitative models to help appreciate the behavioral processes associated with successful cross-functional and cross-firm alignment in supply/demand planning. We model the interaction between a sales and a manufacturing function within a firm, or between an upstream and downstream firm. We claim that misalignment is costly both to the involved functions/firms and to the rest of the organization or supply chain, and focus the paper on studying the circumstances under which alignment will or will not happen. Using game theory, we find that, although misaligned economic incentives can play a role in explaining misalignment of planning behaviors, there is another important issue to consider: in our setting, the key factor that determines whether two functions or firms can align their planning is how much each party knows about the other's beliefs about demand. Thus, in this paper's setting, improved communication can induce alignment even if no economic incentives are changed. While consistent with the predominant view in organizational behavior (OB), this is a fundamental departure from the extant operations management (OM) literature.
40 pages

How do organizations survive in the face of change? Underlying this question is a rich debate about whether organizations can adapt-and if so how. One perspective, organizational ecology, presents evidence suggesting that most organizations are largely inert and ultimately fail. A second perspective argues that some firms do learn and adapt to shifting environmental contexts. Recently, this latter view has coalesced around two themes. The first, based on research in strategy suggests that dynamic capabilities, the ability of a firm to reconfigure assets and existing capabilities, explains long-term competitive advantage. The second, based on organizational design, argues that ambidexterity, the ability of a firm to simultaneously explore and exploit, enables a firm to adapt over time. In this paper we review and integrate these comparatively new research streams and identify a set of propositions that suggest how ambidexterity acts as a dynamic capability. We suggest that efficiency and innovation need not be strategic tradeoffs and highlight the substantive role of senior teams in building dynamic capabilities.
62 pages

Architectural Innovation and Dynamic Competition: The Smaller "Footprint" Strategy
No. 07-014
Carliss Y. Baldwin, Kim B. Clark
Finance
August 2006
Complete Text (Acrobat PDF Version)

We describe a dynamic strategy that can be employed by firms capable of architectural innovation. The strategy involves using knowledge of the bottlenecks in an architecture together with the modular operator “splitting” to shrink the “footprint” of the firm’s inhouse activities. Modules not in the footprint are outsourced—module boundaries are redrawn and interfaces designed for this purpose. The result is an invested capital advantage, which can be used to drive the returns of competitors below their cost of capital. We explain how this strategy works and model its impact on competition through successive stages of industry evolution. We then show how this strategy was used by Sun Microsystems against Apollo Computer in the 1980s and by Dell against Compaq and other personal computer makers in the 1990s
54 pages

This paper examines the licensing of intellectual property in exchange for royalties that depend on the self-report of the licensee. The self-reporting aspect of the problem gives rise to demand for auditing by the licensor. We characterize the optimal royalty contract, accounting system choice by the licensee, and audit strategy choice by the licensor. We show when the owner prefers to license the property in exchange for a royalty and when it prefers to use the property directly. We also show that the internal control provisions of section 404 of Sarbanes-Oxley make royalty arrangements based on self-reporting more attractive.
32 pages

We present a model of bandwidth allocation in a stylized peer-to-peer file sharing network with s peers (sharers) who share files and download from each other and f peers (freeriders) who download from sharers but do not contribute files. Assuming that upload bandwidth is scarcer than download bandwidth and efficient allocation, we compute the expected bandwidth obtained by each peer. We show that (i) while the exact formula is complex, s/(s + f) is a good approximation and (ii) sharers (freeriders) obtain bandwidth larger (smaller) than s/(s+f). The paper constitutes a first step towards a general analytical foundation for scarce resource allocation in peer-to-peer file sharing networks.
23 pages

18 pages

This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on long-term bonds and short-term bonds forecasts positively future excess returns on bonds at varying horizons, and that the short-term nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component, and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta.
56 pages

In this paper, we examine the motivations of large information technology ("IT") vendors, to invest in open source software ("OSS"). What drives companies with large, proprietary software portfolios to invest hundreds of millions of dollars in OSS? We approach this question by grouping a sample of OSS projects into clusters and examining vendors' motivations for each cluster. We find one cluster has received almost no investment. Contributions to projects in this cluster are confined to the voluntary effort of the vendors' employees, and vendors are likely altruistically motivated. By contrast, the other cluster has received over 99% of vendor investments. Here, vendors are more likely economically motivated to invest in OSS projects that can serve as a complementary asset to vendors' core, proprietary businesses.
31 pages

The controversy over whether and how much to charge for health products in the developing world rests, in part, on whether higher prices can increase use, either by targeting distribution to high-use households (a screening effect), or by stimulating use psychologically through a sunk-cost effect. We develop a methodology for separating these two effects. We implement the methodology in a field experiment in Zambia using door-to-door marketing of a home water purification solution. We find that higher prices screen out those who use the product less. By contrast, we find no consistent evidence of sunk-cost effects.
55 pages

Capturing Benefits from Tomorrow’s Technology in Today’s Products: The Effect of Absorptive Capacity
No. 07-009
Daniel Snow
Technology and Operations Management
July 2006
Complete Text (Acrobat PDF Version)

In this paper, I propose and examine a specific means by which firm R&D experience may be helping firms to improve their current-technology products: Firms that conduct future-technology R&D may be better at adapting components from related future technologies for use in their current-technology products. I use patent data to test whether automobile carburetor suppliers with higher levels of future-technology R&D activity are better at adapting components from related future technologies for use in carburetors.
29 pages

Cartels and Competition: Neither Markets nor Hierarchies
No. 07-011
Jeffrey Fear
Business, Government, and International Economy
August 2006
Complete Text (Acrobat PDF Version)

This article provides an overview on the rise and fall of cartels since the late 19th century when the modern cartel movement properly arrived with the rise of big business based on scale and scope. The general narrative about cartels may not be a story of rise and fall, but rise, boom, collapse, revitalization, gradual decline, and then criminalization. Yet, until the 1980s, the global story of big business must be told in conjunction with cartels rather than without them. They affected technological development, corporate strategy, and organizational change. Viewing cartels only as a "conspiracy against the public" short-circuits many important questions and obscures the great variations in objectives, type, and services provided by cartels.
32 pages

Coerced Confessions: Self-Policing in the Shadow of the Regulator
No. 07-020
Jodi L. Short and Michael W. Toffel
Technology and Operations Management
September 2006, 4th revision June 2007
Complete Text (Acrobat PDF Version)

As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive dataset for the "Audit Policy," a United States Environmental Protection Agency (U.S. EPA) program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.
41 pages

Corporate Governance and Networks: Bankers in the Corporate Networks of Brazil, Mexico, and the United States circa 1910
No. 07-008
Aldo Musacchio
Business, Government, and International Economy
July 2006
Complete Text (Acrobat PDF Version)

How does the development of financial markets change the interaction between banks and corporations? This paper compares the importance of interlocking boards of directors between corporations and banks in Brazil, Mexico and the United States circa 1909. The hypothesis tested is that the development of financial markets and the institutions that accompany it (e.g. financial disclosure rules, investor protections, etc) allows corporations to rely less on connections to banks. There are two specific hypotheses tested in this work. First, given the development of disclosure and corporate governance standards in Brazil, I expect bankers to have been less central than in Mexico and, perhaps, the United States. Second, I test if the availability of financing alternatives, like a well developed bond market in Brazil, reduced the average importance of corporate connections to commercial banks compared to Mexico. I test these hypotheses using network analysis and a simple multivariate regression that explains bank connections. I use comparable business directories to create databases with names of directors and financial information for all major corporations in Mexico and Brazil in 1909. The findings show that using different centrality measures, connections between banks and corporations were less important in Brazil than in Mexico and the United States. Also, in Brazil, the availability of bonds as a way to obtain financing allowed corporations to have a lower average number of connections to banks when compared to their Mexican counterparts. In Mexico, foreign companies, which had access to financial markets abroad, had also lower average connections with banks. I conclude by arguing that even though the Brazil, Mexico and the U.S. had very different network structures, rapid industrial growth was achieved by these three countries. In Mexico, a strong and dense network replaced for some of the institutions that promoted financial development and growth in Brazil.
42 pages

Organizational design affects performance via coupled search processes. At low frequency, managers search for appropriate organizational designs. At higher frequency, managers use designs to search for high-performing operational choices. The two searches are coupled: organizational design molds the choice among operational alternatives, and performance feedback from operational choices shapes design. Our simulation model shows how coupled search processes can dramatically obscure the true impact of design on performance, confounding empirical research. We identify research strategies for tackling this difficulty; discuss populationlevel advantages of coupled search processes; and highlight implications for analogous coupled search processes that shape networks, cognition, and capabilities.
48 pages

Cross-Functional Alignment in Supply Chain Planning: A Case Study of Sales and Operations Planning
No. 07-001
Rogelio Oliva and Noel Watson
Technology and Operations Management
July 2006, revised October 2006, July 2008, February 2009
Complete Text (Acrobat PDF Version)

In most organizations, supply chain planning is a cross-functional effort. Functional areas such as sales, marketing, finance, and operations traditionally specialize in portions of the planning activities, which results in conflicts over expectations, preferences, and priorities. We report findings from a detailed case analysis of a successful supply chain planning process. In contrast to traditional research on this area, which focuses on incentives, responsibilities, and structures, we adopt a process perspective and find that integration was achieved despite an incentive landscape that did not support it. By drawing a distinction between the incentive landscape and the planning process, we identify process as an additional mediator beyond the incentive landscape that can affect organizational outcomes. Thus, organizations may be capable of integration while different functions retain different incentives to maintain focus on their stakeholders' needs. Through iterative coding, we identified the requisite attributes of the planning process that drive planning performance — informational, procedural, and alignment quality — but hypothesize that achieving alignment in the execution of plans can be more important than informational and procedural quality. In addition to process attributes, we also identify social elements that influenced the performance of the planning process and place the information processing attributes within a broader social and organizational context.

Keywords:
Operations interface, sales and operations planning, supply chain planning, case study.
37 pages

The Balanced Scorecard offers a previously unrecognized benefit: a new way of looking at the traditional organizational structure of cost and profit centers. Every unit, by contributing to effective strategy execution, has the opportunity to support and create profit. This capability has important implications for specifying objectives and evaluating the performance of all organizational units.
9 pages

   We examine entrepreneurship and creative destruction following US banking deregulations using Census Bureau data. US banking reforms brought about exceptional growth in both entrepreneurship and business closures. Most of the closures, however, were the new ventures themselves. Although we do find evidence for the standard story of creative destruction, the most pronounced impact was a massive increase in churning among new entrants. We argue that creative destruction requires many business failures along with the few great successes. The successes are very difficult to identify ex ante, which is why democratizing entry is an important trait of well-functioning capital markets.
48 pages

Ratings of corporations' environmental activities and capabilities influence billions of dollars of "socially responsible" investments as well as some consumers, activists, and potential employees. In one of the first studies to assess these ratings, we examine how well the most widely used ratings-those of Kinder, Lydenberg, Domini Research & Analytics (KLD)-provide transparency about past and likely future environmental performance. We find KLD "concern" ratings to be fairly good summaries of past environmental performance. In addition, firms with more KLD concerns have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. KLD environmental strengths, in contrast, do not accurately predict pollution levels or compliance violations. Moreover, we find evidence that KLD's ratings are not optimally using publicly available data. We discuss the implications of our findings for advocates and opponents of corporate social responsibility as well as for studies that relate social responsibility ratings to financial performance.
51 pages

Theory predicts that mandated employment protections may reduce productivity by distorting production choices. Firms facing (non-Coasean) worker dismissal costs will curtail hiring below efficient levels and retain unproductive workers, both of which should affect productivity. These theoretical predictions have rarely been tested. We use the adoption of wrongful-discharge protections by U.S. state courts over the last three decades to evaluate the link between dismissal costs and productivity. Drawing on establishment-level data from the Annual Survey of Manufacturers and the Longitudinal Business Database, our estimates suggest that wrongful- discharge protections reduce employment flows and firm entry rates. Moreover, analysis of plant-level data provides evidence of capital deepening and a decline in total factor productivity following the introduction of wrongful-discharge protections. This last result is potentially quite important, suggesting that mandated employment protections reduce productive efficiency as theory would suggest. However, our analysis also presents some puzzles including, most significantly, evidence of strong employment growth following adoption of dismissal protections. In light of these puzzles, we read our findings as suggestive but tentative.
48 pages

Abstract is not available
42 pages

The central insight of asset pricing is that a security's value depends on both its distribution of payoffs across economic states and state prices. In fixed income markets, many investors focus exclusively on estimates of expected payoffs, such as credit ratings, without considering the state of the economy in which default is likely to occur. Such investors are likely to be attracted to securities whose payoffs resemble those of economic catastrophe bonds-bonds that default only under severe economic conditions. We show that many structured finance instruments can be characterized as economic catastrophe bonds, but offer far less compensation than alternatives with comparable payoff profiles. We argue that this difference arises from the willingness of rating agencies to certify structured products with a low default likelihood as "safe" and from a large supply of investors who view them as such
44 pages

This paper uses concepts from the theory of the firm and MIS research to argue that some types of information technology (IT) will be deployed only within hierarchical governance structures. This argument introduces a contingency into the 'electronic markets hypothesis,’ which holds that greater use of IT is unidirectionally associated with reduced use of hierarchies. We revisit the assumption that interfirm IT is never a relationship-specific asset. While many types of interfirm IT are highly redirectable others are not, and become relationship-specific assets once configured for a particular context; these assets are referred to here as enterprise information technologies. Because complete contracts over IT assets are not possible, relationship specificity is an important consideration; scholarship on the theory of the firm yields a consistent prescription that when assets are relationship specific and contracts incomplete, the single decision-making authority of a hierarchy is optimal. The paper therefore argues that when enterprise IT is required, so is an electronic hierarchy: a collaboration in which one member has all required decision rights over jointly used IT. This contingent theory yields three hypotheses, which are tested using data gathered from firms in Italian industrial districts. Because of this paper’s focus on governance rather than price-setting, electronic hierarchies are contrasted not with electronic markets, but instead with electronic heterarchies.
56 pages

The purpose of this paper is to detect the presence of sophisticated economic motives behind individual concerns for privacy. Recent theories of privacy demands in commercial contexts have assumed an economically aware and sophisticated consumer, capable of evaluating the indirect consequences of information transmission. We present evidence, from a large-scale experiment evoking a realistic context, that privacy concerns are indeed sensitive to the indirect consequences of information transmission.
10 pages

Entrepreneurship and Business History: Renewing the Research Agenda
No. 07-007
Geoffrey Jones and R. Daniel Wadhwani
Entrepreneurial Management
July 2006
Complete Text (Acrobat PDF Version)

During the 1940s and 1950s business historians pioneered the study of entrepreneurship. The interdisciplinary Center for Research on Entrepreneurial History, based at Harvard Business School which included Joseph Schumpeter and Alfred Chandler, and its journal Explorations in Entrepreneurial History were key institutional drivers of the research agenda. However the study of entrepreneurship ran into formidable methodological roadblocks, and attention shifted to the corporation, leaving the study of entrepreneurship fragmented and marginal. Nevertheless business historians have made significant contributions to the study of entrepreneurship through their diverse coverage of countries, regions and industries, and – in contrast to much management research over the past two decades - through exploring how the economic, social, organizational, and institutional context matters to evaluating entrepreneurship. This working paper suggests that there are now exciting opportunities for renewing the research agenda on entrepreneurship, building on the strong roots already in place, and benefiting from engaging with advances made in the study of entrepreneurial behavior and cognition. There are opportunities for advancing understanding on the historical role of culture and values on entrepreneurial behavior, using more careful methodologies than in the past, and seeking to specify more exactly how important culture is relative to other variables. There are also major opportunities to complement research on the role of institutions in economic growth by exploring the precise relationship between institutions and entrepreneurs.
50 pages

Designers often seek modular architectures to better accommodate expected changes and to enable parallel development. However, we lack a formal theory and model of modularity and software evolution, which can be used for description, prediction, and prescription. According to Baldwin and Clark's theory, modular architectures add value to system designs by creating options to improve the system by substituting or experimenting on individual modules. In this paper, we evaluate their theory by looking at the design evolution of two software product platforms through the modeling lens of design structure matrices (DSMs) and design rule theory. Our analysis shows that DSM models and options theory can explain how real-world modularization activities in one case allowed for different rates of evolution in different software modules and in another case conferred distinct strategic advantages on a firm (by permitting substitution of an at-risk software module without substantial change to the rest of the system). The experiment supports our hypothesis that these formal models and theory can account for important aspects of software design evolution in large-scale systems
11 pages

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, they engender excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as large as 0.6 percent of the agent's economic resources. This is a significant distortion in of itself. It's also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.
49 pages

Decision researchers have long been interested in behaviors that deviate from rational choice. Of these, the compromise effect has received considerable attention, with it repeatedly shown that the probability of choosing an item increases when that item is a middling, as opposed to extreme, alternative in a choice set. The term extremeness avoidance has been used to describe the reason underlying this phenomenon. In this research, we argue that extremeness avoidance behavior depends on assortment type, with consumers displaying extremeness avoidance for alignable assortments, but systematically and predictably displaying extremeness seeking for non-alignable assortments. Across three studies, we show the extremeness seeking effect, contrast it with extremeness avoidance, and explore its underlying cause.
40 pages

Most of what organizational scholars know about new industry emergence and entrepreneurship in new industries comes from studies of completely new industries that were born out of technological innovations. We know far less about the emergence of non-technologybased industries and about the legitimacy-seeking activities of entrepreneurs in an industry that is transported from one part of the world to another, making it novel only in a new, limited geographic region. In this exploratory and inductive study of the emergence and evolution of the Indian high-end fashion industry and the actions of entrepreneurs in the early days of this industry, I seek to redress these shortcomings of prior organizational research. Based on a series of interviews with designers and individuals associated with the industry, I find that although legitimacy-seeking is an important activity for pioneering entrepreneurs, they are unconsciously aided by other actors who are acting out of self-interest rather than from a desire to actively help these entrepreneurs. Furthermore, entrepreneurs are aided by the fact that the industry is not new to the world, due to which they can adapt and adopt institutional practices already legitimized by counterpart industries in other parts of the world. The paper builds on existing community ecology and social movement perspectives on industry emergence and evolution and adds new dimensions to both, and thus has implications for organizational theory.
41 pages

We report on a field study demonstrating systematic differences between the preferences people anticipate they will have over a series of options in the future and their subsequent revealed preferences over those options. Using a novel panel data set, we analyze the film rental and return patterns of a sample of online DVD rental customers over a period of four months. We predict and find that should DVDs (e.g., documentaries) are held significantly longer than want DVDs (e.g., action films) within-customer. Similarly, we also predict and find that people are more likely to rent DVDs in one order and return them in the reverse order when should DVDs are rented before want DVDs. Specifically, a 1.3% increase in the probability of a reversal in preferences (from a baseline rate of 12%) ensues if the first of two sequentially rented movies has more should and fewer want characteristics than the second film. Finally, we find that as the same customers gain more experience with online DVD rentals, the extent to which they hold should films longer than want films decreases. Our results suggest that present bias has a meaningful impact on choice in the field and that people may learn about their present bias with experience, and, as a result, gain the capacity to curb its influence.
36 pages

We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.
37 pages

Kim Clark occupies a unique place in management scholarship. As a member of the Technology and Operations Management unit of Harvard Business School, he participated in several major research initiatives during the 1980s and early 1990s, before becoming Dean of the School in 1995. And even as Dean, he continued to pursue research until 2005, when he left Harvard to become President of Brigham Young University—Idaho. In this paper, we describe Clark’s research and discuss his contributions to management and economics. We look at three distinct bodies of work. In the first, Clark (in conjunction with Robert Hayes and Steven Wheelwright) argued that the abandonment by U.S. managers of manufacturing as a strategic function exposed U.S. companies to Japanese competition. In the second research stream, conducted with Wheelwright, Bruce Chew, Takahiro Fujimoto, Kent Bowen and Marco Iansiti, Clark made the case that product development could be managed in new ways that would lead to significant competitive advantage for firms. Finally, in work conducted with Abernathy, Rebecca Henderson and Carliss Baldwin, Clark placed product and process designs at the center of his explanation of how innovation determines the structure and evolution of industries.
54 pages

Many companies have successfully used outsourcing to lower costs. But, unless the company's efforts are unusually good, true competitive advantage is fleeting when competitors begin outsourcing and achieve similar results. To build sustainable competitive advantage, leading companies are now using an advanced form of outsourcing, called global collaboration, to drive new revenue, quicken time-to-market, and increase innovation. Global collaboration impacts their top as well as bottom lines. But effectively adopting this approach requires adjustments to traditional outsourcing strategy, organization and processes.

In a recent research project, we interviewed managers from 45 projects in over 20 firms to understand the practices that differentiated those firms that reported greater success with the use of collaboration. We found that the competencies required for achieving top-line growth through global partners are different than the competencies required to be successful in reducing costs via outsourcing. Yet, many companies continue to manage global collaboration projects in the same ways they managed cost-reduction projects and thus do not obtain the full value from these projects. Our work led us to propose several frameworks for how firms should think about their collaboration efforts (reported in a separate working paper) as well as to codify a set of organizational "best practices" that were common to companies who reported greater success in the use of collaboration (reported in this paper).
20 pages

People often experience tension over certain choices (e.g., they should reduce their gas consumption or increase their savings, but they do not want to). Some posit that this tension arises from the competing interests of a deliberative "should" self and an affective "want" self. We show that people are more likely to select choices that serve the should self (should-choices) when the choices will be implemented in the distant rather than the near future. This "future lock-in" is demonstrated in four experiments for should-choices involving donation, public policy, and self-improvement. Additionally, we show that future lock-in can arise without changing the structure of a should-choice, but by just changing people's temporal focus. Finally, we provide evidence that the should self operates at a higher construal level (abstract, superordinate) than the want self, and that this difference in construal partly underlies future lock-in.
63 pages

This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.
74 pages

In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use 'quality' to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.
43 pages

How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages
No. 07-013
Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek
Business, Government and International Economy
August 2006
Complete Text (Acrobat PDF Version)

The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers. Our calibration exercises indicate that a) holding the extent of foreign presence constant, financially well-developed economies experience growth rates that are almost twice those of economies with poor financial markets, b) increases in the share of FDI or the relative productivity of the foreign firm leads to higher additional growth in financially developed economies compared to those observed in financially under-developed ones, and c) other local conditions such as market structure and human capital are also important for the effect of FDI on economic growth.
56 pages

We use oil price fluctuations to construct a new instrument to test the impact of transfers from wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, the national accounts, and the balance of payments. Aid has no measurable impact on prices or economic growth, though it does affect most components of the national income accounts. We find that much aid is consumed, primarily in the form of imported non-capital goods. Aid substitutes for domestic savings, has no effect on the financial account, and leads to unaccounted capital flight.
28 pages

How do decisions made for tomorrow or two days in the future differ from decisions made for several days in the future? We use data from an online grocer to address this question. In general, we find that as the delay between order completion and delivery increases, grocery customers spend less, order a higher percentage of "should" items (e.g., vegetables), and order a lower percentage of "want" items (e.g., ice cream), controlling for customer fixed effects. These findings are all consistent with theories suggesting that people's should selves exert more influence over their choices the further in the future outcomes will be experienced. However, orders placed for delivery tomorrow versus two days in the future do not show this want/should pattern, and we discuss a potential explanation.
22 pages

26 pages

This study considers organizational artifacts as triggers of procedural justice expectations, showing the effects of one artifact – an organizational wait queue – on perceived procedural justice. Queue designs that violated consistency or suggested bias were perceived as less procedurally just than those that implied consistency and lack of bias. Information about the bias implied by a queue improved perceived procedural justice. The analysis suggests organizational artifacts to be "secondary contract makers" and informs the study of procedural justice by suggesting a new source of inferences about and precursors to perceived justice. The study offers implications for the management of queues as well as other artifacts.
31 pages

As numerous papers have argued, sales, inventory, and gross margin for a retailer are interrelated. We construct a simultaneous equation model to establish these interrelationships at a firm level. Using publicly available financial data we estimate the six causal effects among sales, inventory, and gross margin. Our results show that sales, inventory, and gross margin are mutually endogenous. In particular, we provide new evidence of the impact of inventory on sales and the interrelationship between gross margin and inventory. We also estimate the effects of exogenous explanatory variables such as store growth, proportion of new inventory, capital investment per store, selling expenditure, and index of consumer sentiment on sales, inventory, and gross margin. We show that our model can be used to benchmark retailers’ performance in sales, inventory, and gross margin simultaneously. Finally, we show that our model can be used to generate sales forecasts even when sales were managed using inventory and gross margin. In numerical tests, sales forecasts from our model are more accurate than forecasts from time-series models that ignore inventory and price as well as forecasts from financial analysts.
32 pages

This paper details the construction of a firm-year panel dataset combining the NBER Patent Dataset with the Industry R&D Survey conducted by the Census Bureau and National Science Foundation. The developed platform offers an unprecedented view of the R&D-to-patenting innovation process and a close analysis of the strengths and limitations of the Industry R&D Survey. The files are linked through a name-matching algorithm customized for uniting the firm names to which patents are assigned with the firm names in Census Bureau’s SSEL business registry. Through the Census Bureau’s file structure, this R&D platform can be linked to the operating performances of each firm’s establishments, further facilitating innovation-to-productivity studies.
29 pages

This study addresses the paradox of embedded human agency, or the contradiction between actors’ agency and institutional determinism. It helps to resolve this paradox by considering the enabling role of actors’ social position. Adopting a relational view of human agency, I model the impact of their social position on the likelihood that actors will initiate changes that diverge from the existing institutions. I test this model using data from 93 change projects conducted by clinical managers at the National Health Service in the United Kingdom. My findings suggest that social position is an important enabling condition for divergent organizational change, and is a determinant as well of the type of divergent organizational change an actor may undertake.
65 pages

Many recent studies highlight the need to rethink the way we manage innovation. Traditional approaches, based on the assumption that the creation and pursuit of new ideas is best accomplished by a centralized and collocated R&D team, are rapidly becoming outdated. Instead, innovations are increasingly brought to the market by networks of firms, selected for their unique capabilities, and operating in a coordinated manner. This new model demands that firms develop different skills, in particular, the ability to collaborate with partners to achieve superior innovation performance. Yet despite this need, there is little guidance on how to develop or deploy this ability.

This article describes the results of a study to understand the strategies and practices used by firms that achieve greater success in their collaborative innovation efforts. We found many firms mistakenly applied an "outsourcing" mindset to collaboration efforts which, in turn, led to three critical errors: First, they focused solely on lower costs, failing to consider the broader strategic role of collaboration. Second, they didn't organize effectively for collaboration, believing that innovation could be managed much like production and partners treated like "suppliers." And third, they didn't invest in building collaborative capabilities, assuming that their existing people and processes were already equipped for the challenge. Successful firms, by contrast, developed an explicit strategy for collaboration and made organizational changes to aid performance in these efforts. Ultimately, these actions allowed them to identify and exploit new business opportunities. In sum, collaboration is becoming a new and important source of competitive advantage. We propose several frameworks to help firms develop and exploit this new ability.
23 pages

Organizational Responses to Environmental Demands: Opening the Black Box (previously "Institutional Pressures and Environmental Strategies")
No. 07-022
Magali A. Delmas and Michael W. Toffel
Technology and Operations Management
October 2006, revised June 2007, January 2008
Complete Text (Acrobat PDF Version)

This paper combines new and old institutionalism to explain differences in organizational strategies. We propose that differences in the influence of corporate departments lead their facilities to prioritize different external pressures and thus adopt different management practices. Specifically, we argue that external constituents-including customers, regulators, legislators, local communities, and environmental activist organizations-who interact with influential corporate departments are more likely to affect facility managers' decisions. As a result, managers of facilities that are subjected to comparable institutional pressures adopt distinct sets of management practices that appease different external constituents. We test our framework in the context of the adoption of environmental management practices using an original survey and archival data obtained for nearly 500 facilities. We find support for these hypotheses.
56 pages

International Financial Integration and Entrepreneurial Firm Dynamics (previously "International Financial Integration and Entrepreneurship")
No. 07-012
Laura Alfaro and Andrew Charlton
Business, Government, and International Economy
August 2006, revised March 2007
Complete Text (Acrobat PDF Version)

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm level data set of approximately 24 million firms in nearly 100 countries in 2004 and 1999, which enables us to present both cross-country and industry level evidence. We establish robust cross-country correlations between increased international financial integration and the activity of entrepreneurs using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution and de jure and de facto measures of international capital integration. We then explore causal channels through which foreign capital may encourage entrepreneurship. We find evidence that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration, suggesting that foreign capital may improve access to capital either directly or through improved domestic financial intermediation. Second we find that entrepreneurial activity is higher in industries which have a large share of foreign firms or in vertically linked industries.
51 pages

No abstract
31 pages

The Judgment-Decision Paradox in Experience-based Decisions and the Contingent Recency Effect
No. 07-003
Greg Barron, Ido Erev, and Eldad Yechiam
Negotiation, Organizations, and Markets
July 2006
Complete Text HBS Only (Acrobat PDF Version)

The current paper explores a judgment-decision paradox in experience-based decisions: the finding that rare events are overweighted in probability judgments but are underweighted in repeated decisions under uncertainty. Two laboratory studies examine both decisions and probability assessments within the same paradigm. The results reveal overweighting and negative recency in probability assessments but underweighting and positive recency in choices. At the same time, there remains an overall consistency between choices and assessments. A third study validates the results in a field study. The results show that, after a negative rare-event (i.e. a suicide bombing) people believe the risk to have decreased (negative recency) but are more cautious (positive recency).
28 pages

19 pages

Learning and Equilibrium As Useful Approximations: Accuracy of Prediction on Randomly Selected Constant Sum Games
No. 07-004
Ido Erev , Alvin E. Roth, Robert L. Slonim, and Greg Barron
Negotiation, Organizations, and Markets
July 2006
Complete Text HBS Only (Acrobat PDF Version)

There is a good deal of miscommunication between and among experimenters and theorists, and psychologists and economists, about how to evaluate a theory that can be rejected by sufficient data, but may nevertheless be a useful approximation. A standard experimental design reports whether a general theory can be rejected on an informative test case. This paper, in contrast, reports an experiment designed to meaningfully pose the question: "how good an approximation does a theory provide on average." Even on the simplest class of two-person constant sum games there is mixed evidence on this question, and resulting controversy (dating from the 1950’s in psychology and continuing through the 1990’s in economics). We consider a random sample of 2x2 constant sum games to determine how close on average are the equilibrium predictions to observed play in repeated play of a game against a fixed opponent. We also compare the predictions of several models of learning and related models. We find that equilibrium becomes a better predictor of observed play as the players become more experienced, but that simple models of learning predict more accurately, over the 500 periods of repeated play that we observe. We also discuss how the predictive value of a theory can be measured in terms of how many pairs of experimental subjects you would have to observe playing a previously unexamined game before the mean of the experimental observations would provide a better prediction than the theory about the behavior of a new pair of subjects playing this game. We call this latter quantity the model’s Equivalent Number of Observations (ENO), and explore its properties.
29 pages

Theories abound on the potential macroeconomic impact of AIDS in Africa, yet there have been surprisingly few empirical studies to test the mixed theoretical predictions. In this paper, we examine the impact of the AIDS epidemic on African nations through 2005 using the male circumcision rate to identify plausibly exogenous variation in HIV prevalence. Medical researchers have found significant evidence that male circumcision can reduce the risk of contracting HIV. We find that national male circumcision rates for African countries are both a strong predictor of HIV/AIDS prevalence and uncorrelated with other determinants of economic outcomes. Two-stage least squares regressions do not support the hypotheses that AIDS has had any measurable impact on economic growth or savings in African nations. However we do find weak evidence that AIDS has lead to a decline in fertility combined with a slow-down in education gains, as measured by youth literacy, and a rise in poverty, as measured by malnutrition.
61 pages

Manage Resource Allocation to Craft Strategy
No. 07-018
Joseph L. Bower and Clark G. Gilbert
General Management
September 2006
Complete Text (Acrobat PDF Version)

Research from a set of studies conducted over 35 years shows that actual strategy rather than words on paper at corporate is crafted step by step as company resources are committed to policies, programs, people, and facilities. In turn the process of allocating resources is distributed across all levels of the company. Those activities go on simultaneously. As a consequence, the way in which the structure divides up responsibility and the way the processes of the organization distribute information have vital consequences. Senior managers often have less control over their strategy than they think while middle managers and operating managers can have a much greater role on strategy than is generally recognized either those managers or by top management: But the complexity of the resource allocation process only increases the need for leadership at the top. This requires a more complete understanding of the processes of the company from a strategic perspective. That understanding implies that systems cannot substitute for management in the resource allocation process.
10 pages

To date, little research has been done on managing the organizational and political dimensions of generating and improving forecasts in corporate settings. We examine the implementation of a supply chain planning process at a consumer electronics company, concentrating on the forecasting approach around which the process revolves. Our analysis focuses on the forecasting process and how it mediates and accommodates the functional biases that can impair the forecast accuracy. We categorize the sources of functional bias into intentional, driven by misalignment of incentives and the disposition of power within the organization, and unintentional, resulting from informational and procedural blind spots. We show that the forecasting process, together with the supporting mechanisms of information exchange and elicitation of assumptions, is capable of managing the potential political conflict and the informational and procedural shortcomings. We also show that the creation of an independent group responsible for managing the forecasting process, an approach that we distinguish from generating forecasts directly, can stabilize the political dimension sufficiently to enable process improvement to be steered. Finally, we find that while a coordination system-the relevant processes, roles and responsibilities, and structure-can be designed to address existing individual and functional biases in the organization, the new coordination system will in turn generate new individual and functional biases. The introduced framework of functional biases (whether those biases are intentional or not), the analysis of the political dimension of the forecasting process, and the idea of a coordination system are new constructs to better understand the interface between operations management and other functions.
36 pages

We use an economic model to study the optimal management of know-how, defined here as employee-generated information about the performance of specific solutions to problems that may or will recur in the future. We derive three main results. First, information about successes is typically more useful than information about failures, since successful methods can be replicated while failures can only be avoided. This supports firms' focus on 'best practice'. Second, recording mediocre know- how can actually be counter-productive, since such mediocre know-how may inefficiently reduce employees' incentives to experiment. This is a strong-form competency trap. Third, the firms that gain most from a formal knowledge system are also the ones that should be most selective when encoding information (i.e., the ones that are most at risk from the competency trap); namely, large firms that repeatedly face problems about which there is little general knowledge and that have high turnover among their employees. Beyond these main principles, we also show that it may be optimal to disseminate know-how on a plant-level but not on a firm-level, and that storing back-up solutions is most valuable at medium levels of environmental change.
22 pages

In a platform-mediated network, users rely on a common platform, provided by one or more intermediaries, that encompasses infrastructure and rules required by users to transact with each other. A fundamental design decision for firms that aspire to develop platform-mediated networks is whether to preserve proprietary control or share their platform with rivals. A proprietary platform has a single provider that solely controls its technology, for example, Federal Express, Apple Macintosh, or Google. With a shared platform, such as Visa, DVD, or Linux, multiple firms collaborate in developing the platform's technology then compete in offering users different but compatible versions of the platform. This article examines factors that favor proprietary versus shared models when designing new platforms then explains how management challenges differ for proprietary and shared platform during subsequent life-cycle stages: network mobilization and platform maturity.
28 pages

Since the dawn of broadcasting, and especially in the past decade, Americans have turned their attention from local to more distant sources of news and entertainment. While the integration of media markets will raise the private welfare of many consumers, critics of a globalized information and entertainment industry claim that transnational media undermine civic engagement, transforming locally engaged citizens into viewers consuming programming from distant sources. In response to such concerns, many regulatory agencies, including the Federal Communication Commission in the United States, curtail the integration of media markets to promote “localism.” To find the right balance between the private benefits of integrated markets and the public value of civic engagement, evidence on the size of the positive spillovers from local media is needed. To date, such evidence is scant. In this paper, we exploit the rapid growth of Hispanic communities in the United States to test whether the presence of local television news affects local civic behavior. Spanish-language local television news programming was available in 25 US metro areas in 2002, up from only 14 areas in 1994. Our estimates indicate that Hispanic voter turnout increased by 5 to 10 percentage points, relative to non-Hispanic voter turnout, in markets where local Spanish-language television news became available. We conclude that the tradeoff between integrated media markets and civic engagement is real. The results of this study provide a basis for the continued pursuit of regulatory policies that promote localism.
22 pages

This paper provides a first pass at clarifying the economic tradeoffs between two polar strategies for market intermediation: the "merchant" mode, in which the intermediary buys from sellers and resells to buyers; and the "two-sided platform" mode, under which the intermediary enables affiliated sellers to sell directly to affiliated buyers. The merchant mode yields higher profits than the two-sided platform mode when the chicken-and-egg problem due to indirect network effects for the two-sided platform mode is more severe and when the degree of complementarity/substitutability among sellers' products is higher. Conversely, the platform mode is preferred when seller investment incentives are important or when there is asymmetric information regarding seller product quality. We discuss these tradeoffs in the context of several prominent digital intermediaries.
19 pages

Multi-sided platforms (MSPs), which bring together two or more interdependent groups of customers, have recently risen to economic and business prominence in many industries. This paper first lays out a simple micro-founded framework which aims to organize academic and managerial thinking about MSPs. It argues that any MSP performs one or both among two fundamental functions: reducing search costs and reducing shared transaction costs among its multiple sides. Using a variety of illustrations, the framework is then used to formulate general principles driving MSP design and expansion strategies: choosing the relevant platform "sides", deciding which fundamental activities to perform and trading off depth against scope of MSP functions.
26 pages

The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of national economic and financial systems. This paper proposes a new comprehensive approach to measure, analyze, and manage macroeconomic risk based on the theory and practice of modern contingent claims analysis (CCA). We illustrate how to use the CCA approach to model and measure sectoral and national risk exposures, and analyze policies to offset their potentially harmful effects. This new framework provides economic balance sheets for inter-linked sectors and a risk accounting framework for an economy. CCA provides a natural framework for analysis of mismatches between an entity's assets and liabilities, such as currency and maturity mismatches on balance sheets. Policies or actions that reduce these mismatches will help reduce risk and vulnerability. It also provides a new framework for sovereign capital structure analysis. It is useful for assessing vulnerability, policy analysis, risk management, investment analysis, and design of risk control strategies. Both public and private sector participants can benefit from pursuing ways to facilitate more efficient macro risk accounting, improve price and volatility discovery, and expand international risk intermediation activities.
46 pages

Several scholars have documented the positive consequences of job-hopping by inventors, including knowledge spillovers and agglomeration and the concentration of spinoffs. This work investigates a possible antecedent of inventor mobility: regional variation in the enforcement of postemployment noncompete covenants. While previous research on non-competes has been largely focused on California and Silicon Valley, we exploit Michigan's inadvertent reversal of its noncompete enforcement legislation as a natural experiment to investigate the impact of noncompetes on mobility. Using the U.S. patent database and a differences-in-differences approach between inventors in states that did not enforce and did not change enforcement of non-compete laws, we find that relative mobility decreased by 34% in Michigan after the state reversed its policies. Moreover, this effect was amplified 14% for "star" inventors and 17% for "specialist" inventors.
33 pages

        A century ago, everyone thought time and distance were well defined physical concepts. But neither proved absolute. Instead, measures/reports of time and distance were found to depend on one's reference point, specifically one's direction and speed of travel, making our apparent physical reality, in Einstein's words, "merely an illusion."
        Like time and distance, standard fiscal measures, including deficits, taxes, and transfer payments, depend on one's reference point/reporting procedure/language/labels. As such, they too represent numbers in search of concepts that provide the illusion of meaning where none exists.
        This paper, dedicated to our dear friend, David Bradford, provides a general proof that standard and routinely used fiscal measures, including the deficit, taxes, and transfer payments, are economically ill-defined. Instead these measures reflect the arbitrary labeling of underlying fiscal conditions. Analyses based on these and derivative measures, such as disposable income, private assets, and personal saving, represent exercises in linguistics, not economics.
18 pages

We present a simple formal model to address the question: When is open innovation superior to integrated innovation? Our model has firms with limited visibility that either control all aspects of product innovation (integrated innovation) or open their designs to components developed by other players (open innovation). We show that the desirability of each development method depends on the complexity of product development. With low complexity, both approaches fare similarly. As complexity grows, open innovation becomes increasingly attractive. When complexity is very large, integrated innovation tends to deliver better returns. We show that an open innovation strategy allows the firm to discover combinations of product features that would be hard to envision under integration. Open innovation, however, confines the ability of the firm to establish the product’s technological trajectory. The resolution of the trade-off between discovery and confinement determines the best approach to innovation.
22 pages

Optimal Reserve Management and Sovereign Debt
No. 07-010
Laura Alfaro and Fabio Kanczuk
Business, Government, and International Economy
August 2006
Complete Text (Acrobat PDF Version)

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 do not 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 optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.
31 pages

This paper empirically explores the relations between alternative organizational designs and a firm's ability to explore as well as exploit. We operationalize exploitation and exploration in terms of innovation streams; incremental innovation in existing products as well as exploring into architectural and/or discontinuous innovation. Based on in-depth, longitudinal data on 13 business units and 22 innovations, we investigate the consequences of organization design choices on innovation outcomes as well as the ongoing performance of existing products. We find that ambidextrous organization designs are significantly more effective in executing innovation streams than functional, cross-functional, and spinout designs. Further, transitions to ambidextrous designs were associated with significantly increased innovation outcomes, while shifts away from ambidextrous designs were associated with decreases in innovation outcomes. We explore the nature of ambidextrous organizational designs - their characteristics, how they operate, and their boundary conditions. Given these results, we discuss the relations between streams of innovation, organizations designs, and the nature of organizational adaptation.
57 pages

We study competitive interaction between two alternative models of digital content distribution over the Internet: peer-to-peer (p2p) file sharing and centralized client-server distribution. We present microfoundations for a stylized model of p2p file sharing where all peers are endowed with standard preferences and show that the endogenous structure of the network is conducive to sharing by a significant number of peers, even if sharing is costlier than freeriding. We build on this model of p2p to analyze the optimal strategy of a profit-maximizing firm, such as Apple, that offers content available at positive prices. We characterize the size of the p2p network as a function of the firm's pricing strategy, and show that the firm may be better off setting high prices, allowing the network to survive, and that the p2p network may work more efficiently in the presence of the firm than in its absence.
40 pages

In this paper we propose a perceptions framework for categorizing a range of inventory decision making that can be employed in a single-stage supply chain. We take the existence of a wide range of inventory decision making processes, as given and strive not to model the reasons that the range persists but seek a way to categorize them via their effects on inventory levels, orders placed given the demand faced by the inventory system. Using a perspective that we consider natural and thus appealing, the categorization involves the use of conceptual perceptions of demand to underpin the link across three features of the inventory system: inventory levels, orders placed and actual demand faced. The perceptions framework is based on forecasting with Auto-Regressive Integrated Moving Average (ARIMA) time series models. The context in which we develop this perceptions framework is of a single stage stochastic inventory system with periodic review, constant leadtimes, infinite supply, full backlogging, linear holding and penalty costs and no ordering costs. Forecasting ARIMA time series requires tracking forecast errors (interpolating) and using these forecast errors and past demand realizations to predict future demand (extrapolating). So called optimal inventory policies are categorized here by perceptions of demand that align with reality. Naturally then, deviations from optimal inventory policies are characterized by allowing the perception about demand implied by the interpolations or extrapolations to be primarily different from the actual demand process. Extrapolations and interpolations being separate activities, can in addition, imply differing perceptions from each other and this can further categorize inventory decision making.
34 pages

Stigmatized minorities may have an advantage in persuading majority group members during some face-to-face interactions due to the greater self-presentational demands such interactions elicit. In contrast to models which predict greater persuasive impact of members of ingroups, White participants were more convinced by persuasive appeals delivered by a Black interaction partner than by a White interaction partner. When interacting with a Black partner, Whites engaged in greater self-presentation, which in turn made them more susceptible to their partner's persuasive appeal (Studies 1 and 2). This persuasive benefit of stigma was eliminated when participants were exposed to the same partners making the same arguments on video, decreasing self-presentational demands (Study 2). We conclude by discussing when stigma is likely to facilitate versus impair persuasion.
53 pages

Due to network effects and switching costs, platform providers often become entrenched. To dislodge them, entrants generally must offer revolutionary products. We explore a second path to platform leadership change that does not rely on Schumpeterian creative destruction: platform envelopment. By leveraging common components and shared user relationships, one platform provider can move into another's market, combining its own functionality with the target's in a multi-platform bundle. Dominant firms otherwise sheltered from entry by standalone rivals may be vulnerable to an adjacent platform provider's envelopment attack. We analyze conditions under which envelopment strategies are likely to succeed.
30 pages

Capitalism is often defined as an economic system where private actors are allowed to own and control the use of property in accord with their own interests, and where the invisible hand of the pricing mechanism coordinates supply and demand in markets in a way that is automatically in the best interests of society. Government, in this perspective, is often described as responsible for peace, justice, and tolerable taxes. This paper defines capitalism as a system of indirect governance for economic relationships, where all markets exist within institutional frameworks that are provided by political authorities, i.e. governments. In this second perspective capitalism is a three level system much like any organized sports. Markets occupy the first level, where the competition takes place; the institutional foundations that underpin those markets are the second; and the political authority that administers the system is the third. While markets do indeed coordinate supply and demand with the help of the invisible hand in a short term, quasi-static perspective, government coordinates the modernization of market frameworks in accord with changing circumstances, including changing perceptions of societal costs and benefits. In this broader perspective government has two distinct roles, one to administer the existing institutional frameworks, including the provision of infrastructure and the administration of laws and regulations, and the second to mobilize political power to bring about modernization of those frameworks as circumstances and/or societal priorities change. Thus, for a capitalist system to evolve in an effective developmental sense through time, it must have two hands and not one: an invisible hand that is implicit in the pricing mechanism and a visible hand that is explicitly managed by government through a legislature and a bureaucracy. Inevitably the visible hand has a strategy, no matter how implicit, short sighted or incoherent that strategy may be.
30 pages

This paper conducts an empirical analysis of the geographic, economic and social factors that contributed to the spread of civil war in Nepal over the period 1996-2006. This within-country analysis complements existing cross-country studies on the same subject. Using a detailed dataset to track civil war casualties across space and over time, several patterns are documented. Conflict-related deaths are significantly higher in poorer districts, and in geographical locations that favor insurgents, such as mountains and forests; a 10 percentage point increase in poverty is associated with 25-27 additional conflict-related deaths. This result is similar to that documented in cross-country studies. In addition, the relationship with poverty and geography is similar for deaths caused by the insurgents and deaths caused by the state. Furthermore, poorer districts are likely to be drawn into the insurgency earlier, consistent with the theory that a lower cost of recruiting rebels is an important factor in starting conflict. On the other hand, geographic factors are not significantly associated with such onset, suggesting that they instead contribute to the intensity of violence once conflict has started. Finally, in contrast with some cross-country analyses, ethnic and caste polarization, land inequality, and political participation are not significantly associated with violence.
26 pages

In this paper we use highly disaggregated data on trade in capital goods to study differences in the price of capital across countries. Our strategy is motivated by the fact that most countries import the bulk of machinery equipment (from a small number of industrialized countries). We find the price of imported capital goods to be negatively and significantly correlated with the income of the importing country. Because most low-income countries import the bulk of capital goods, our results provide suggestive evidence that capital goods are more expensive in poor countries, consistent with the conventional explanation regarding the low real investment rates in poor countries.
29 pages

Pricing Liquidity: The Quantity Structure of Immediacy Prices
No. 07-017
George C. Chacko, Jakub W. Jurek, and Erik Stafford
Finance
September 2006
Complete Text (Acrobat PDF Version)

This paper develops a model for understanding liquidity via the pricing of limit orders. Limit orders can be well defined and priced with the tools of option pricing, allowing the complex tradeoff between transaction size and speed to be reduced to a single price. The option-based framework allows the properties of liquidity to be characterized as functions of the fundamental value and the order flow processes. In the special case when immediate execution is desired, the option strike price at which immediate exercise is optimal determines the effective bid/ask price. A model with full-information, but imperfect market making, is able to describe many of the known properties of transaction costs.
48 pages

This paper identifies a fundamental economic welfare tradeoff between two-sided open platforms and two-sided proprietary (closed) platforms connecting consumers and producers. Proprietary platforms create two-sided deadweight losses through monopoly pricing but at the same time, precisely because they set prices in order to maximize profits, they partially internalize two-sided positive indirect network effects and direct competitive effects on the producer side. We show that this can sometimes make proprietary platforms more socially desirable than open platforms, which runs against the common intuition that open platforms are more efficient. By the same token, inter-platform competition may also turn out to be socially undesirable because it may prevent platforms from sufficiently internalizing indirect externalities and direct intra-platform competitive effects
43 pages

This paper focuses on the relationship between public action and access to public goods. It begins by developing a simple model of collective action which is intended to capture the various mechanisms that are discussed in the theoretical literature on collective action. We argue that several of these intuitive theoretical arguments rely on special additional assumptions that are often not made clear. We then review the empirical work based on the predictions of these models of collective action. While the available evidence is generally consistent with these theories, there is a dearth of quality evidence. Moreover, a large part of the variation in access to public goods seems to have nothing to do with the "bottom-up" forces highlighted in these models and instead reflect more "top-down" interventions. We conclude with a discussion of some of the historical evidence on top-down interventions.
39 pages

Defining the Attributes and Processes that Enhance the Effectiveness of Workforce Diversity Initiatives in Knowledge Intensive Firms
No. 07-019
Modupe N. Akinola and David A. Thomas
Organizational Behavior
September 2006, revised August 2008
Complete Text (Acrobat PDF Version)

Workforce diversity continues to be a key focus for organizations, driven by globalization of the U.S. economy and the desire for organizations to more accurately reflect the demographic diversity of the US population. Yet, most research on diversity in organizations has focused on the outcomes associated with workforce diversity and not on the processes that can enhance diversity in organizations. We address this limitation by developing a conceptual model and propositions that highlight the attributes of effective workforce diversity initiatives and the process through which workforce diversity initiatives become effective. We focus on knowledge intensive work and argue that in this context, the nature of the work is directly tied to societal stereotypes of underrepresented minorities, making knowledge intensive firms a rich environment to examine diversity initiatives and explore the dynamics that hinder retention and promotion for underrepresented minorities in these firms. We close by discussing directions for future research on workforce diversity initiatives.
44 pages

This essay examines how repugnance sometimes constrains what transactions and markets we see. When my colleagues and I have helped design markets and allocation procedures, we have often found that distaste for certain kinds of transactions is a real constraint, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency. I'll first consider a range of examples, from slavery and indentured servitude (which once were not as repugnant as they now are) to lending money for interest (which used to be widely repugnant and is now not), and from bans on eating horse meat in California to bans on dwarf tossing in France. An example of special interest will be the widespread laws against the buying and selling of organs for transplantation. The historical record suggests that while repugnance can change over time, it can persist for a very long time, although changes in institutions that reflect repugnance can occur relatively quickly when the underlying repugnance changes.
32 pages

Resolving Information Asymmetries in Markets: The Role of Certified Management Programs
No. 07-023
Michael W. Toffel
Technology and Operations Management
October 2006
Complete Text (Acrobat PDF Version)

Firms and regulators are increasingly relying on voluntary mechanisms to signal and infer quality of difficult-to-observe management practices. Prior evaluations of voluntary management programs have focused on those that lack verification mechanisms and have found little evidence that they legitimately distinguish adopters as having superior management practices or performance. In this paper, I conduct one of the first evaluations to determine whether a voluntary management program that features an independent verification mechanism is achieving its ultimate objectives. Using a sample of thousands of manufacturing facilities across the United States, I find evidence that the ISO 14001 Environmental Management System Standard has attracted companies with superior environmental performance. After developing quasi-control groups using propensity score matching, I also find that adopters subsequently improve their environmental performance. These results suggest that robust verification mechanisms such as independent certification may be necessary for voluntary management programs to mitigate information asymmetries surrounding management practices. Implications are discussed for the industry-associations, government agencies, and the non-governmental organizations that design these programs, the companies that are investing resources to adopt them, and those that are relying on them to infer the quality of management practices.
41 pages

This paper analyzes the rise of business and economic forecasting agencies in the United States. The field was developed by entrepreneurs like Roger Babson and James Brookmire following the Panic of 1907, and advanced by professional economists, like Irving Fisher and Warren Persons, after World War I. By the late- 1920s, about a dozen forecasters competed to sell businesspeople their predictions, usually in the form of weekly or monthly newsletters. Forecasters were part of a larger class of financial and managerial consultants who sought to refine business decision-making through the introduction of statistical data and scientific analysis. The failure of most forecasting agencies to predict the stock market crash of 1929, and to foresee the gravity of the ensuing depression, led to a crisis in the industry. Nonetheless, the pioneering group of forecasters shaped the core problems, and invented many of the techniques, that influenced the maturation of the industry in the decades that followed.
69 pages

Scale without Mass: Business Process Replication and Industry Dynamics
No. 07-016
Erik Brynjolfsson, Andrew McAfee, Michael Sorell, and Feng Zhu
Technology and Operations Management
August 2006, revised October 2008
Complete Text (Acrobat PDF Version)

In the mid-1990s, productivity growth accelerated sharply in the U.S. economy. In this paper, we identify several other industry-level changes that have occurred during the same time and argue that they are consistent with an increased use of information technology (IT). We use case studies to illustrate how IT has enabled firms to more rapidly replicate improved business processes throughout an organization, thereby not only increasing productivity but also market share and market value. We then empirically document a substantial increase in turbulence starting in the 1990s, as measured by the average intra-industry rank change in sales, earnings before interest, taxes, depreciation and amortization (EBITDA), and other metrics. In particular, we find that IT-intensive industries account for most of this increase in turbulence, especially after 1995. In addition, we find that IT-intensive industries became more concentrated than non IT-intensive industries after 1995, reversing the previous trend. The combination of increased turbulence and concentration, especially among IT-intensive industries, is consistent with recent theories of hypercompetition as well as Schumpeterian creative destruction. We conclude that the improved ability of firms to replicate business innovations has changed the nature of business competition.
48 pages

Scholars of management have long considered how institutions can help resolve market imperfections and thereby improve human welfare. Most previous research has emphasized the use of for-profit firms. Such institutions cannot effectively address many environmental problems, however, because environmental problems often transcend firm boundaries. As a result, management scholars have begun to explore the use of more distributed institutional forms. In this article, we review the emerging scholarship on the formation and function of self-regulatory institutions.
33 pages

Trust in buyer-supplier relationships is sometimes regarded as a competitive advantage because trust can increase the gains from trade for firms and their suppliers. In this study, we document a particular type of competitive advantage conferred by trust. Using adoption rates of a new product as a case study, we show that trust protects current suppliers from competitors who offer innovative products. Buyers who trust their current suppliers are less likely to seek information about the new product and they express less interest in purchasing it. Once the product becomes available, they do in fact make fewer purchases. We also find that entrepreneurs from lesstrusted groups – in this study, African-Americans – find it particularly difficult to overcome the barriers erected by trust. Trust, we conclude, confers competitive advantage by slowing down the diffusion of new ideas and products in the economy. As trust is built up over time, earning a buyer’s trust confers a significant first-mover advantage.
29 pages

The design of the New York City (NYC) High School match involved tradeoffs between incentives and efficiency, because some schools are strategic players that rank students in order of preference, while others order students based on large priority classes. Therefore it is desirable for a mechanism to produce stable matchings (to avoid giving the strategic players incentives to circumvent the match), but is also necessary to use tie-breaking for schools whose capacity is sufficient to accommodate some but not all students of a given priority class. We analyze a model that encompasses one-sided and two-sided matching models. We first observe that breaking indifferences the same way at every school is sufficient to produce the set of student optimal stable matchings. Our main theoretical result is that a student-proposing deferred acceptance mechanism that breaks indifferences the same way at every school is not dominated by any other mechanism that is strategy- proof for students. Finally, using data from the recent redesign of the NYC High School match, which places approximately 90,000 students per year, we document that the extent of potential efficiency loss is substantial. Over 6,800 student applicants in the main round of assignment could have improved their assignment in a (non strategy-proof) student optimal mechanism, if the same student preferences would have been revealed.
29 pages

The rise of online channels facilitates the distribution of a wide range of products and services. Academics and industry observers agree that online distribution will fundamentally change the number and variety of products that consumers purchase. However, there is sharp disagreement about what type of change will occur. Proponents of the "long tail" idea argue that a sharp increase in the variety of products offered through online channels will fuel a shift in consumption away from hits to a much larger number of lower-selling niche products. While the long-tail view predicts an increase in the heterogeneity of consumption patterns, the well-known superstar effect promises the exact opposite. As consumers have access to their favorite content wherever they are whenever they demand it, consumption patterns will become more, not less uniform, this theory predicts.
To shed light on this debate, we study the distribution of revenues across products in the context of the U.S. home video industry for the 2000 to 2005 period. We find superstar and long-tail effects in home video sales, but each effect comes with a twist. There is a long-tail effect in that the number of titles that sell only a few copies every week increases almost twofold during our study period. But at the same time, the number of non-selling titles rises rapidly; it is now four times as high as in 2000.
Many underdogs thus in fact appear to be losers. We also find evidence of a superstar effect. Among the best-performing titles, an ever-smaller number of titles accounts for the bulk of sales. The caveat here is that today's superstars lack the punch of earlier generations: video sales generally decrease over time across all quantiles of the sales distribution, but this effect is most pronounced among best-selling titles. Our findings have important implications for entertainment companies. Exploiting the tail might prove unprofitable if many titles do not sell at all. At the same time, producing superstars is more difficult than ever. The trends we uncover thus point to significant challenges for the entertainment industry.
50 pages

The emergence of a research literature on team learning has been driven by at least two factors. First, longstanding interest in what makes organizational work teams effective leads naturally to questions of how members of newly formed teams learn to work together and how existing teams improve or adapt. Second, some have argued that teams play a crucial role in organizational learning. These interests have produced a growing and heterogeneous literature. Empirical studies of learning by small groups or teams present a variety of terms, concepts, and methods. This heterogeneity is both generative and occasionally confusing. We identify three distinct areas of research that provide insight into how teams learn to stimulate cross-area discussion and future research. We find that scholars have made progress in understanding how teams in general learn, and propose that future work should develop more precise and context-specific theories to help guide research and practice in disparate task and industry domains.
63 pages

Human beings are critical to the functioning of the vast majority of operating systems, influencing both the way these systems work and how they perform. Yet most formal analytical models of operations assume that the people who participate in operating systems are fully rational or at least can be induced to behave rationally. Many other disciplines, including economics, finance, and marketing, have successfully incorporated departures from this rationality assumption into their models and theories. In this paper, we argue that operations management scholars should do the same. We highlight initial studies that have adopted a "behavioral operations perspective" and explore the theoretical and practical implications of incorporating behavioral and cognitive factors into models of operations. Specifically, we address three questions: 1) What is a behavioral perspective on operations? 2) What might be the intellectual added value of such a perspective? 3) What are the basic elements of behavioral operations research?
50 pages

This paper presents a case study of offshore oil platforms—a workplace that has traditionally rewarded men for masculine displays of prowess and interactions centered on proving masculinity—in which such displays and interactions were absent. We use this case to develop theory about how organizational features, such as work practices and norms, can disrupt conventional masculine identity-construction processes. In this case, organizational features designed to enhance safety and effectiveness had the unintended effect of changing how men enacted their masculine identities at work. Interview and participant observation data show that the major reorientation was away from seeking to garner masculinity credentials and towards seeking to learn how to perform their jobs more safely and effectively. The latter required that workers engage in mutual expressions of vulnerability: they acknowledged their physical limitations, learned from their mistakes, and attended to their own and others’ emotions. As a result, these men expressed a broader repertoire of personal qualities, including qualities that run counter to conventionally masculine scripts. Our findings point to the mutability of masculine identity as a social status achievement and to how organizations can disrupt such tendencies and stand to gain in the process.
50 pages

This paper studies how the conversion of a waste stream into a useful and saleable by-product affects a firm's optimal operating strategy. We determine whether local implementation can be optimal, i.e., continuing business-as-usual to produce the original product and merely converting the collaterally generated waste stream into by-product, or whether global implementation - that re-optimizes the now joint production process - is required to maximize profit. Whereas local BPS implementation can be managed as if it were an alternate method of waste disposal, global implementation requires managerial attention at a strategic level. To determine which implementation mode is profit-maximizing, we derive optimality conditions for three possible operating regimes. These optimality conditions depend crucially on the waste disposal cost, which acts as a subsidy for the by-product that "consumes" the waste, and also on the virgin raw material cost, which acts as a subsidy for the original product that "feeds" the by-product process. These two costs create a symbiotic relationship between the original product and by-product. Since BPS turns waste into useful raw material, the firm may increase profit by generating more "waste". Although BPS is generally lauded as a win-win for business and the environment, the firm may actually increase emissions if it acts to maximize profit because it increases production to leverage the competitive advantage it gains from its operational synergy.
Keywords: Waste, by-product, environment, disposal cost, operations, competition, collateral output.
41 pages

Central to a firm’s growth and marketing policy is the revenue and profit potential of its customer assets. As a result, there has been a recent proliferation of work regarding customer lifetime value. However, extant research in this area is silent regarding how to assess the profitability of customers in a networked setting. In such settings, the presence of one type of customer can affect the value of another. Examples of such settings include job agencies (whose customers include both job seekers and listers), realtors (whose clients include home sellers and purchasers), and auction houses (whose customers include buyers and sellers). Customers such as buyers of an auction house pay no fees to the firm making their value difficult to compute. Yet these customers generate value to the firm because their presence attracts fee-paying sellers. In this paper we consider the value of a customer in these types of networked setting. We compute the value of customers by developing a joint model of buyer and seller growth. This growth comes from three sources — marketing actions (price and advertising), direct network effects (e.g., buyer to buyer effects), and indirect network effects (e.g., buyer to seller effects). Using this growth model we concurrently solve the firm’s problem of choosing optimal pricing and advertising subject to constraints on customer growth. By relaxing constraints on growth by one customer, we can then impute their lifetime value to the firm. We apply our model to data from an auction house. Our results show that there are strong direct and indirect network effects present in our data. We find that in the most recent period buyers have a value of about $550 and the sellers have a value of around $500. We also find that our approach leads to estimates of firmvalue that are more accurate than models that fail to consider network effects. Finally, price and advertising elasticities are low (-0.16 and 0.006) and decrease over time as network effects become increasingly important.
37 pages

Openness and free information sharing amongst scientists are supposed to be core norms of the scientific community. However, many studies have shown that these norms are not universally followed. Lack of openness and transparency means that scientific problem solving is constrained to a few scientists who work in secret and who typically fail to leverage the entire accumulation of scientific knowledge available. We present evidence of the efficacy of problem solving when disclosing problem information. The method’s application to 166 discrete scientific problems from the research laboratories of 26 firms is illustrated. Problems were disclosed to over 80,000 independent scientists from over 150 countries. We show that disclosure of problem information to a large group of outside solvers is an effective means of solving scientific problems. The approach solved one-third of a sample of problems that large and well-known R & D-intensive firms had been unsuccessful in solving internally. Problem-solving success was found to be associated with the ability to attract specialized solvers with range of diverse scientific interests. Furthermore, successful solvers solved problems at the boundary or outside of their fields of expertise, indicating a transfer of knowledge from one field to others.
58 pages

The Harvard Economic Service pioneered in the business of economic forecasting by publishing a quarterly journal on economic statistics and, starting in 1922, a weekly letter on economic conditions. The Harvard forecasting model, developed by the statistician and economist Warren Persons, gained international renown for its three-curve A-B-C chart, which rendered business fluctuations as the ebb and flow of speculation (A), business (B), and banking (C). The service was directed by C. J. Bullock, who promoted Harvard’s forecasting service around the world by forming collaborative agreements with John Maynard Keynes, Lucien March, Corrado Gini, and other prominent economists of the time. Through these contacts, the Harvard method influenced the evolution of forecasting techniques in several European countries. The Harvard Economic Service, however, attracted criticism for its purely empirical approach, its failure to make consistently accurate predictions, and its pursuit of commercial objectives in a university setting. Harvard’s efforts to build a forecasting service are an early chapter in the evolution of the social sciences, the growth of the financial analysts, and the commercialization of academic knowledge.
77 pages

Many industries are geographically concentrated. Many mechanisms that could account for such agglomeration have been proposed. We note that these theories make different predictions about which pairs of industries should be coagglomerated. We discuss the measurement of coagglomeration and use data from the Census Bureau’s Longitudinal Research Database from 1972 to 1997 to compute pairwise coagglomeration measurements for U.S. manufacturing industries. Industry attributes are used to construct measures of the relevance of each of Marshall’s three theories of industry agglomeration to each industry pair: (1) agglomeration saves transport costs by proximity to input suppliers or final consumers, (2) agglomeration allows for labor market pooling, and (3) agglomeration facilitates intellectual spillovers. We assess the importance of the theories via regressions of coagglomeration indices on these measures. Data on characteristics of corresponding industries in the United Kingdom are used as instruments. We find evidence to support each mechanism. Our results suggest that input-output dependencies are the most important factor, followed by labor pooling.
43 pages

This chapter explores complexities of the relationship between learning and performance. We start with the general proposition that learning promotes performance, and then describe several challenges for researchers and managers who wish to study or promote learning in support of performance improvement. We also review psychological and interpersonal risks of learning behavior, suggest conditions under which exploratory learning and experimentation is most critical, and describe conditions and leader behaviors conducive to supporting this kind of learning in organizations. We illustrate our ideas with examples from field studies across numerous industry contexts, and conclude with a discussion of implications of this complex relationship for performance management.
37 pages

Last updated 04/14/09.

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