HBS Working Papers: 2009-2010 - Faculty & Research

HBS Working Papers Collection

2009 - 2010

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Accelerating Energy Innovation: Insights from Multiple Sectors
No. 10-067
Rebecca M. Henderson and Richard G. Newell
General Management, Strategy
February 2010, revised February 2011
Complete Text (Acrobat PDF Version)

23 pages

Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results
No. 10-051
Robert L. Simons
Accounting and Management
January 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper reports the collective finding from 102 field studies that look at the relationship between two organization design variables: span of control and span of accountability. Clustering the data yields propositions suggesting that the relationship between these variables may be an important determinant of strategic exploitation and exploration activities.

Data from the field studies suggest that, in accordance with the controllability principle, accountability and control are tightly aligned for exploitation activities. However, this result was found in only a small number of tasks and functions. In the majority of situations, spans of accountability were wider than spans of control. This "Entrepreneurial Gap" is posited to be a result of management's desire for innovation and exploration-and used as a catalyst for changing strategy, creating high levels of customer satisfaction, or motivating people to navigate complex matrix organizations.
Keywords: Ambidextrous Organization, Strategic Exploration and Exploitation, Entrepreneurial Gap, Accountability, Span of Control
35 pages

Agency Costs, Mispricing, and Ownership Structure
No. 10-094
Sergey Chernenko, C. Fritz Foley and Robin Greenwood
Finance
May 2010
Complete Text (Acrobat PDF Version)

Abstract:
Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. We show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.
JEL Code: G14,G3,G32,K22
50 pages

Agency Revisited
No. 10-082
Ramon Casadesus-Masanell and Daniel F. Spulber
Strategy
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
The article presents a comprehensive overview of the principal-agent model that emphasizes the role of trust in the agency relationship. The analysis demonstrates that the legal remedy for breach of duty can result in a full-information efficient outcome eliminating both moral hazard and adverse selection problems in agency. The legal remedy motivates agents to behave in a trustworthy fashion and principals to place their trust in agents. In contrast to the standard agency model, a complete description of the principal-agent relationship cannot be based on explicit incentives alone but must recognize implicit and exogenous incentives for trust behavior that derive from the legal, social, and market context. These incentives reduce the need to rely on explicit incentives, allowing the principal and agent to reduce transaction costs by using incomplete contracts.
58 pages

The Architecture of Complex Systems: Do Core-periphery Structures Dominate?
No. 10-059
Alan MacCormack, Carliss Y. Baldwin, and John Rusnak
Finance
January 2010
Complete Text (Acrobat PDF Version)

Abstract:
Any complex technological system can be decomposed into a number of subsystems and associated components, some of which are core to system function while others are only peripheral. The dynamics of how such "core-periphery" structures evolve and become embedded in a firm's innovation routines has been shown to be a major factor in predicting survival, especially in turbulent technology-based industries. To date however, there has been little empirical evidence on the propensity with which core-periphery structures are observed in practice, the factors that explain differences in the design of such structures, or the manner in which these structures evolve over time.
We address this gap by analyzing a large number of systems in the software industry. Our sample includes 1,286 software releases taken from 19 distinct applications. We find that 75-80% of systems possess a core-periphery structure. However, the number of components in the core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development - open, distributed organizations developing systems with smaller cores. We find that core components are often dispersed throughout a system, making their detection and management difficult for a system architect. And we show that systems evolve in different ways - in some, the core is stable, whereas in others, it grows in proportion to the system, challenging the ability of an architect to understand all possible component interactions. Our findings represent a first step in establishing some stylized facts about the structure of real world systems.
37 pages

Towards an understanding of the role of standard setters in standard setting
No. 10-105
Abigail Allen and Karthik Ramanna
Accounting and Management
June 2010, revised September 2010, June 2011
Complete Text (HBS access only, Acrobat PDF Version)

Abstract:
We investigate the idiosyncratic influence of standard setters in standard setting. In particular, we examine how FASB members' and SEC commissioners' length of tenure, past professional experience, and political affiliations vary with the degree to which exposure drafts issued during their terms are perceived as decreasing accounting "reliability" and increasing accounting "relevance." Among other results, we find that members' and commissioners' length of service on the board and a prior career in investment banking/ investment management are associated with exposure drafts perceived as decreasing accounting "reliability;" and FASB members' affiliations with the Democratic Party are associated with proposing standards perceived as increasing accounting "reliability." The results contribute to a broader understanding of the implications of regulated standard setting beyond our current knowledge of the role of corporate lobbying in the process.
64 pages

Assess, Don't Assume, Part I: Etiquette and National Culture in Negotiation
No. 10-048
James K. Sebenius
Negotiation, Organizations & Markets
December 2009
Complete Text (Acrobat PDF Version)

Abstract:
When facing a cross-border negotiation, the standard preparatory assessments-of the parties, their interests, their no-deal options, opportunities for and barriers to creating and claiming value, the most promising sequence and process design, etc.- should be informed and modified by two classes of potentially relevant cross-border factors, the general and the negotiation-specific. Drawing on considerable literature in cross-border and cross-cultural negotiation, this paper develops the first two levels of a four-level prescriptive framework for effectively carrying out such assessments:

Common expectations for surface behavior: etiquette, protocol, and deportment. A surface-level assessment informs one about local expectations concerning greetings, business cards, gift-giving, dress, punctuality, body language, table manners, and so forth.
Deeper cultural characteristics and their implications for the negotiation process itself. Below the surface are characteristics such as whether a culture is focused on the individual or the collective, the nature and importance of relationships, how personal space and the role of time are viewed, the extent to which authority and hierarchy are accepted, how ambiguity and risk are regarded, and so on. Extending this assessment to expectations that are more specific to the negotiation process itself yields several questions: Is there a view that negotiation is a collaborative process aimed at mutual advantage or a competitive battle? Should one focus on specific issues early on or is there a lengthy process of relationship building first? Is the process formal or informal? Is communication direct or indirect? Are agreements constructed from general principles "down" or from specific provisions "up"? And so on.

The bulk of this essay develops these two points but with some strong caveats against stereotyping, overemphasizing national culture, falling prey to potent psychological biases in cross-cultural perception, as well as potentially adapting "past" one's counterpart. [A close companion paper--"Assess, Don't Assume, Part II: Decision Making, Governance, and Political Economy in Negotiation"--elaborates the importance to effective negotiating strategy and tactics of incorporating two less well-studied factors beyond etiquette and deeper cultural characteristics: 3) systematic cross-border differences in decision making, governance, and 4) the broader economic and political context for negotiation as well as salient "comparable" deals.]
22 pages

Assess, Don't Assume, Part II: Negotiating Implications of Cross-Border Differences in Decision Making, Governance, and Political Economy
No. 10-050
James K. Sebenius
Negotiation, Organizations & Markets
December 2009
Complete Text (Acrobat PDF Version)

Abstract:
When facing a negotiation that crosses national borders and/or cultures, the standard preparatory assessments-of the parties, their interests, their no-deal options, opportunities for and barriers to creating and claiming value, the most promising sequence and process design, etc.- should be informed and modified by potentially relevant factors. Drawing on considerable literature in cross-border and cross-cultural negotiation, a two-paper series develops a four-level prescriptive framework for effectively carrying out such assessments. The first paper in this series ("Etiquette and National Culture in Negotiation") described 1) common expectations for surface behavior, and 2) some implications of deeper cultural characteristics for the negotiation process itself, as well as cross-border caveats such as stereotyping and overemphasizing national culture to the exclusion of other factors. The current paper carries this analysis further by systematically analyzing a third and fourth class of factors that often prove critical in cross-border dealmaking:

The decision-making and governance processes that are the targets of influence efforts. While negotiations take place with individuals, those individuals are typically enmeshed in organizational processes and cultures. Thus, a key assessment focuses on the organization's decision-making and governance processes. Several questions guide this analysis: Who has what decision rights? Is it a one-person authoritarian process? A simple consensus? A multi-stage consensus process? A key subgroup? How does the formal decision-making and governance process differ from the informal one?
The broader economic and political context for negotiation as well as salient "comparable" deals. Several questions guide this analysis: is there a formal or informal government policy toward the kind of arrangements under negotiation such as the requirement that the majority of a joint venture be owned by a local partner? Are high-tech deals particularly sought-after by the state? What recent deals by others, successful or not, will be salient in the minds of your local hosts and authorities when they contemplate yours? Does the political ethos favor state control or privatization? Does a wrenching political transition foster managerial uncertainty and decision paralysis? And so on.

13 pages

Audit Quality and Auditor Reputation: Evidence from Japan
No. 10-088
Douglas J. Skinner and Suraj Srinivasan
Accounting and Management
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's "Big Four" audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama's operations for two months as punishment for its role in the accounting fraud at Kanebo. This action was unprecedented, and followed a sequence of events that seriously damaged ChuoAoyama's reputation for audit quality. We use these events to provide evidence on the importance of auditors' reputation for audit quality in a setting where litigation plays essentially no role. We find that ChuoAoyama's audit clients switched away from the firm as questions about its audit quality became more pronounced but before it was clear that the firm would be wound up, consistent with the importance of auditors' reputation for delivering quality.
58 pages

Banking Deregulations, Financing Constraints and Firm Entry Size
No. 10-010
William R. Kerr and Ramana Nanda
Entrepreneurial Management
July 2009, revised October 2009
Complete Text (Acrobat PDF Version)

Abstract:
We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
Keywords: entrepreneurship, entry size, financial constraints, banking.
JEL Codes: E44, G21, L26, L43, M13.
13 pages

Banking market concentration and consumer credit constraints: Evidence from the 1983 Survey of Consumer Finances
No. 10-077
Daniel Bergstresser
Finance
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper uses data from the 1983 Survey of Consumer Finances to test the relationship between the banks' market power and households' self-reported levels of credit constraints. The 1983 Survey was the last to identify households' geographic location, making it useful for this analysis. There is evidence that borrowers, and particularly young borrowers, were less credit-constrained in markets where banks enjoyed more market power. Interest rates on consumer borrowing decreased more sharply with age in competitive markets than in concentrated markets. These results are consistent with the Sharpe (1990) and Petersen-Rajan (1995) models of information acquisition in credit markets.
Keywords: Banks, market structure, consumption, credit constraints
JEL Classification: D1; E2; G2; L1
20 pages

Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity (PDF file of Keynote Slides)
No. 10-068
Michael C. Jensen and Werner Erhard
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
There is far too much concern today about the conflicts of interest between people; for example, conflicts of interest between agents and owners--historically a favorite topic of Jensen--and not enough attention paid to the damage caused by an individual's conflict of interest with himself or herself. We argue here that a large amount of the damage inflicted on people and organizations is caused by actions of individuals that are not in their own self-interest. That is, people consistently impose costs on their loved ones, friends, associates, partners, employers and the public by actions that are not in their own self interest.

In this talk we focus on the integrity issues that cause huge problems in the lives of most individuals and to every one we come in contact with. These slides draw on the work on a new model of integrity that we have co-authored with Steve Zaffron and is available at:
http://ssrn.com/abstract=920625
http://ssrn.com/abstract=1542759
http://ssrn.com/abstract=1511274

We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, quality of life, and value-creation for all entities, and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology, yet its major role in productivity and performance has been largely hidden or unnoticed, or even ignored by economists and others.

In summary, we show that defining integrity as honoring one's word (as we have defined honoring one's word): 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at both the individual and organizational level, and 2) empowers the three virtue phenomena of morality, ethics and legality.
67 pages

Breakthrough Inventions and Migrating Clusters of Innovation
No. 10-020
William R. Kerr
Entrepreneurial Management
September 2009
Complete Text (Acrobat PDF Version)

Abstract:
We investigate the speed at which clusters of invention for a technology migrate spatially following breakthrough inventions. We identify breakthrough inventions as the top one percent of US inventions for a technology during 1975-1984 in terms of subsequent citations. Patenting growth is significantly higher in cities and technologies where breakthrough inventions occur after 1984 relative to peer locations that do not experience breakthrough inventions. This growth differential in turn depends on the mobility of the technology's labor force, which we model through the extent that technologies depend upon immigrant scientists and engineers. Spatial adjustments are faster for technologies that depend heavily on immigrant inventors. The results qualitatively con.rm the mechanism of industry migration proposed in models like [Duranton, G., 2007. Urban evolutions: The fast, the slow, and the still. American Economic Review 97, 197.221].
JEL Classifications: F2, J4, J6, O3, O4, R1, R3.
Keywords: Agglomeration, Clusters, Entrepreneurship, Invention, Mobility, Reallocation, R&D, Patents, Scientists, Engineers, Immigration.
41 pages

The CHAT Dataset
No. 10-035
Diego A. Comin and Bart Hobijn
Business, Government and the International Economy
November 2009
Complete Text (Acrobat PDF Version)

Abstract:
This note accompanies the Cross-country Historical Adoption of Technology (CHAT) dataset. CHAT is an unbalanced panel dataset with information on the adoption of over 100 technologies in more than 150 countries since 1800. The data is available for download at: http://www.nber.org/data/chat. We discuss the main aim of CHAT, its scope and limitations, as well as several ways in which we have used the data so far and ways to potentially use the data for other research.
Suggested acknowledgment:
If you use the CHAT dataset for your research, please include the following citation: "Our technology measures come from the CHAT data set which is an extension of the data set described in Comin and Hobijn (2004)"
20 pages

Cyclicality of Credit Supply: Firm Level Evidence
No. 10-107
Bo Becker and Victoria Ivashina
Finance
June 2010, revised August 2011
Complete Text (Acrobat PDF Version)

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

Clusters of Entrepreneurship
No. 10-019
Edward L. Glaeser, William R. Kerr, and Giacomo A. M. Ponzetto
Entrepreneurial Management
September 2009
Complete Text (Acrobat PDF Version)

Abstract:
Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people.
Keywords: Entrepreneurship, Industrial Organization, Chinitz, Agglomeration, Clusters, Cities.
JEL Codes: J2, L0, L1, L2, L6, O3, R2.
54 pages

Commodity Chains: what can we learn from a business history of the rubber chain? (1870-1910)
No. 10-089
Felipe Tâmega Fernandes
Entrepreneurial Management
April 2010
Complete Text (Acrobat PDF Version)

Abstract:
The literature on the rubber boom applied a Dependendist view of rubber production in the Brazilian Amazon. Even though a sizable surplus was generated in the rubber chain, it was mostly appropriated by foreigners. This view is in tune with the Global Commodity Chain approach that argues that manufacturing/core economies absorb the bulk of surplus generated in the commodity chain. This paper challenges both frameworks and asks for a more careful examination of the business history of commodity chains: it is a first step in this direction through an analysis of the relationship between two nodes of the rubber chain.
Keywords: Rubber, Commodities, Commodity Chains, Business History, Amazon Region, Brazil.
JEL Classification Code: L1, L2, L73, N56, N86.
48 pages

Competing Ad Auctions
No. 10-055
Itai Ashlagi, Benjamin G. Edelman, and Hoan Soo Lee
Negotiation, Organizations & Markets
January 2010, revised May 2010, February 2011
Complete Text (Acrobat PDF Version)

Abstract:
We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: We derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.
21 pages

Conceptual Foundations of the Balanced Scorecard
No. 10-074
Robert S. Kaplan
Accounting and Management
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
David Norton and I introduced the Balanced Scorecard in a 1992 Harvard Business Review article (Kaplan & Norton, 1992). The article was based on a multi-company research project to study performance measurement in companies whose intangible assets played a central role in value creation (Nolan Norton Institute, 1991). Norton and I believed that if companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems.

After publication of the 1992 HBR article, several companies quickly adopted the Balanced Scorecard giving us deeper and broader insights into its power and potential. During the next 15 years, as it was adopted by thousands of private, public, and nonprofit enterprises around the world, we extended and broadened the concept into a management tool for describing, communicating and implementing strategy. This paper describes the roots and motivation for the original Balanced Scorecard article as well as the subsequent innovations that connected it to a larger management literature.
37 pages

Conglomerates and LBO Associations: A Comparison of Organizational Forms
No. 10-024
George P. Baker and Cynthia A. Montgomery
Negotiation, Organizations & Markets, Strategy
September 2009
Complete Text (Acrobat PDF Version)

Abstract:
No Abstract is available at this time
35 pages

The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
No. 10-086
William R. Kerr, Josh Lerner, and Antoinette Schoar
Entrepreneurial Management, Finance
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper documents the role of angel funding for the growth, survival, and access to follow-on funding of high-growth start-up firms. We use a regression discontinuity approach to control for unobserved heterogeneity between firms that obtain funding and those that do not. This technique exploits that a small change in the collective interest levels of the angels can lead to a discrete change in the probability of funding for otherwise comparable ventures. We first show that angel funding is positively correlated with higher survival, additional fundraising outside the angel group, and faster growth measured through growth in web site traffic. The improvements typically range between 30% and 50%. When using the regression discontinuity approach, we still find a strong, positive effect of angel funding on the survival and growth of ventures, but not on access to additional financing. Overall, the results suggest that the bundle of inputs that angel investors provide have a large and significant impact on the success and survival of start-up ventures.
36 pages

Corporate Governance and Internal Capital Markets
No. 10-100
Zacharias Sautner and Belén Villalonga
Finance
May 2010
Complete Text (Acrobat PDF Version)

Abstract:
We exploit an exogenous shock to corporate ownership structures created by a recent tax reform in Germany to explore the link between corporate governance and internal capital markets. We find that firms with more concentrated ownership are less diversified and have more efficient internal capital markets. Our findings provide direct evidence in support of Scharfstein and Stein's (2000) model, which suggests that internal capital misallocations are partly a result of poor corporate governance. We also provide evidence of a channel through which the benefits of ownership concentration outweigh its costs.
48 pages

Culture Clash: The Costs and Benefits of Homogeneity
No. 10-003
Eric J. Van den Steen
Strategy
July 2009
Complete Text (Acrobat PDF Version)

Abstract:
This paper develops an economic theory of the costs and benefits of corporate culture — in the sense of shared beliefs and values — in order to study the effects of 'culture clash' in mergers and acquisitions.
I first use a simple analytical framework to show that shared beliefs lead to more delegation, less monitoring, higher utility (or satisfaction), higher execution effort (or motivation), faster coordination, less influence activities, and more communication, but also to less experimentation and less information collection. When two firms that are each internally homogenous but different from each other, merge, the above results translate to specific predictions how the change in homogeneity will affect firm behavior. The paper's predictions can also serve more in general as a test for the theory of culture as homogeneity of beliefs.
38 pages

A Decision-making Perspective to Negotiation: A Review of the Past and a Look into the Future
No. 10-002
Chia-Jung Tsay and Max H. Bazerman
Negotiation, Organizations & Markets
July 2009
Complete Text (Acrobat PDF Version)

Abstract:
Through the decision-analytic approach to negotiations, the past quarter century has seen the development of a better dialog between the descriptive and the prescriptive, as well as a burgeoning interest in the field for both academics and practitioners. Researchers have built upon the work in behavioral decision theory, examining the ways in which negotiators may deviate from rationality. The 1990s brought a renewed interest in social factors, as work on social relationships, egocentrism, attribution and construal processes, and motivated illusions was incorporated into our understanding of negotiations. Several promising areas of research have emerged in recent years, drawing from other disciplines and informing the field of negotiations, including work on the influence of ethics, emotions, intuition, and training.
Keywords: negotiation, bargaining, biases, ethics, affect, intuition, negotiation training
29 pages

The Determinants of Individual Performance and Collective Value in Private-Collective Software Innovation
No. 10-065
Ned Gulley and Karim R. Lakhani
Technology and Operations Management
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
We investigate if the actions by individuals in creating effective new innovations are aligned with the reuse of those innovations by others in a private-collective software development context. This relationship is studied in the setting of eleven "wiki-like" programming contests, where contest submissions are open for reuse by others, each involving more than one hundred contributors and several thousand attempts to generate, over a one-week period, the "best" software solution to a difficult programming challenge. We find that greater amounts of new code and novel recombinations of others' code, in a contest submission, increases both the probability of achieving top rank and the subsequent reuse by others in their own submission (community value). While, increasing use of borrowed code in a submission reduces the probability of achieving top rank, but increases the community value of the submission. Code structures that are more non-conforming to commonly accepted programming conventions similarly increase the probability of generating a top performer, but reduce subsequent reuse by others. Surprisingly, greater code complexity in a submission increases both the odds of generating a top performing entry and its community value. We discuss the implications of these findings in light of the literature on private-collective innovation with an emphasis on the importance of considering both individual and community perspectives as they relate to knowledge creation, reuse and recombination for innovation.
41 pages

The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making
No. 10-034
Roy Y.J. Chua and Xi Zou
Organizational Behavior
November 2009
Complete Text (Acrobat PDF Version)

Abstract:
Although the concept of luxury has been widely discussed in social theories and marketing research, relatively little research has directly examined the psychological consequences of exposure to luxury goods. This paper demonstrates that mere exposure to luxury goods increases individuals' propensity to prioritize self-interests over others' interests, influencing the decisions they make. Experiment 1 found that participants primed with luxury goods were more likely than those primed with non-luxury goods to endorse business decisions that benefit themselves but could potentially harm others. Using a word recognition task, Experiment 2 further demonstrates that exposure to luxury is likely to activate self-interest but not necessarily the tendency to harm others. Implications of these findings were discussed.
Keywords: Luxury goods, Cognition, Decision making, Self-interest
16 pages

Disagreement about the Team's Status Hierarchy: An Insidious Obstacle to Coordination and Performance
No. 10-113
Heidi K. Gardner
Organizational Behavior
June 2010
Complete Text (Acrobat PDF Version)

Abstract:
Hierarchies are pervasive in groups, generally providing clear guidelines for the dominance and deference behaviors that members are expected to show based on their relative ranks. But what happens when team members disagree about where each member ranks on the status hierarchy? While some research has examined overt status rivalries (Sutton & Hargadon, 1996), typically focusing on battles for the top positions (Groysberg, Polzer & Elfenbein, 2009; Overbeck, Correll, & Park, 2005), our study contributes novel findings on the effects of disagreement amongst all members' perceptions of their team's status hierarchy. This paper develops and tests a theory to explain how even small differences in members' status perceptions-differences that may not be apparent to the members themselves-can diminish coordination, generate task conflict, and weaken performance.

We identify two conditions-time pressure and intragroup familiarity-under which team members' disagreements on the status hierarchy are more likely to lead to poor coordination and increased conflict. Survey data from a longitudinal field study of 89 consulting and accounting teams from a Big Four firm allow us to examine how teams experience status disagreement over time. Independent, third-party performance data for each team demonstrates how coordination and conflict ultimately affect performance with clients.

These findings contribute both to the micro-status literature (especially to the growing body of research on the role of status in shaping team dynamics and outcomes) and more broadly to the team effectiveness literature.
42 pages

Does Competition Favor Delegation?
No. 10-009
Christian Alejandro Ruzzier
July 2009
Complete Text (Acrobat PDF Version)

Abstract:
This paper studies the consequences of product-market competition on firms' decisions to delegate more or fewer decision-making responsibilities to managers. By simultaneously addressing the choice of both competitive actions and organizational design, the paper makes an attempt at bringing economic theory and management strategy closer together.
An increase in substitutability between the products of the different firms triggers a different response depending on the size of the firm: larger firms delegate more responsibility, whereas smaller firms centralize decision making. The increase in substitutability also causes some firms to exit the market, which pushes in the direction of reduced managerial autonomy. Stronger competition also leads to less discretion in markets in which the possibilities for product differentiation are important.
For a given number of firms, an increase in market size increases centralization, as the owner of the firm finds it more costly to accept rent seeking by the managers. However, this increase in market size will lead to the entry of more firms, which calls for more decentralized decision making. Under reasonable conditions, the aggregate effect leads to a U-shaped relationship where firms in both small and large markets are characterized by high levels of discretion, while there is less discretion for intermediate market sizes. Finally, a reduction in entry barriers leads unambiguously to an increase in the level of discretion given to the agent, as it results in a larger number of firms entering the market and, for a given market size, in lower concentration or expected firm-level demand, which reduces the value of having control and pushes in the direction of increased autonomy.
Keywords: product-market competition, delegation, authority, oligopoly, firm organization
JEL Codes: D43, L13, L22, M21
28 pages

Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007-2009 Financial Crisis
No. 10-101
Venkat Kuppuswamy and Belén Villalonga
Finance
May 2010, revised November 2010
Complete Text (Acrobat PDF Version)

Abstract:
We show that the value of corporate diversification increased during the 2007-2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates' access to internal capital markets became more valuable not just because external capital markets became more costly, but also because the efficiency of internal capital allocation increased significantly during the crisis. Our analysis provides new evidence on how the diversification discount and its drivers vary with financial constraints and economic conditions, and suggests that corporate diversification can serve an important insurance function for investors.
58 pages

Does Product Market Competition Lead Firms To Decentralize?
No. 10-052
Nicholas Bloom, Raffaella Sadun, and John Van Reenen
Strategy
January 2010
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Abstract:
There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms - including their decentralization decisions - across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country . We analyze data on almost 4,000 firms across twelve countries in Europe, North America and Asia. We find that competition does indeed seem to foster greater decentralization.
12 pages

The Economic Crisis and Medical Care Usage
No. 10-079
Annamaria Lusardi, Daniel Schneider, and Peter Tufano
Finance
March 2010
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Abstract:
We use a unique, nationally representative cross-national dataset to document the reduction in individuals' usage of routine non-emergency medical care in the midst of the economic crisis. A substantially larger fraction of Americans have reduced medical care than have individuals in Great Britain, Canada, France, and Germany, all countries with universal health care systems. At the national level, reductions in medical care are related to the degree to which individuals must pay for it, and within countries are strongly associated with exogenous shocks to wealth and employment.
24 pages

The Empire Struck Back: The Mexican Oil Expropriation of 1938 Reconsidered
No. 10-108
Noel Maurer
Business, Government and the International Economy
June 2010
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Abstract:
The Mexican expropriation of 1938 was the first large-scale non-Communist expropriation of foreign-owned natural resource assets. The literature generally makes three assertions: the U.S. government did not fully back the companies, Mexico did not fully compensate them for the value of their assets, and the oil workers benefitted from the change in ownership. This paper musters data and evidence that supports only the first of those assertions, and only to a limited extent: the companies devised political strategies that maneuvered Roosevelt into supporting their interests, and they were more than fully compensated by the Mexican government as a result.
33 pages

The End of Chimerica
No. 10-037
Niall Ferguson and Moritz Schularick
Business, Government and the International Economy
November 2009
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Abstract:
For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.
31 pages

Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930
No. 10-027
Andre Martínez-Fritscher and Aldo Musacchio
Business, Government and the International Economy
October 2009, revised December 2009
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Abstract:
There is a large literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk free rate). In this paper, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the capacity to pay. We use a newly created data base with state-level fiscal and risk premium data for Brazil states between 1891 and 1930 to show that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g., rubber and coffee) ended up having higher revenues per capita and, thus, lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments (i.e., the fact that states cannot produce any commodity they want) and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We end by running instrumental variable estimates using indices of export prices for each state to instrument for revenues per capita. Our IV estimates confirm our results that states with commodities that had higher price increases had lower risk premia.
45 pages

Environmental Federalism in the European Union and the United States
No. 10-085
David Vogel, Michael Toffel, Diahanna Post, and Nazli Z. Uludere Aragon
Technology and Operations Management
March 2010
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Abstract:
The United States (US) and the European Union (EU) are federal systems in which the responsibility for environmental policy-making is divided or shared between the central government and the (member) states. The attribution of decision-making power has important policy implications. This chapter compares the role of central and local authorities in the US and the EU in formulating environmental regulations in three areas: automotive emissions for health related (criteria) pollutants, packaging waste, and global climate change. Automotive emissions are relatively centralised in both political systems. In the cases of packaging waste and global climate change, regulatory policy-making is shared in the EU, but is primarily the responsibility of local governments in the US. Thus, in some important areas, regulatory policy-making is more centralised in the EU. The most important role local governments play in the regulatory process is to help diffuse stringent local standards through more centralised regulations, a dynamic which has become recently become more important in the EU than in the US.
42 pages

Fiduciary Duties and Equity‐Debtholder Conflicts
No. 10-070
Bo Becker and Per Strömberg
Finance
February 2010, revised June 2011, November 2011
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Abstract:
We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity-debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in firms incorporated in that state. This change limited managers' incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity-bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.
JEL Code: G32, G33, L2
53 pages

Estimating the Effects of Large Shareholders Using a Geographic Instrument
No. 10-028
Bo Becker, Henrik Cronqvist, and Rüdiger Fahlenbrach
Finance
October 2009, revised February 2010
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Abstract:
Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument - the density of wealthy individuals near a firm's headquarters - for the presence of large, non-managerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.
64 pages

The Evolution of Science-Based Business: Innovating How We Innovate
No. 10-062
Gary P. Pisano
Technology and Operations Management
January 2010
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33 pages

The Fable of Fisher Body Revisited
No. 10-081
Ramon Casadesus-Masanell and Daniel Spulber
Strategy
March 2010
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15 pages

Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior
No. 10-012
Lalin Anik, Lara B. Aknin, Michael I. Norton, and Elizabeth W. Dunn
Marketing
August 2009
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Abstract:
While lay intuitions and pop psychology suggest that helping others leads to higher levels of happiness, the existing evidence only weakly supports this causal claim: Research in psychology, economics, and neuroscience exploring the benefits of charitable giving has been largely correlational, leaving open the question of whether giving causes greater happiness. In this chapter, we have two primary aims. First, we review the evidence linking charitable behavior and happiness. We present research from a variety of samples (adults, children and primates) and methods (correlational and experimental) demonstrating that happier people give more, that giving indeed causes increased happiness, and that these two relationships may operate in a circular fashion. Second, we consider whether advertising these benefits of charitable giving - asking people to give in order to be happy - may have the perverse consequence of decreasing charitable giving, crowding out intrinsic motivations to give by corrupting a purely social act with economic considerations.
23 pages

Financing Constraints and Entrepreneurship
No. 10-013
William R. Kerr and Ramana Nanda
Entrepreneurial Management
August 2009
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Abstract:
Abstract is not available at this time
21 pages

Foreign Entry and the Mexican Banking System, 1997-2007
No. 10-114
Stephen Haber and Aldo Musacchio
Business, Government and the International Economy
June 2010
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Abstract:
What is the impact of foreign bank entry on the pricing and availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks: the foreign market share therefore increased five-fold between 1997 and 2007. We construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. We also find that switching from domestic to foreign ownership is associated with a decrease in non-performing loans and an increase in interest rate spreads, suggesting that foreign concerns bought domestic banks that had been making loans with low interest rates to parties that had a low probability of repayment.
39 pages

From Russia with Love: The Impact of Relocated Firms on Incumbent Survival
No. 10-112
Oliver Falck, Christina Guenther, Stephan Heblich, and William R. Kerr
Entrepreneurial Management
June 2010
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Abstract:
We identify the impact of local firm concentration on incumbent performance with a quasi natural experiment. When Germany was divided after World War II, many firms in the machine tool industry fled the Soviet occupied zone to prevent expropriation. We show that the regional location decisions of these firms upon moving to western Germany were driven by non-economic factors and heuristics rather than existing industrial conditions. Relocating firms increased the likelihood of incumbent failure in destination regions, a pattern that differs sharply from new entrants. We further provide evidence that these effects are due to increased competition for local resources.
Keywords: Agglomeration, competition, firm dynamics, labor, Germany
JEL Codes: R10, L10, H25, O10, J20
36 pages

From Strategy to Business Models and to Tactics
No. 10-036
Ramon Casadesus-Masanell and Joan Enric Ricart
Strategy
November 2009
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Abstract:
The notion of business model has been used by strategy scholars to refer to "the logic of the firm, the way it operates and how it creates value for its stakeholders." On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate and relate business model and strategy. Business model, we argue, is a reflection of the firm's realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ when there are important contingencies upon which a well-designed strategy must be based. Our framework also delivers a clear separation between tactics and strategy. This distinction is possible because strategy and business model are different constructs.
45 pages

The Global Agglomeration of Multinational Firms
No. 10-043
Laura Alfaro and Maggie Chen
Business, Government and the International Economy
December 2009, revised April 2010
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Abstract:
The proliferation of multinational activities has led to the emergence of new industrial clusters around the world. In this paper, we examine how "first nature" location fundamentals and "second nature" agglomeration economies jointly determine the global landscape of multinational firms. Using a unique worldwide plant dataset that reports detailed location, ownership, and operation information for plants in more than 100 countries, we construct a spatially continuous index to measure the significance and extent of agglomeration between multinational firms. Our analysis indicates that multinationals' agglomeration goes above and beyond first-nature driven geographic concentration due to market size, comparative advantage, and trade costs. Second-nature forces including knowledge spillovers, capital-market externalities, and vertical production linkages also play a significant role. In comparison to domestic plants, knowledge spillovers and capital market externalities exert a stronger impact on multinational firms while labor market pooling has a weaker effect. These findings remain robust when we examine entry decisions and explore the process of agglomeration.
Keywords: multinational firm, agglomeration, first nature, input-output linkage, knowledge spillover, factor market externality
JEL Codes: F2, D2, R1, R3
44 pages

Determinants of Successful Frontline Process Improvement: Action versus Analysis
No. 10-047
Anita L. Tucker and Sara J. Singer
Technology and Operations Management
December 2009, revised July 2011
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Abstract:
Senior manager participation is a key success driver for process improvement programs. To increase their participation, we designed an intervention in which senior managers worked with frontline staff to identify and solve safety-related problems over an 18-month period. On average, the 20 randomly selected treatment hospitals identified 17.3 problems per work area and solved 9.1 of these. However, their readmission rates and percentage increase in nurses' perceptions of safety improvement were no better than 48 control hospitals'. Thus, we investigated drivers of successful program implementation within the set of treatment hospitals. We found that managers from hospitals with low and high perceived improvement identified similar numbers of problems. However, high perceived improvement hospitals took action on more problems. We found no benefit from selecting problems with the highest benefit-to-cost ratios because there was a flat landscape for problems' benefit-to-cost ratios. Thus, for safety improvement in hospitals, allocating resources to search for and select high benefit/cost problems appears to be of limited benefit versus allocating resources to take action on known problems. This approach also aligns with how managers actually selected problems for resolution efforts: problems that were easy to solve were more likely to be selected.
40 pages

The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930
No. 10-075
André Martínez-Fritscher, Aldo Musacchio, and Martina Viarengo
Business, Government and the International Economy
March 2010
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Abstract:
Brazil at the turn of the twentieth century offers an interesting puzzle. Among the large economies in the Americas it had the lowest level of literacy in 1890, but by 1940 the country had surpassed most of its peers in terms of literacy and had done a significant improvement of its education system. All of this happened in spite of the fact that the Constitution of 1891 included a literacy requirement to vote and gave states the responsibility to spend on education. That is to say, Brazilian states had a significant improvement in education levels and a significant increase in expenditures on education per capita despite having institutions that limited political participation for the masses (Lindert, 2004; Engerman, Mariscal and Sokoloff, 2009) and having one of the worst colonial institutional legacies of the Americas (Acemoglu, Johnson, and Robison, 2001; Easterly and Levine, 2003; and Engerman and Sokoloff, 1997, 2002). This paper explains how state governments got the funds to pay for education and examines the incentives that politicians had to spend on education between 1889 to 1930. Our findings are threefold. First, we show that the Constitution of 1891, which decentralized education and allowed states to collect export taxes to finance expenditures, rendered states with higher windfall tax revenues from the export of commodities to spend more on education per capita. Second, we prove that colonial institutions constrained the financing of education, but that nonetheless the net effect of the increase in commodity exports always led to a net increase in education expenditures. Finally, we argue that political competition after 1891 led politicians to spend on education, Since only literate adults could vote, we show that increases in expenditures (and increases in revenues from export taxes) led to increases in the number of voters at the state level.
65 pages

"I read Playboy for the articles": Justifying and rationalizing questionable preferences
No. 10-018
Zoë Chance and Michael I. Norton
Marketing
September 2009
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Abstract:
No abstract is available at this time
23 pages

The Impact of Private Equity Ownership on Portfolio Firms' Corporate Tax Planning
No. 10-004
Brad Badertscher, Sharon P. Katz, and Sonja Olhoft Rego
Accounting and Management
July 2009, revised March 2010
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Abstract:
This study investigates whether private equity (PE) firms influence the tax practices of their portfolio firms. Prior research documents that PE firms create economic value in portfolio firms through effective governance, financial, and operational engineering. Given PE firms' focus on value creation, we examine whether PE firms influence the extent and types of tax avoidance at portfolio firms as an additional source of economic value. We document that PE-backed portfolio firms engage in significantly more nonconforming tax planning and have lower marginal tax rates than other private firms. Moreover, we document that PE-backed portfolio firms pay 14.2 percent less income tax per dollar of pre-tax income than non-PE backed firms, after controlling for NOLs and debt tax shields. We find additional tax savings for PE-backed portfolio firms that are either majority-owned or owned by large PE firms, consistent with PE ownership stake, expertise, and resources serving as important factors in the tax practices of portfolio firms. We infer that PE firms view tax planning as an additional source of economic value in their portfolio firms, where the benefits outweigh any potential reputational costs associated with corporate tax avoidance.
Keywords: Private equity; ownership structure; tax avoidance; tax planning; book-tax differences; cash effective tax rates; marginal tax rates.
58 pages

In Favor of Clear Thinking: Incorporating Moral Rules into a Wise Cost-benefit Analysis
No. 10-001
Max H. Bazerman and Joshua D. Greene
Negotiation, Organizations & Markets
July 2009
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Abstract:
Bennis, Medin, and Bartels (2009) have contributed an interesting paper on the comparative benefit of moral rules versus cost-benefit analysis. Many of their specific comments are accurate, useful, and insightful. At the same time, we believe they have misrepresented cost-benefit analysis and have reached a set of conclusions that are misguided and, if adopted wholesale, potentially dangerous. Overall, they offer wise suggestions for making CBA more effective, rather than eliminating CBA as a decision-making tool.
11 pages

Do Market Leaders Lead in Business Process Innovation? The Case(s) of E-Business Adoption
No. 10-104
Kristina Steffenson McElheran
Technology and Operations Management
June 2010, revised April 2011
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Abstract:
This paper investigates the relationship between market position and the adoption of IT-enabled process innovations. Prior research has focused overwhelmingly on product innovation and garnered mixed empirical support. I extend the literature into the understudied area of business process innovation, developing a framework for classifying innovations based on the complexity, interdependence, and customer impact of the underlying business process. I test the framework's predictions in the context of e-buying and e-selling adoption. Leveraging detailed U.S. Census data, I find robust evidence that market leaders were significantly more likely to adopt the incremental innovation of e-buying but commensurately less likely to adopt the more radical practice of e-selling. The findings highlight the strategic significance of adjustment costs and co-invention capabilities in technology adoption, particularly as businesses grow more dependent on new technologies for their operational and competitive performance.
36 pages

India Transformed? Insights from the Firm Level 1988-2005
No. 10-030
Laura Alfaro and Anusha Chari
Business, Government and the International Economy
October 2009
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Abstract:
Using firm-level data this paper analyzes, the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.
JEL Classification: O12, O14, O19, L10
55 pages

Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads
No. 10-008
Edward J. Riedl and George Serafeim
Accounting and Management
July 2009
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Abstract:
Finance theory suggests that information risk—that is, the uncertainty regarding valuation parameters for an underlying asset—is reflected in firms' equity betas and the information asymmetry component of bid-ask spreads. We empirically examine these predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Consistent with predictions, results reveal that portfolios of level 3 financial assets have higher implied betas and lead to larger bid-ask spreads relative to those designated as level 1 or level 2 assets. Both results are consistent with a higher cost of capital for banks holding more opaque financial assets, as reflected by the level 3 fair value designation.
Keywords: banks, risk, fair value, financial instruments
JEL Codes: G12, G14, G21, M41
43 pages

Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery
No. 10-011
David M. Cutler, Robert S. Huckman, and Jonathan T. Kolstad
Technology and Operations Management
August 2009
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Abstract:
Prior studies suggest that, with elastically supplied inputs, free entry may lead to an inefficiently high number of firms in equilibrium. Under input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for cardiac surgery in the state. We show that entry led to a redistribution of surgeries to higher-quality surgeons and that this entry was approximately welfare neutral.
43 pages

Insider Trading Preceding Goodwill Impairments
No. 10-007
Karl A. Muller, III, Monica Neamtiu, and Edward J. Riedl
Accounting and Management
July 2009
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Abstract:
We investigate whether insiders strategically sell shares prior to the disclosure of goodwill impairment losses. We provide evidence that insiders of goodwill impairment firms engage in abnormal selling of their shares quarters prior to the announcement of such losses. In addition, of firms recording goodwill impairments, we provide evidence that those firms with insiders selling prior to the announcement of the loss face significantly more negative abnormal returns. Our findings are robust to subsample analysis examining firms reporting goodwill impairments and having low quality information environments (i.e., delayed price discovery). This isolates a setting wherein observed strategic trading behavior more likely reflects insiders' private information regarding goodwill, as opposed to other (non-goodwill related) economic performance. Overall, the results are consistent with corporate insiders being able to profit from their private information relating to a specific financial reporting element, goodwill impairments, prior to its incorporation by the equity market or recognition by the firm's accounting system.
Keywords: Goodwill, impairment, insider trading, SFAS 142
55 pages

The insurance industry in Brazil: a long-term view
No. 10-109
Marcelo de Paiva Abreu and Felipe Tâmega Fernandes
Entrepreneurial Management
June 2010
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Abstract:
This paper surveys the formation and development of insurance business in Brazil. It describes its origins, from the colonial times and imperial era to recent events. Particular attention is given to regulatory changes, showing how they evolved in response to macroeconomic shocks that affected the Brazilian economy during this period.
Keywords: Insurance, Brazil, Regulation
JEL Classification: G22, G38, L50, N46.
39 pages

Integrity: A Positive Model That Incorporates the Normative Phenomena of Morality, Ethics, and Legality - Abridged
No. 10-061
Werner H. Erhard, Michael C. Jensen, and Steve Zaffron
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities), and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology. Yet the major role of integrity in productivity and performance has been largely hidden or unnoticed, or even ignored by economists and others.
The philosophical discourse, and common usage as reflected in dictionary definitions, leave an overlap and confusion among the four phenomena of integrity, morality, ethics, and legality. This overlap and confusion confound the four phenomena so that the efficacy and potential power of each is seriously diminished.
We show that defining integrity as honoring one's word, as we have defined "honoring one's word": 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at the individual, organizational and social levels, and 2) empowers the three virtue phenomena of morality, ethics and legality.
We also demonstrate that applying cost-benefit analysis to honoring your word guarantees that you will be untrustworthy.
This paper, intended for use in our leadership course (see http://ssrn.com/abstract=1263835), is an abridged version of our full paper of the same title available at: http://ssrn.com/abstract=920625
This abridged paper is written under the assumption that the reader has read the following 5-page document that lays out the basic structure of our model and analysis. It is available at: http://ssrn.com/abstract=1511274
33 pages

Integrity: Without It Nothing Works
No. 10-042
Michael C. Jensen
November 2009
Complete Text (Acrobat PDF Version)

Abstract:
There is confusion between integrity, morality and ethics. In our much longer paper on the topic (see "Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality" (available at http://ssrn.com/abstract=920625 )) my co-authors, Werner Erhard and Steve Zaffron and I, distinguish integrity, from morality and ethics in the following way. Integrity in our model is honoring your word. As such integrity is a purely positive phenomenon. It has nothing to do with good vs. bad, right vs. wrong behavior. Like the law of gravity the law of integrity just is, and if you violate the law of integrity as we define it you get hurt just as if you try to violate the law of gravity with no safety device. The personal and organizational benefits of honoring one's word are huge--both for individuals and for organizations--and generally unappreciated.
6 pages

International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination
No. 10-044
David Collis, David Young, and Michael Goold
Strategy
December 2009
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Abstract:
This paper examines differences in the size and roles of corporate headquarters around the world. Based on a survey of over 600 multibusiness corporations in seven countries (France, Germany, Holland, UK, Japan, US, and Chile) the paper describes the differences among countries, and then applies a model of the factors determining the size of corporate headquarters (Young, Collis, and Goold, 2003) to systematically examine those differences.

The data shows that there are significant differences among countries in the size and role of corporate headquarters, and strongly suggests the existence of a developing country model, a European model, a US model, and a Japanese model of corporate headquarters. Contrary to popular expectations, corporate headquarters in the US are about twice the size of European counterparts. Headquarters there exert a higher level of functional influence and have larger staffs in certain key areas, such as IT and R&D. US managers are generally more satisfied than their European counterparts with their larger more powerful headquarters which suggests that, at least in the US context, large corporate headquarters can create value.

Japanese headquarters, as might have been expected, are substantially larger than elsewhere - a factor of four times larger than in Europe. However, those headquarters are becoming smaller because of dissatisfaction with their performance. It is clear that having headquarters the size of the Japanese firms in the survey is not conducive to value creation.

More specifically, the evidence cannot refute a hypothesis that the slope of the relationship between firm size and the size of corporate headquarters is the same across all countries, but that there are significant differences in the intercept for Chile, the US, Japan, and the European countries. What the data indicates is that at a firm employing 20,000, a European corporate headquarters would on average employ 124 individuals, a US headquarters would have 255 employees, and Japan 467 employees.

The paper also examines differences between countries in the extent to which they perform the two key corporate tasks of control and coordination. The US and Chile chose to be somewhat more interventionist in the traditional tools and processes used to monitor and control business units - setting strategy, budgets, and administering capital budgets. However, there was a significant difference in the degree of influence in operational affairs between countries. The US and Japan exerted far more influence than the other countries over every activity from IT and purchasing, to marketing, R&D and HR issues.

The US was also found to have significantly larger legal, tax, and treasury functions than the common European model, perhaps reflecting a more legalistic institutional structure. Japan also has significantly larger tax, treasury, and corporate management functions, but overall was not that much larger than the common European model.

While the causes of these observed differences cannot be directly determined from the research, suggestions are made that the institutional infrastructure, the size and homogeneity of the domestic market, and cultural factors within countries are important underlying drivers.
36 pages

Introductory Reading For Being a Leader and The Effective Exercise of Leadership: An Ontological Model
No. 10-091
Werner Erhard, Michael C. Jensen, Steve Zaffron, and Kari L. Granger
April 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper is the sixth of six pre-course reading assignments for an experimental leadership course developed by the authors over five years (2004 - 2008) at the U. of Rochester Simon School of Business working with students, alumni, executives, and faculty from various academic institutions. It is currently taught at the U.S. Air Force Academy, was taught in June 2009 at the Erasmus Academie in Rotterdam, and a version is currently taught at U. of Rochester Simon School of Business, and the Erasmus University Law School. This course will be taught at the Mays School of Business, Texas A&M University June 9 to June 16, 2010.

The intention of this course is to leave the participants actually being leaders and exercising leadership effectively as their natural self-expression, and for the course to contribute to creating a new science of leadership for ourselves and others to use, experiment with, research, improve on, and innovate from.

This leadership course is different from others you may know of or have experienced. This course is based on the proposition that: 1) given being and action by the right context for leader and leadership, everyone has the capacity to be a leader, and 2) there are certain personal obstacles that must be dealt with in order to actualize that capacity. In the course students master a context that gives them the being of a leader and the effective exercise of leadership as their natural self-expression.

Rather than teaching "leadership strategies" or being a "how to guide", this course allows participants to create for themselves that enabling and empowering context that gives one the being and action of a leader as one's natural self-expression. And, in the course we provide participants the opportunity to become aware of and deal with their personal obstacles. This allows them to remove, or at least relax, those obstacles and access their natural capacity for leadership.

The promise of this course:

You will leave this course being who you need to be to be a leader.
You will leave this course with what it takes to exercise leadership effectively.

While you will not necessarily have all of the experience and knowledge you need to be a truly extraordinary leader, you will have experienced whatever personal transformation is required for you to leave the course being who you need to be to be a leader, and with what it takes to exercise leadership effectively.
82 pages

Investing in Improvement: Strategy and Resource Allocation in Public School Districts
No. 10-057
Stacey M. Childress
General Management
January 2010
Complete Text (Acrobat PDF Version)

Abstract:
This working paper offers concrete examples of improved productivity and efficiencies at the district level, drawing from the author's experience working with districts and developing such case studies for Harvard Business School. Childress makes the point that given the rarity of the strategic approaches to resource allocation, district leaders need more guidance and tools to help them make better decisions and manage the consequences, particularly when they are under enormous fiscal pressure.
32 pages

Investment Taxation and Portfolio Performance
No. 10-084
Daniel Bergstresser and Jeffrey Pontiff
Finance
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
Taxes have a first-order impact on portfolio returns. Most research mistakenly assumes that portfolios command similar tax burdens, or that tax burdens are proportional to dividend yields. Portfolio strategies differ in the pace of capital gains realization. We use the federal tax codes from 1926 through 2007 to construct the after-tax returns that individual investors, corporations, and broker-dealers would have generated on a set of benchmark portfolios. For an individual at the 99th income percentile, the effective tax rates on SMB and HML, respectively, are 7 and 15 times greater than the tax rate on the market premium.
51 pages

The Job Market for New Economists: A Market Design Perspective
No. 10-096
Peter A. Coles, John Cawley, Phillip B. Levine, Muriel Niederle, Alvin E. Roth, and John J. Siegfried
Negotiation, Organizations & Markets
May 2010
Complete Text (Acrobat PDF Version)

29 pages

Just Say No to Wall Street: Putting A Stop to the Earnings Game
No. 10-090
Joseph Fuller and Michael C. Jensen
April 2010
Complete Text (Acrobat PDF Version)

Abstract:
Putting an end to the "earnings game" requires that CEOs reclaim the initiative by avoiding earnings guidance and managing expectations in such a way that their stocks trade reasonably close to their intrinsic value. In place of earnings forecasts, management should provide information about the company's strategic goals and main value drivers. They should also discuss the risks associated with the strategies, and management's plans to deal with them.

Using the experiences of several companies, the authors illustrate the dangers of conforming to market pressures for unrealistic growth targets. They argue that an overvalued stock, by encouraging overpriced acquisitions and other risky, value-destroying bets, can be as damaging to the long-run health of a company as an undervalued stock.

CEOs and CFOs put themselves in a bind by providing earnings guidance and then making decisions designed to meet Wall Street's expectations for quarterly earnings. When earnings appear to be coming in short of projections, top managers often react by suggesting or demanding that middle and lower level managers redo their forecasts, plans, and budgets. In some cases, top executives simply acquiesce to increasingly unrealistic analyst forecasts and adopt them as the basis for setting organizational goals and developing internal budgets. But in cases where external expectations are impossible to meet, either approach sets up the firm and its managers for failure and in the process value is destroyed.
9 pages

Labor Regulations and European Private Equity
No. 08-043
Ant Bozkaya and William R. Kerr
Entrepreneurial Management
December 2009
Complete Text (Acrobat PDF Version)

Abstract:
European nations substitute between employment protection regulations and labor market expenditures (e.g., unemployment insurance benefits) for providing worker insurance. Employment regulations more directly tax firms making frequent labor adjustments than other labor insurance mechanisms. Venture capital and private equity investors are especially sensitive to these labor adjustment costs. Nations favoring labor expenditures as the mechanism for providing worker insurance developed stronger private equity markets in high volatility sectors over 1990-2004. These patterns are further evident in US investments into Europe. In this context, policy mechanisms are more important than the overall insurance level provided.
Keywords: employment protection regulations, dismissal costs, unemployment insurance benefits, private equity, venture capital, buy-outs, entrepreneurship.
JEL codes: G24, J21, J65, L26, M13, O31, O32, O52.
37 pages

The Limits of Nonprofit Impact: A Contingency Framework for Measuring Social Performance
No. 10-099
Alnoor Ebrahim and V. Kasturi Rangan
General Management, Marketing
May 2010
Complete Text (Acrobat PDF Version)

Abstract:
Leaders of organizations in the social sector are under growing pressure to demonstrate their impacts on pressing societal problems such as global poverty. We review the debates around performance and impact, drawing on three literatures: strategic philanthropy, nonprofit management, and international development. We then develop a contingency framework for measuring results, suggesting that some organizations should measure long-term impacts, while others should focus on shorter-term outputs and outcomes. In closing, we discuss the implications of our analysis for future research on performance management.
Keywords: performance measurement, impact, nonprofit management, social enterprise, philanthropy, accountability, management control systems.
53 pages

Local R&D Strategies and Multi-location Firms: The Role of Internal Linkages
No. 10-064
Juan Alcacer and Minyuan Zhao
Strategy
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
This study looks at the role of firms' internal linkages in highly competitive technology clusters, where much of the world's R&D takes place. The leading players in these clusters are multi-location firms that organize and integrate knowledge across sites worldwide. Strong internal links across locations allow these firms to leverage knowledge for competitive advantage without risking critical knowledge outflow to competitors. We examine whether multi-location firms increase internal ties when they face appropriability risks from direct competitors. Our empirical analysis of the global semiconductor industry shows that when leading firms co-locate with direct market competitors, innovations tend to be quickly internalized, and are more likely to involve collaboration across locations, particularly with inventors from the firm's primary R & D site. Our results suggest that R&D dynamics in clusters are heavily influenced by multi-location firms with innovative links across locations, and that future research on technology innovation in clusters should account for these links.
Keywords: technology clusters, knowledge spillover, internalization, appropriability.
33 pages

Location Strategies for Agglomeration Economies
No. 10-071
Juan Alcácer and Wilbur Chung
Strategy
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
Geographically concentrated industry activity creates pools of skilled labor and specialized suppliers, and increases opportunities for knowledge spillovers. The strategic value of these agglomeration economies may vary by firm, depending upon the relative value of each economy, and upon firm and agglomeration economy traits. To better determine when a firm will be attracted to agglomeration economies, we develop a three-layer framework. The first layer assesses the relative importance of skilled labor, suppliers, and knowledge spillovers. The second layer considers whether firms can benefit from geographic concentration without co-locating. The final layer examines why some firms are more inclined to co-locate than others based upon firm and agglomeration economy traits. We test our framework on the U.S. location choices of new manufacturing entrants between 1985 and 1994 and find that firms are far more attracted to skilled labor and specialized suppliers than they are to potential knowledge spillovers, even in R&D intensive industries. We also find that leading firms will be more attracted to pools of labor, suppliers, and potential knowledge spillovers when their own contributions are less fungible, and cannot be easily leveraged for strategic advantage by proximate competitors.
Keywords: agglomeration economies, location choice, firm strategy
JEL Classifications: R30, R12, L21
38 pages

Management and the Financial Crisis (We have met the enemy and he is us …)
No. 10-033
William A. Sahlman
Entrepreneurial Management
October 2009
Complete Text (Acrobat PDF Version)

Abstract:
The financial crisis of 2008-9 has revealed that our broad model of corporate governance is broken, independent of the shortcomings in the regulatory system. Managers and boards of directors in scores of systemically important firms failed to protect employees, customers, or shareholders, and placed the global financial system at risk. I assert that the root cause of the crisis can be found in five related systems: incentives; risk management and control; accounting; human capital; and culture. The worst firms had lethal combinations of strong incentives, weak control and risk management, flawed internal and external accounting, low skill and/or low integrity people, and corrosive cultures.

Piecemeal attempts to fix elements of corporate governance will fail. The problem, to illustrate, is not just the structure of compensation. Nor will increasing required capital prevent problems at companies with strong incentives and weak controls. I believe that we may need a new kind of external agency for systemically risky firms that would take a holistic look at the five systems to identify weaknesses, make recommendations to managers and boards, and set regulatory policies, including assessing charges for insuring against losses. Without such a comprehensive assessment and improvement plan, boards cannot do their jobs, and the system will remain as subject to calamitous events as it was before the crisis.
36 pages

Manipulability in Matching Markets: Conflict and Coincidence of Interests
No. 10-111
Itai Ashlagi and Flip Klijn
Negotiation, Organizations & Markets
June 2010
Complete Text (Acrobat PDF Version)

Abstract:
We study comparative statics of manipulations by women in the men-proposing deferred acceptance mechanism in the two-sided one-to-one marriage market. We prove that if a group of women employs truncation strategies or weakly successfully manipulates, then all other women weakly benefit and all men are weakly harmed. We show that our results do not appropriately generalize to the many-to-one college admissions model.
11 pages

The Many Faces of Nonprofit Accountability
No. 10-069
Alnoor S. Ebrahim
General Management
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
What does it mean for a nonprofit organization to be accountable? Nonprofit leaders tend to pay attention to accountability once a problem of trust arises - a scandal in the sector or in their own organization, questions from citizens or donors who want to know if their money is being well spent, or pressure from regulators to demonstrate that they are serving a public purpose and thus merit tax-exempt status. Amid this clamor for accountability, it is tempting to accept the popular view that more accountability is better. But is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. This paper provides an overview of the accountability pressures facing nonprofit leaders, and examines several mechanisms available to them: disclosures, performance evaluations, self-regulation, participation, and adaptive learning. Nonprofit leaders must adapt any such mechanisms to suit their organization - be it a membership-based organization, a service-delivery nonprofit, or an advocacy network. More crucially, they need to pay greater attention to strategy-driven forms of accountability that can help them to achieve their missions.
33 pages

Matching Firms, Managers, and Incentives
No. 10-073
Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun
Strategy
March 2010, revised August 2011
Complete Text (Acrobat PDF Version)

Abstract:
We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.
59 pages

Medium Term Business Cycles in Developing Countries
No. 10-029
Diego Comin, Norman Loayza, Farooq Pasha, and Luis Serven
Business, Government and the International Economy
October 2009, September 2010
Complete Text (Acrobat PDF Version)

Abstract:
We build a two country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. We calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.
Keywords: Business Cycles in Developing Countries, Co-movement between Developed and Developing economies, Volatility, Extensive Margin of Trade, Product Life Cycle, FDI.
JEL Classification: E3, O3.
54 pages

Men as Cultural Ideals: How Culture Shapes Gender Stereotypes
No. 10-097
Amy J. C. Cuddy, Susan Crotty, Jihye Chong, and Michael I. Norton
Negotiation, Organizations & Markets , Marketing
May 2010
Complete Text (Acrobat PDF Version)

Abstract:
Three studies demonstrate how culture shapes the contents of gender stereotypes, such that men are perceived as possessing more of whatever traits are culturally valued. In Study 1, Americans rated men as less interdependent than women; Koreans, however, showed the opposite pattern, rating men as more interdependent than women, deviating from the "universal" gender stereotype of male independence. In Study 2, bi-cultural Korean American participants rated men as less interdependent if they completed a survey in English, but as more interdependent if they completed the survey in Korean, demonstrating how cultural frames influence the contents of gender stereotypes. In Study 3, American college students rated a male student as higher on whichever trait - ambitiousness or sociability - they were told was the most important cultural value at their university, establishing that cultural values causally impact the contents of gender stereotypes.
25 pages

Mental Health in the Aftermath of Conflict
No. 10-040
Quy-Toan Do and Lakshmi Iyer
Business, Government and the International Economy
November 2009
Complete Text (Acrobat PDF Version)

Abstract:
We survey the recent literature on the mental health effects of conflict. We highlight the methodological challenges faced in this literature, which include the lack of validated mental health scales in a survey context, the difficulties in measuring individual exposure to conflict, and the issues related to making causal inferences from observed correlations. We illustrate how some of these issues can be overcome in a study of mental health in post-conflict Bosnia and Herzegovina. Mental health is measured using a clinically validated scale; conflict exposure is proxied by administrative data on war casualties instead of being self-reported. We find that there are no significant differences in overall mental health across areas which are affected by ethnic conflict to a greater or lesser degree.
27 pages

The Mirroring Hypothesis: Theory, Evidence and Exceptions
No. 10-058
Lyra Colfer and Carliss Y. Baldwin
Finance
January 2010, revised June 2010
Complete Text (Acrobat PDF Version)

Abstract:
The mirroring hypothesis predicts that the organizational patterns of a development project (e.g. communication links, geographic collocation, team and firm co-membership) will correspond to the technical patterns of dependency in the system under development. Scholars in a range of disciplines have argued that mirroring is either necessary or a highly desirable feature of development projects, but evidence pertaining to the hypothesis is widely scattered across fields, research sites, and methodologies. In this paper, we formally define the mirroring hypothesis and review 102 empirical studies spanning three levels of organization: within a single firm, across firms, and in open community-based development projects. The hypothesis was supported in 69% of the cases. Support for the hypothesis was strongest in the within-firm sample, less strong in the across-firm sample, and relatively weak in the open collaborative sample. Based on a detailed analysis of the cases in which the mirroring hypothesis was not supported, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. We present examples from practice and describe the more complex organizational patterns that emerge when actionable transparency allows designers to 'break the mirror.'
Keywords: Modularity, innovation, product and process development, organization design, design structure, organizational structure, organizational ties
39 pages

Mixed Source
No. 10-022
Ramon Casadesus-Masanell and Gastón Llanes
Strategy
September 2009, revised October 2010
Complete Text (Acrobat PDF Version)

Abstract:
We study competitive interaction between a profit-maximizing firm that sells software and complementary services and a free open source competitor. We examine the firm's choice of business model between the proprietary model (where all software modules are proprietary), the open source model (where all modules are open source), and the mixed source model (where some-but not all-modules are open). When a module is opened, users can access and improve the code, which increases quality and value creation. Opened modules, however, are available for others to use free of charge. We derive the set of possibly optimal business models when the modules of the firm and the open source competitor are compatible (and thus can be combined) and incompatible and show that: (i) when the firm's modules are of high (low) quality, the firm is more open under incompatibility (compatibility) than under compatibility (incompatibility); (ii) firms are more likely to open substitute, rather than complementary, modules to existing open source projects; and (iii) there may be no trade-off between value creation and value capture when comparing business models with different degrees of openness.
Keywords: Open Source, User Innovation, Business Models, Complementarity, Compatibility, Value Creation, Value Capture
JEL Codes: O31, L17, D43
45 pages

Multinational Strategies and Developing Countries in Historical Perspective
No. 10-076
Geoffrey Jones
Entrepreneurial Management
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
This working paper offers a longitudinal and descriptive analysis of the strategies of multinationals from developed countries in developing countries. The central argument is that strategies were shaped by the trade-off between opportunity and risk. Three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third factor was competition from local firms. The impact of these factors on corporate strategies is explored, as shown in Fig. 1, during the three eras in the modern history of globalization from the nineteenth century until the present day. The performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats.
58 pages

Negotiating the Path of Abraham
No. 10-049
Kimberlyn Leary, James K. Sebenius, and Joshua Weiss
Negotiation, Organizations & Markets
December 2009
Complete Text (Acrobat PDF Version)

Abstract:
In the face of daunting barriers, the Abraham Path Initiative envisions uncovering and revitalizing a route of cultural tourism that follows the path of Abraham and his family some 4000 years ago across the Middle East. It begins in the ancient ruins of Harran, in modern-day Turkey, where Abraham first heard the call to "go forth." It passes through some of the world's most revered cultural, historical, and holy sites, ending in the city of Hebron/Al-Khalil at the tomb of Abraham. With Abraham as a venerated patriarchal figure for Islam, Judaism, and Christianity-monotheistic religions whose adherents have so often clashed--the potential unifying power of this conception has attracted a remarkable range of supporters from around the world. From a notion crystallized at Harvard in 2004, this idea has been carefully negotiated into a concrete reality with supporting country organizations in Syria, Turkey, Jordan, Palestine2, and Israel. If completed, it would eventually extend to encompass Abraham's travels to and from Egypt, Iraq, and Saudi Arabia. With the endorsement of the U.N.'s Alliance of Civilizations, over three hundred kilometers of the Path have now been opened to a fast-growing number of travelers ranging from student study groups to Syrian President al-Assad walking a stretch of the path with former U.S. President Jimmy Carter. As it takes fuller shape, the Path variously serves as a catalyst for sustainable tourism and economic development, a platform for the energy and idealism of young people, a beacon for pilgrims and peace-builders, as well as a focus for seemingly endless media inquiries from reporters, documentary film-makers, and writers keen on telling its story to audiences worldwide. This paper provides background on the Path in terms of strategic negotiation, social entrepreneurship, sustainable tourism, and economic development.
42 pages

Network Effects in Countries' Adoption of IFRS
No. 10-092
Karthik Ramanna and Ewa Sletten
Accounting and Management
April 2010, revised September 2010, April 2011, June 2011
Complete Text (HBS access only. Acrobat PDF Version)

Abstract:
If the differences in accounting standards across countries reflect relatively stable institutional differences (e.g., auditing technology, the rule of law, etc.), why did several countries rapidly, albeit in a staggered manner, adopt IFRS over local standards in the 2003-2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of countries' shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users increase and contribute significantly towards the country's decision to adopt IFRS. We find that perceived network benefits increase the degree of IFRS harmonization among countries, and that smaller countries have a differentially higher response to these benefits. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption is self-reinforcing, which, in turn, has implications for the consequences of IFRS adoption.
52 pages

A New Model of Integrity: The Missing Factor Of Production (PDF file of Keynote and PowerPoint Slides)
No. 10-087
Michael C. Jensen, Kari L. Granger, and Werner Erhard
March 2010
Complete Text (Acrobat PDF Version)

Abstract:
An Actionable Pathway To Dramatic Increases In Individual And Organizational Performance.

Full Day Executive Program Seminar taught at Olin Business School, Washington University, St.Louis, MO.

Workshop Objectives:

To provide you and your organization(s) an unambiguous and actionable access to the causal link between integrity and superior performance, quality of life, value creation and competitive advantage.

We define integrity as a state or condition of being whole, complete, unbroken, unimpaired, sound, perfect condition. We distinguish integrity as a matter of a person's (or an organization's) word being whole and complete. One's word is whole and complete when one honors one's word.

During the course, we rigorously define your word, and we distinguish honoring one's word from keeping one's word. Honoring your word, as we define it, means you either keep your word or as soon as you know you will not, you say that you will not, and clean up any mess you cause by not keeping your word. Thus, even when you do not keep your word, you have a way to maintain your integrity.

Honoring one's word provides a powerful and actionable pathway to earning the trust of others.
152 pages

A New Model of Leadership (PDF File of Keynote Slides)
No. 07-107
Micheal C. Jensen and Allan L. Scherr
February 2010
Complete Text (Acrobat PDF Version)

Abstract:
In this paper we provide a new definition of leadership that gives organizations and individuals access to new power, performance and accomplishment. In our model leadership consists of four critical elements:

The creation of a vision for the future that represents a significant departure from the past, one that requires breakthroughs for its realization.
The creation of a system that facilitates enrollment into and elicits voluntary commitment to the vision by the critical mass of people required to discover and implement the breakthroughs required for realization of the vision.
The creation of a system that ensures both the timely identification of breakdowns (and the dissemination of information about them) that, if unresolved, would prevent the successful realization of the vision.
The creation of a system for managing breakdowns that causes people to voluntarily recommit to the vision and maintain these commitments through to the implementation of the breakthroughs required for the realization of the vision.

36 pages

On the Descriptive Value of Loss Aversion in Decisions under Risk
No. 10-056
Eyal Ert and Ido Erev
January 2010
Complete Text (Acrobat PDF Version)

Abstract:
Five studies are presented that explore the assertion that losses loom larger than gains. The first two studies reveal equal sensitivity to gains and losses. For example, half of the participants preferred the gamble "1000 with probability 0.5; -1000 otherwise" over "0 with certainty." Studies 3, 4, and 5 address the apparent discrepancy between these results and the evidence for loss aversion documented in previous research. The results reveal that only under very specific conditions does the pattern predicted by the loss aversion assertion emerge. This pattern does not emerge in short experiments or in the first 10 trials of long experiments. Nor does it emerge in long experiments with two-outcome symmetric gambles, or in long experiments with asymmetric multi-outcome gambles. The observed behavior, in these settings, reflects risk neutrality in choice among low-magnitude mixed gambles.
JEL Classification: C91, D01.
37 pages

Opening Up or Shutting Down? The Effects of Multiple Identities on Problem Solving
No. 10-041
Lakshmi Ramarajan
Organizational Behavior
November 2009
Complete Text (Acrobat PDF Version)

Abstract:
Across three studies, I investigate the distinct effects of multiple identity conflict and enhancement within people on two crucial aspects of resolving problems with others: integrative behavior and openness. The results of two studies support the hypotheses that multiple identity conflict is negatively related to integrative thinking while multiple identity enhancement is positively related to attitudes of openness to others. In a third study, I conducted an interpersonal dyadic negotiation experiment with business school students and found that, as predicted, these effects replicated and extended to integrative outcomes and open behaviors. This research shows that there are both harmful and helpful effects of multiple identities on interpersonal problem solving depending on whether those identities are enhancing or conflicting: multiple identity conflict shuts down integrative thought and behavior and multiple identity enhancement opens us up to other people.
Keywords: multiple identities, identity conflict, identity enhancement, problem solving, integrative complexity, integrative outcomes, openness, conflict management
69 pages

Operational Failures and Problem Solving: An Empirical Study of Incident Reporting
No. 10-017
Julia Adler-Milstein, Sara J. Singer, and Michael W. Toffel
Technology and Operations Management
August 2009
Complete Text (Acrobat PDF Version)

Abstract:
Operational failures occur in all industries with consequences that range from minor inconveniences to major catastrophes. Many organizations have implemented incident reporting systems to highlight actual and potential operational failures in order to encourage problem solving and prevent subsequent failures. Our study is among the first to develop and empirically test theory regarding which reported operational failures are likely to spur problem solving. We hypothesize that problem solving activities are especially likely to follow reported operational failures that provoke financial and legal liability risks. We also hypothesize that management commitment to problem solving, enacted through managers' communication and engagement practices, can encourage frontline workers to conduct problem solving. We test our hypotheses in the health care context, in which the use of incident reporting systems to highlight operational failures is widespread. Using data on nearly 7,500 reported incidents from a single hospital, we find support for our hypotheses. Our findings suggest that frontline workers' participation in problem solving is motivated by some inherent characteristics of the problems as well as by particular management practices.
43 pages

Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions
No. 10-054
Benjamin G. Edelman and Michael Schwarz
Negotiation, Organizations & Markets
January 2010
Complete Text (Acrobat PDF Version)

8 pages

Patent policy, patent pools, and the accumulation of claims in sequential innovation
No. 10-005
Gastón Llanes and Stefano Trento
Entrepreneurial Management
July 2009
Complete Text (Acrobat PDF Version)

Abstract:
We present a dynamic model where the accumulation of patents generates an increasing number of claims on sequential innovation. We study the equilibrium innovation activity under three regimes: patents, no-patents and patent pools. Patent pools increase the probability of innovation with respect to patents, but we also find that: (1) their outcome can be replicated by a licensing scheme in which innovators sell complete patent rights, and (2) they are dynamically unstable. We find that none of the above regimes can reach the first or second best. Finally, we consider patents of finite duration and determine the optimal patent length.
Keywords: Sequential Innovation, Patent Pools, Anticommons
JEL Codes: L13, O31, O34
34 pages

Competing by Restricting Choice: The Case of Search Platforms
No. 10-098
Hanna Halaburda and Mikolaj Jan Piskorski
Strategy
May 2010, revised June 2010, March 2011, August 2011
Complete Text (Acrobat PDF Version)

Abstract:
We show that a two-sided platform can successfully compete by limiting the choice of potential matches it offers to its customers while charging higher prices than platforms with unrestricted choice. Starting from microfoundations, we find that increasing the number of potential matches not only has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents with heterogeneous outside options resolve the trade-off between the two effects differently. For agents with a lower outside option, the competitive effect is stronger than the choice effect. Hence, these agents have higher willingness to pay for a platform restricting choice. Agents with a higher outside option prefer a platform offering unrestricted choice. Therefore, the two platforms may coexist without the market tipping. Our model helps explain why platforms with different business models coexist in markets, including on-line dating, housing and labor markets.
Keywords: matching platform, indirect network effects, limits to network effects
40 pages

Preference Intensities and Risk Aversion in School Choice: A Laboratory Experiment
No. 10-093
Flip Klijn, Joana Pais, and Marc Vorsatz
April 2010
Complete Text (Acrobat PDF Version)

Abstract:
We experimentally investigate in the laboratory two prominent mechanisms that are employed in school choice programs to assign students to public schools. We study how individual behavior is influenced by preference intensities and risk aversion. Our main results show that (a) the Gale-Shapley mechanism is more robust to changes in cardinal preferences than the Boston mechanism independently of whether individuals can submit a complete or only a restricted ranking of the schools and (b) subjects with a higher degree of risk aversion are more likely to play "safer" strategies under the Gale-Shapley but not under the Boston mechanism. Both results have important implications for the efficiency and the stability of the mechanisms.
Keywords: school choice, risk aversion, preference intensities, laboratory experiment, Gale-Shapley mechanism, Boston mechanism, efficiency, stability, constrained choice.
JEL Code: C78, C91, C92, D78, I20.
43 pages

Private Equity and Industry Performance
No. 10-045
Shai Bernstein, Josh Lerner, Morten Sørensen and Per Strömberg
Finance, Entrepreneurial Management
December 2009
Complete Text (Acrobat PDF Version)

Abstract:
The growth of the private equity industry has spurred concerns about its potential impact on the economy more generally. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where PE funds have invested in the past five years have grown more quickly in terms of productivity and employment. There are few significant differences between industries with limited and high private equity activity. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. These patterns are not driven solely by common law nations such as the United Kingdom and United States, but also hold in Continental Europe.
40 pages

A Reexamination of Tunneling and Business Groups: New Data and New Methods
No. 10-072
Jordan I. Siegel and Prithwiraj Choudhury
Strategy
February 2010, revised March 2010, April 2010, August 2010, August 2011, November 2011, and January 2012
Complete Text (Acrobat PDF Version)

Abstract:
One of the most rigorous methodologies in the corporate governance literature uses firms' reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant adjustment, the quality of governance can only be elucidated accurately analyzing a firm's business strategy and their corporate governance. These differences can help one determine whether the fruits of a positive macro-level shock have been expropriated by insiders. Using the example of Indian firms, we show that an influential finding is reversed when these differences are considered. We further argue that the conventional wisdom about tunneling and business groups will need to be reformulated in light of the data, methodology, and findings presented here.
47 pages

Reversing the Null: Regulation, Deregulation, and the Power of Ideas
No. 10-080
David Moss
Business, Government and the International Economy
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
It has been said that deregulation was an important source of the recent financial crisis. It may be more accurate, however, to say that a deregulatory mindset was an important source of the crisis - a mindset that, to a very significant extent, grew out of profound changes in academic thinking about the role of government. As scholars of political economy quietly shifted their focus from market failure to government failure over the second half of the twentieth century, they set the stage for a revolution in both government and markets, the full ramifications of which are still only beginning to be understood. This intellectual sea-change generated some positive effects, but also some negative ones, including (it seems) an excessively negative impression of the capacity of government to address problems in the marketplace. Today, as we consider the need for new regulation, particularly in the wake of the financial crisis, another fundamental shift in academic thinking about the role of government may be required - involving nothing less than a reversal of the prevailing null hypothesis in the study of political economy.
16 pages

The Role of Institutional Development in the Prevalence and Value of Family Firms
No. 10-103
Raphael Amit, Yuan Ding, Belén Villalonga, and Hua Zhang
Finance
May 2010
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Abstract:
We investigate the role played by institutional development in the prevalence and value of family firms, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across the Chinese provinces with homogeneity in cultural norms, law, and regulation. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is low, family ownership and management increase value, while family control in excess of ownership reduces value. When institutional efficiency is high, none of these effects are significant.
Keywords: Family firms, Ownership, Control, Management, Value, Institutional development, China
60 pages

Specific Knowledge and Divisional Performance Measurement
No. 10-025
Michael C. Jensen and William H. Meckling
September 2009
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Abstract:
This paper discusses five common divisional performance measurement methods—cost centers, revenue centers, profit centers, investment centers, and expense centers—while providing a theory that explains when each of these methods is likely to be the most efficient. The central insight of the theory is that each method offers a different way of aligning decision-making authority with valuable "specific knowledge" inside the organization.

The theory suggests that cost and revenue centers work best in cases where headquarters has good information about cost and demand functions, product quality, and optimal output mix. Profit centers—defined as business units whose managers have responsibility for overall profits, but not the authority to make major capital spending decisions—tend to supplant revenue and cost centers when line managers have a significant informational advantage over headquarters and when there are few interdependencies (or "synergies") between divisions. Investment centers—profit centers in which unit managers are allowed to make major investment decisions—tend to prevail when the activity is capital-intensive and when it is difficult for headquarters to identify the value-maximizing investment strategy for the business unit.

In evaluating the performance of profit centers, rate-of-return measures like ROA are likely to be effective when unit managers do not have major influence over the level of new investment. But, in the case of investment centers, Economic Value Added, or EVA, is likely to be the most effective single-period measure because it is designed to encourage only value-increasing investment decisions.
13 pages

State Owned Entity Reform in Absence of Privatization: Reforming Indian National Laboratories and Role of Leadership
No. 10-006
Prithwiraj Choudhury and Tarun Khanna
Strategy
July 2009
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Abstract:
The literature on state-owned entity (SOE) reform has been focused on privatization. We however show that even in the absence of property rights, SOEs may significantly improve performance and document 42 Indian state-owned laboratories over 1993-2006 starting from a base of negligible U.S. patents, being granted more patents than all domestic private firms combined. Patent licensing revenue increases from 3% to 15% as a fraction of government budget without negatively affecting publication quality and quantity. This follows incentive policy change and leadership change at labs, an event whose timing is plausibly exogenous being dictated by government employment rules.
32 pages

Stock Price Fragility
No. 10-031
Robin Greenwood and David Thesmar
Finance
October 2009
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Abstract:
We investigate the relationship between ownership structure of financial assets and non-fundamental risk. An asset is fragile if its owners collectively have to buy or sell. Such assets are susceptible to non-fundamental price movements. An asset can be fragile because of concentrated ownership, or because its owners face correlated liquidity shocks, ie., they must buy or sell at the same time. Two assets are "co-fragile" if their owners have correlated trading needs, even if the holdings of these owners do not directly overlap. We formalize this idea and apply it to the ownership of US stocks between 1990 and 2007. Consistent with our predictions, fragility strongly predicts future price volatility, and co-fragility predicts cross-stock return comovement.
48 pages

When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge
No. 10-063
Carliss Y. Baldwin
Finance
February 2010, revised July 2010, October 2010
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Abstract:
This paper describes how entrepreneurial firms can use superior architectural knowledge to open up a technical system to gain strategic advantage. The strategy involves, first, identifying "bottlenecks" in the existing system, and then creating a new open architecture that isolates the bottlenecks in modules and allows others to connect to the system at key interfaces. An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck modules, and while outsourcing and allowing complementors to supply non-bottleneck components. I show that a firm pursuing this strategy will have a higher return on invested capital (ROIC) than competitors with a less modular, closed architecture. Over time, the more open firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. The strategy was used by Sun Microsystems in the 1980s and Dell Computer in the 1990s.
Keywords: architecture, innovation, knowledge, modularity, dynamics, competition, industry evolution
JEL Classification: D23, L22, L23, M11, O31, O34, P13
45 pages

Strategies to Fight Ad-sponsored Rivals
No. 10-026
Ramon Casadesus-Masanell and Feng Zhu
Strategy
September 2009, revised March 2010
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Abstract:
We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or the number of ads a product carries, we allow the incumbent to consider changes in its business model. We consider four alternative business models, a subscription-based model, an ad-sponsored model, a mixed model in which the incumbent offers a product that is both subscription-based and ad-sponsored, and a dual model in which the incumbent offers two products, one based on the ad-sponsored model and the other based on the mixed business model. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations. We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through the subscription-based or the ad-sponsored model, rather than the mixed or the dual model, because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.
34 pages

Stretching the Inelastic Rubber: Taxation, Welfare and Lobbies in Amazonia, 1870-1910
No. 10-032
Felipe Tâmega Fernandes
Entrepreneurial Management
October 2009
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Abstract:
This paper examines the effect of government intervention via taxation on domestic welfare. A case-study of Brazilian market power on rubber markets during the boom years of 1870-1910 shows that the government generated 1.3% of GDP through an export tax on rubber but that it could have generated 4.7% in total, had the government set the tariff at the optimal level. National, regional and local constraints prevented the government from maximizing regional welfare. In a context of lobbies, government budget maximization may have differed from regional welfare maximization.
Keywords: Rubber, Commodities, Market Power, Optimal Tariff, Welfare, Trade and Brazil.
JEL Codes: F14, H21, L13, L73, and N76.
43 pages

Substitution Patterns of the Random Coefficients Logit
No. 10-053
Thomas J. Steenburgh and Andrew Ainslie
Marketing
January 2010
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Abstract:
Previous research suggests that the random coefficients logit is a highly flexible model that overcomes the problems of the homogeneous logit by allowing for differences in tastes across individuals. The purpose of this paper is to show that this is not true. We prove that the random coefficients logit imposes restrictions on individual choice behavior that limit the types of substitution patterns that can be found through empirical analysis, and we raise fundamental questions about when the model can be used to recover individuals' preferences from their observed choices.
Part of the misunderstanding about the random coefficients logit can be attributed to the lack of cross-level inference in previous research. To overcome this deficiency, we design several Monte Carlo experiments to show what the model predicts at both the individual and the population levels. These experiments show that the random coefficients logit leads a researcher to very different conclusions about individuals' tastes depending on how alternatives are presented in the choice set. In turn, these biased parameter estimates affect counterfactual predictions. In one experiment, the market share predictions for a given alternative in a given choice set range between 17% and 83% depending on how the alternatives are displayed both in the data used for estimation and in the counterfactual scenario under consideration. This occurs even though the market shares observed in the data are always about 50% regardless of the display.
41 pages

Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance
No. 10-110
Laura Alfaro and Maggie Chen
Business, Government and the International Economy
June 2010
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Abstract:
We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.
Keywords: global financial crisis, establishment response, foreign direct investment, production linkage, financial linkage, network
JEL Classifications: F2, F1
44 pages

Systemic Risk and the Refinancing Ratchet Effect
No. 10-023
Amir E. Khandani, Andrew W. Lo, and Robert C. Merton
Finance
September 2009, revised July 2010
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Abstract:
The confluence of three trends in the U.S. residential housing market-rising home prices, declining interest rates, and near-frictionless refinancing opportunities-led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained during good times without the ability to decrease leverage during bad times. If refinancing-facilitated homeowner-equity extraction is sufficiently widespread-as it was during the years leading up to the peak of the U.S. residential real-estate market-the inadvertent coordination of leverage during a market rise implies higher correlation of defaults during a market drop. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages. Our simulations generate loss estimates of $1.5 trillion from June 2006 to December 2008 under historical market conditions, compared to simulated losses of $280 billion in the absence of equity extractions.
Keywords: Systemic Risk; Financial Crisis; Household Finance; Real Estate; Subprime
JEL Codes: G01, G12, G13, G18, G21, E17, E27, E37, E47, R21, R38
69 pages

Trade Policy and Firm Boundaries
No. 10-060
Laura Alfaro, Paola Conconi, Harald Fadinger, and Andrew F. Newman
Business, Government and the International Economy
June 2010, revised February 2011, August 2011
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Abstract:
This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers' pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration, but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.
Keywords: Firm Organization, Vertical Integration, Incomplete Contracts, Trade Policy.
JEL Codes: D23, F13.
49 pages

Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation
No. 10-038
Carliss Y. Baldwin and Eric von Hippel
Finance
November 2009
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Abstract:
In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace - producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.
36 pages

Unstable Equity? Combining Banking with Private Equity Investing
No. 10-106
Lily Fang, Victoria Ivashina, and Josh Lerner
Finance, Entrepreneurial Management
June 2010, revised August 2010
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Abstract:
Theoretical work suggests that banks can be driven by market mispricing to undertake activity in a highly cyclical manner, accelerating activity during periods when securities can be readily sold to other parties. While financial economists have largely focused on bank lending, banks are active in a variety of arenas, with proprietary trading and investing being particularly controversial. We focus on the role of banks in the private equity market. We show that bank-affiliated private equity groups accounted for a significant share of the private equity activity and the bank's own capital. We find that banks' share of activity increases sharply during peaks of private equity cycles. Deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. While bank-affiliated investments generally involve targets with better ex-ante characteristics, bank-affiliated investments have slightly worse outcomes than non-affiliated investments. Also consistent with theory, the cyclicality of banks' engagement in private equity and favorable financing terms are negatively correlated with the amount of capital that banks commit to funding of any particular transaction.
49 pages

Unraveling Results from Comparable Demand and Supply: An Experimental Investigation
No. 10-095
Muriel Niederle, Alvin E. Roth and M. Utku Ünver
Negotiation, Organizations & Markets
May 2010
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Abstract:
Markets sometimes unravel, with offers becoming inefficiently early. Often this is attributed to competition arising from an imbalance of demand and supply, typically excess demand for workers. However this presents a puzzle, since unraveling can only occur when firms are willing to make early offers and workers are willing to accept them. We present a model and experiment in which workers' quality becomes known only in the late part of the market. However, in equilibrium, matching can occur (inefficiently) early only when there is comparable demand and supply: a surplus of applicants, but a shortage of high quality applicants.
JEL Code: C78,C9,C92
48 pages

Walking the Talk in Multiparty Bargaining: An Experimental Investigation
No. 10-039
Kathleen L. McGinn, Katherine L. Milkman, and Markus Nöth
Negotiation, Organizations & Markets
November 2009
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Abstract:
We study the framing effects of communication in multiparty bargaining. Communication has been shown to be more truthful and revealing than predicted in equilibrium. Because talk is preference-revealing, it may effectively frame bargaining around a logic of fairness or competition, moving parties on a path toward or away from equal-division agreements. These endogenous framing effects may outweigh any overall social utility effects due to the mere presence of communication. In two experiments, we find that non-binding talk of fairness within a three-party, complete-information game leads toward off-equilibrium, equal division payoffs, while non-binding talk focusing on competitive reasoning moves parties away from equal divisions. Our two studies allow us to demonstrate that spontaneous within-game dialogue and manipulated pre-game talk lead to the same results.
Keywords: communication, fairness, bargaining
JEL Codes: C72, C78, D03, D74
28 pages

When Do Analysts Add Value? Evidence from Corporate Spinoffs
No. 10-102
Emilie Rose Feldman, Stuart C. Gilson, and Belén Villalonga
Finance
May 2010
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Abstract:
We investigate the information content and forecast accuracy of 1,793 analyst reports written around 62 spinoffs--a setting in which analysts' ability to inform investors is potentially very high. We find that analysts pay little attention to subsidiaries about to be spun off even though these subsidiaries constitute a significant part of the parent company operations. Moreover, while the level of detail in analyst research about parent companies is significantly related to EPS and price forecast accuracy, the same is not true for the subsidiaries. We establish that this "forgotten child" phenomenon is linked to a "neglected parent" effect, whereby inaccuracy in subsidiary earnings forecasts is associated with inaccuracy in parent estimates. We conclude by showing that spinoffs may be a particularly complex setting for analysts to evaluate relative to other forms of corporate restructuring, such as IPOs, mergers, or bankruptcies, providing one potential explanation for our findings.
51 pages

Who Selected Adjustable-Rate Mortgages? Evidence from the 1989-2007 Surveys of Consumer Finances
No. 10-083
Daniel Bergstresser and John Beshears
Finance
March 2010
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Abstract:
We find evidence that households selecting adjustable-rate mortgages (ARMs) during the recent decade were disproportionately those who were less suspicious or who may have had difficulty understanding complicated ARM features that became commonplace prior to the financial crisis.
Keywords: Mortgages, Brokers, Adjustable-Rate Mortgages.
49 pages

Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence
No. 10-078
Ian Larkin and Stephen Leider
Negotiation, Organizations & Markets
March 2010, revised September 2011
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Abstract:
We investigate how the convexity of a firm's incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate experimentally that overconfident employees are more likely to sort into a non-linear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to "sort in" ("sort away") attractive (unattractive) employees; such schemes may also reduce a firm's wage bill.
40 pages

Will I Stay or Will I Go? Cooperative and Competitive Effects of Workgroup Sex and Race Composition on Turnover
No. 10-066
Kathleen L. McGinn and Katherine L. Milkman
Negotiation, Organizations & Markets
February 2010
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Abstract:
We develop an integrated theory of the social identity mechanisms linking workgroup sex and race composition across levels with individual turnover. Building on social identity research, we theorize that social cohesion (Tyler, 1999; Hogg and Terry, 2000) and social comparison (Festinger, 1954) lead to well-known cooperative effects within subordinate-supervisor pairs of the same sex and race, but potentially competitive effects among demographically similar peers. Analyzing longitudinal human resource data on professionals employed in a large up-or-out knowledge organization, we assess the distinct effects of demographic match with superiors and demographic match with peers on the exit of junior professionals. We find largely cooperative effects of cross-level composition-junior professionals who work in groups with higher proportions of same sex senior professionals are less likely to exit. At the peer level, however, these effects are reversed, and professionals are more likely to leave as the proportions of same sex and race peers within the workgroup increase. The effects hold across demographic groups, but vary by majority/minority status, disproportionately affecting women and underrepresented minorities.
48 pages

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