HBS Working Papers Collection
2009 - 2010
Banking Deregulations, Financing Constraints and Firm Entry Size*
(07/09, revised 10/09) NEW!
Breakthrough Inventions and Migrating Clusters of Innovation*
(09/09) NEW!
The CHAT Dataset*
(11/09) NEW!
Clusters of Entrepreneurship*
(09/09) NEW!
Conglomerates and LBO Associations: A Comparison of Organizational Forms*
(09/09) NEW!
Culture Clash: The Costs and Benefits of Homogeneity*
(07/09)
A Decision-making Perspective to Negotiation: A Review of the Past and a Look into the Future*
(07/09)
The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making*
(11/09) NEW!
Does Competition Favor Delegation?*
(07/09)
The End of Chimerica*
(11/09) NEW!
Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930*
(10/09) NEW!
Estimating the Effects of Large Shareholders Using a Geographic Instrument*
(10/09) NEW!
Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior*
(08/09) NEW!
Financing Constraints and Entrepreneurship*
(08/09) NEW!
From Strategy to Business Models and to Tactics*
(11/09) NEW!
"I read Playboy for the articles": Justifying and rationalizing questionable preferences*
(09/09) NEW!
The Impact of Private Equity Ownership on Corporate Tax Avoidance*
(07/09)
In Favor of Clear Thinking: Incorporating Moral Rules into a Wise Cost-benefit Analysis*
(07/09)
India Transformed? Insights from the Firm Level 1988-2005*
(10/09) NEW!
Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads*
(07/09)
Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery*
(08/09) NEW!
Insider Trading Preceding Goodwill Impairments*
(07/09)
Management and the Financial Crisis (We have met the enemy and he is us …)*
(10/09) NEW!
Medium Term Business Cycles in Developing Countries*
(10/09) NEW!
Mental Health in the Aftermath of Conflict*
(11/09) NEW!
Mixed Source*
(09/09) NEW!
Opening Up or Shutting Down? The Effects of Multiple Identities on Problem Solving*
(11/09) NEW!
Operational Failures and Problem Solving: An Empirical Study of Incident Reporting*
(08/09) NEW!
Patent policy, patent pools, and the accumulation of claims in sequential innovation*
(07/09)
Repetition of Interaction and Learning: An Experimental Analysis*
(08/09) NEW!
Specific Knowledge and Divisional Performance Measurement*
(09/09) NEW!
State Owned Entity Reform in Absence of Privatization: Reforming Indian National Laboratories and Role of Leadership*
(07/09)
Stock Price Fragility*
(10/09) NEW!
Strategies to Fight Ad-sponsored Rivals*
(09/09) NEW!
Stretching the Inelastic Rubber: Taxation, Welfare and Lobbies in Amazonia, 1870-1910*
(10/09) NEW!
Systemic Risk and the Refinancing Ratchet Effect*
(09/09) NEW!
User, and Open Collaborative Innovation: Ascendent Economic Models*
(11/09) NEW!
Walking the Talk in Multiparty Bargaining: An Experimental Investigation*
(11/09) NEW!
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
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
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
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
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
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
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
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
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
No. 10-037
Niall Ferguson and Moritz Schularick
Business, Government and the International Economy
November 2009
Complete Text (Acrobat PDF Version)
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
No. 10-027
André C. Martínez Fritscher and Aldo Musacchio
Business, Government and the International Economy
October 2009
Complete Text (Acrobat PDF Version)
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.
47 pages
No. 10-028
Bo Becker, Henrik Cronqvist, and Rüdiger Fahlenbrach
Finance
October 2009
Complete Text (Acrobat PDF Version)
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 a large, non-managerial individual shareholder in a firm. These shareholders have a large impact on firms, controlling for selection effects.
60 pages
No. 10-012
Lalin Anik, Lara B. Aknin, Michael I. Norton, and Elizabeth W. Dunn
Marketing
August 2009
Complete Text (Acrobat PDF Version)
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
No. 10-013
William R. Kerr and Ramana Nanda
Entrepreneurial Management
August 2009
Complete Text (Acrobat PDF Version)
Abstract:
Abstract is not available at this time
21 pages
No. 10-036
Ramon Casadesus-Masanell and Joan Enric Ricart
Strategy
November 2009
Complete Text (Acrobat PDF Version)
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
No. 10-018
Zoë Chance and Michael I. Norton
Marketing
September 2009
Complete Text (Acrobat PDF Version)
Abstract:
No abstract is available at this time
23 pages
No. 10-004
Brad Badertscher, Sharon P. Katz, and Sonja Olhoft Rego
Accounting and Management
July 2009
Complete Text (Acrobat PDF Version)
Abstract:
This study investigates how private equity ownership affects corporate tax avoidance. Private equity (PE) firms have been accused of aggressively managing their own tax liabilities and those of their portfolio firms. We investigate the latter assertion based on a sample of private firms for which there is financial statement data available. We first document that firms significantly alter their tax avoidance patterns in anticipation of 'going public' and 'going private' transactions. We then find that majority PE-backed private firms engage in less book-tax nonconforming tax planning than public years; nonetheless, they exhibit substantially lower marginal tax rates. We attribute these results to the larger debt tax shields of majority-owned PE-backed firms, which reduce their need for nonconforming (i.e., more aggressive) tax strategies. Lastly, we examine how different private ownership structures (e.g., majority PE ownership vs. management-owned) affect tax planning at private firms. Our results indicate that majority-owned PE-backed firms engage in more book-tax conforming and nonconforming tax planning than other private firms. We attribute these results to the managerial sophistication and resources available to majority-owned PE-backed firms.
Keywords: Private equity; ownership structure; tax avoidance; tax planning; tax aggressiveness; book-tax differences.
56 pages
No. 10-001
Max H. Bazerman and Joshua D. Greene
Negotiation, Organizations & Markets
July 2009
Complete Text (Acrobat PDF Version)
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
No. 10-030
Laura Alfaro and Anusha Chari
Business, Government and the International Economy
October 2009
Complete Text (Acrobat PDF Version)
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
No. 10-008
Edward J. Riedl and George Serafeim
Accounting and Management
July 2009
Complete Text (Acrobat PDF Version)
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
No. 10-011
David M. Cutler, Robert S. Huckman, and Jonathan T. Kolstad
Technology and Operations Management
August 2009
Complete Text (Acrobat PDF Version)
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
No. 10-007
Karl A. Muller, III, Monica Neamtiu, and Edward J. Riedl
Accounting and Management
July 2009
Complete Text (Acrobat PDF Version)
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
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
No. 10-029
Diego Comin, Norman Loayza, Farooq Pasha, and Luis Serven
Business, Government and the International Economy
October 2009
Complete Text (Acrobat PDF Version)
Abstract:
We build a two country asymmetric DSGE model with two features: (i) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (ii) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-US trade and FDI flows. The model is able to explain (i) why US shocks have a larger effect on Mexico than in the US and hence why the Mexican economy is more volatile than the US; (ii) why US business cycles lead over medium term fluctuations in Mexico and (iii) why Mexican consumption is not less 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.
58 pages
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
No. 10-022
Ramon Casadesus-Masanell and Gastón Llanes
Strategy
September 2009
Complete Text (Acrobat PDF Version)
Abstract:
We study competitive interaction between profit-maximizing firms that sell software and complementary goods or services. In addition to tactical price competition, we allow firms to compete through business model reconfigurations. We consider three business models: the proprietary model (where all software modules offered by the firm are proprietary), the open source model (where all modules are open source), and the mixed source model (where a few modules are open). When a firm opens one of its modules, users can access and improve the source code. At the same time, however, opening a module sets up an open source (free) competitor. This hampers the firm's ability to capture value. We analyze three competitive situations: monopoly, commercial firm vs. non-profit open source project, and duopoly. We show that: (i) firms may become "more closed" in response to competition from an outside open source project; (ii) firms are more likely to open substitute, rather than complementary, modules to existing open source projects; (iii) when the products of two competing firms are similar in quality, firms differentiate through choosing different business models; and (iv) low-quality firms are generally more prone to opening some of their technologies than firms with high-quality products.
Keywords: Open Source, User Innovation, Business Models, Complementarity, Vertical Differentiation, Value Creation, Value Capture
JEL Codes: O31, L17, D43
59 pages
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
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
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
No. 10-016
Bradley R. Staats, Francesca Gino, and Gary P. Pisano
Technology and Operations Management
August 2009
Complete Text (Acrobat PDF Version)
Abstract:
The learning curve is used to investigate how increasing cumulative experience yields improved performance. Experience, however, can take many forms. Building on recent studies on learning in operations, we distinguish between repetition of task (i.e., prior experience with the task) and repetition of interaction (i.e., prior experience with team members). Repetition of interaction may improve learning, since experience working together aids in the identification, transfer, and application of knowledge among members within a group. Additionally, experience need not be constrained to one task. Prior work examining the relationship of multiple tasks (i.e., varied experience) and learning by groups finds inconsistent results. We hypothesize that repetition of interaction may help explain this difference, as familiar teams may be able to use the knowledge gained from the concurrent completion of multiple tasks while unfamiliar teams may not. Using an experimental study we find that while repetition of interaction has no effect on initial performance, it has a persistent effect on learning. By separately examining the repetition of interaction and repetition of task our work offers new insights and direction for the study of learning in operations.
Keywords:Learning, Repetition of interaction, Repetition of task, Team familiarity, Varied experience
34 pages
No. 10-025
Michael C. Jensen and William H. Meckling
September 2009
Complete Text (Acrobat PDF Version)
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
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
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
No. 10-026
Ramon Casadesus-Masanell and Feng Zhu
Strategy
September 2009
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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 advertising intensity, we allow the incumbent to consider changes in its business model. We consider four alternative business models, two pure models (subscription-based and ad-sponsored) and two mixed models that are hybrids of the two pure models. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations, a phenomenon that we dub "competing through business models." We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through a pure, rather than a mixed, business 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.
58 pages
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
No. 10-023
Amir E. Khandani, Andrew W. Lo, and Robert C. Merton
Finance
September 2009
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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 or increased 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
68 pages
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.
41 pages
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