HBS Working Papers: 2010-2011 - Faculty & Research

HBS Working Papers Collection

2010-2011

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Accounting for Crises
No. 11-103
Venky Nagar and Gwen Yu
Accounting and Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
We provide one of the first tests of recent macro global-game crisis models that show that the precision of public signals can coordinate crises (e.g. Angeletos and Werning 2006; Morris and Shin 2002, 2003). In these models, self-fulfilling crises (independent of fundamentals) can occur only when publicly disclosed fundamental signals have high precision; fundamentals are thus the sole driver of crises in low-precision settings. We affirm this proposition on 39 currency crises by exploiting a key publicly disclosed fundamental driving financial markets, namely accounting data. We find that fundamental accounting signals are stronger in-sample predictors of crises in low-precision countries.
59 pages

Accounting Scholarship that Advances Professional Knowledge and Practice
No. 11-043
Robert S. Kaplan
Accounting and Management
October 2010
To view article

Abstract:
Recent accounting scholarship has used statistical analysis on asset prices, financial reports and disclosures, laboratory experiments, and surveys of practice. The research has studied the interface among accounting information, capital markets, standard setters, and financial analysts and how managers make accounting choices. But as accounting scholars have focused on understanding how markets and users process accounting data, they have distanced themselves from the accounting process itself. Accounting scholarship has failed to address important measurement and valuation issues that have arisen in the past 40 years of practice. This gap is illustrated with missed opportunities in risk measurement and management and the estimation of the fair value of complex financial securities. The paper encourages accounting scholars to devote more resources to obtaining a fundamental understanding of contemporary and future practice and how analytic tools and contemporary advances in accounting and related disciplines can be deployed to improve the professional practice of accounting.
Keywords: accounting research, professional practice, accounting education, field studies, risk measurement, pension risk, fair value measurement, options pricing model
36 pages

Agglomerative Forces and Cluster Shapes
No. 11-061
William R. Kerr and Scott Duke Kominers
Entrepreneurial Management
December 2010
Complete Text (Acrobat PDF Version)

Abstract:
We model spatial clusters of similar firms. Our model highlights how agglomerative forces lead to localized, individual connections among firms, while interaction costs generate a defined distance over which attraction forces operate. Overlapping firm interactions yield agglomeration clusters that are much larger than the underlying agglomerative forces themselves. Empirically, we demonstrate that our model's assumptions are present in the structure of technology and labor flows within Silicon Valley and its surrounding areas. Our model further identifies how the lengths over which agglomerative forces operate influence the shapes and sizes of industrial clusters; we confirm these predictions using variations across both technology clusters and industry agglomeration.
Keywords: Agglomeration, Clusters, Industrial Organization, Silicon Valley, Entrepreneurship, Labor Markets, Technology Flows, Patents, Natural Advantages.
JEL Codes: J2, J6, L1, L2, L6, O3, R1, R3.
68 pages

Being A Leader and the Effective Exercise of Leadership: An Ontological Model (PDF file of PowerPoint Slides)
No. 09-124
Werner Erhard, Michael C. Jensen, and Kari Granger

October 2010
Complete Text (Acrobat PDF Version)

Abstract:
This presentation is based on our research program over the last seven years in which our objective has been to rigorously distinguish leader and leadership and to create a technology for providing access to being a leader and exercising leadership effectively (in short, a technology for reliably creating leaders). Our research program involves not only discovering the technology, but also to create a course that would be available to others to use, experiment with, research, improve on and innovate from. Our efforts thus required an experimental laboratory to discover what will enable us as educators and trainers to efficiently and effectively create leaders.

Dean Mark Zupan of the U. of Rochester Simon School Of Business provided us with a research/teaching laboratory during the five years (2004 - 2008) we worked there with students, alumni, executives, and faculty from various academic institutions. This laboratory allowed us to investigate leader and leadership as phenomena, and to create technologies for providing actionable access to leader and leadership. The course is now also taught at the U.S. Air Force Academy, was delivered in 2009 at the Erasmus Academie (Rotterdam), and a version of which is taught at the Erasmus University Law School. In June 2010 the course was taught at the Mays School of Business, Texas A&M University.

The course is designed to leave participants being leaders and exercising leadership effectively as their natural self expression, and to contribute to creating a new science of leadership. We have two or three more years of development left to do and eventually we will produce the product as papers and perhaps a book.

The technology and the course is founded on what we term an ontological model of human nature. The ontological approach is uniquely effective in providing actionable access to being a leader and exercising leadership effectively.

While ontology as a general subject is concerned with the being of anything, here we are concerned with the ontology of human beings (the nature and function of being for human beings). Specifically we are concerned with the ontology of leader and leadership (the nature and function of being for a leader and the actions of effective leadership). Who one is being when being a leader shapes one's perceptions, emotions, creative imagination, thinking, planning, and consequently one's actions in the exercise of leadership.

Being a leader and the effective exercise of leadership as one's natural self-expression does not come from learning and trying to emulate the characteristics or styles of noteworthy leaders, or learning what effective leaders do and trying to emulate them (and most certainly not from merely being in a leadership position, or position of authority).

If you are not being a leader, and you try to act like a leader, you are likely to fail. That's called being inauthentic (playing a role or pretending to be a leader), deadly in any attempt to exercise leadership.

An epistemological mastery of a subject leaves you knowing. An ontological mastery of a subject leaves you being.

Gaining access to being a leader and the effective exercise of leadership as one's natural self-expression also requires dealing with those factors present in all human beings that constrain each person's freedom to be - and constrain and shape one's perceptions, emotions, creative imagination, thinking, planning, and actions. When one is not constrained or shaped by these factors - what we term "ontological constraints" - one's way of being and acting results naturally in one's personal best. We work with the students so that they accomplish this for themselves.
221 pages

Better-reply Dynamics in Deferred Acceptance Games
No. 11-126
Guillaume Haeringer and Hanna Halaburda
Strategy
June 2011
Complete Text (Acrobat PDF Version)

Abstract:
In this paper we address the question of learning in a two-sided matching mechanism that utilizes the deferred acceptance algorithm. We consider a repeated matching game where at each period agents observe their match and have the opportunity to revise their strategy (i.e., the preference list they will submit to the mechanism). We focus in this paper on better-reply dynamics. To this end, we first provide a characterization of better-replies and a comprehensive description of the dominance relation between strategies. Better-replies are shown to have a simple structure and can be decomposed into four types of changes. We then present a simple better-reply dynamics with myopic and boundedly rational agents and identify conditions that ensure that limit outcomes are outcome equivalent to the outcome obtained when agents play their dominant strategies. Better-reply dynamics may not converge, but if they do converge, then the limit strategy profiles constitute a subset of the Nash equilibria of the stage game.
Keywords: Better-reply dynamics, Deferred Acceptance, Two-sided matching.
JEL Codes: C72, D41.
27 pages

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China
No. 11-083
Latika Chaudhary, Aldo Musacchio, Steven Nafziger, and Se Yan
Business, Government and the International Economy
February 2011, revised July 2011
Complete Text (Acrobat PDF Version)

Abstract:
Our paper provides a comparative perspective on the development of public primary education in four of the largest developing economies circa 1910: Brazil, Russia, India and China (BRIC). These four countries encompassed more than 50 percent of the world's population in 1910, but remarkably few of their citizens attended any school by the early 20th century. We present new, comparable data on school inputs and outputs for BRIC drawn from contemporary surveys and government documents. Recent studies emphasize the importance of political decentralization, and relatively broad political voice for the early spread of public primary education in developed economies. We identify the former and the lack of the latter to be important in the context of BRIC, but we also outline how other factors such as factor endowments, colonialism, serfdom, and, especially, the characteristics of the political and economic elite help explain the low achievement levels of these four countries and the incredible amount of heterogeneity within each of them.
Keywords: Brazil, Russia, India, China, economic history, education, political economy, elites
JEL Codes: N30, O15, I22, I28
58 pages

Boundary spanning in a for-profit research lab: An exploration of the interface between commerce and academe
No. 11-012
Christopher C. Liu and Toby E. Stuart
Entrepreneurial Management
August 2010
Complete Text (Acrobat PDF Version)

Abstract:
In innovative industries, private-sector companies increasingly are participants in open communities of science and technology. To participate in the system of exchange in such communities, firms often publicly disclose what would otherwise remain private discoveries. In a quantitative case study of one firm in the biopharmaceutical sector, we explore the consequences of scientific publication-an instance of public disclosure-for a core set of activities within the firm. Specifically, we link publications to human capital management practices, showing that scientists' bonuses and the allocation of managerial attention are tied to individuals' publications. Using a unique electronic mail dataset, we find that researchers within the firm who author publications are much better connected to external (to the company) members of the scientific community. This result directly links publishing to current understandings of absorptive capacity. In an unanticipated finding, however, our analysis raises the possibility that the company's most prolific publishers begin to migrate to the periphery of the intra-firm social network, which may occur because these individuals' strong external relationships induce them to reorient their focus to a community of scientists beyond the firm's boundary.
42 pages

A Brief Postwar History of US Consumer Finance
No. 11-058
Andrea Ryan, Gunnar Trumbull, and Peter Tufano
Business, Government and the International Economy , Finance
December 2010
Complete Text (Acrobat PDF Version)

Abstract:
This article describes the consumer finance sector in the US since World War II. We first define the sector in terms of the functions delivered by firms (payments, savings/investing, borrowing, managing risk, and providing advice.) We provide time series evidence on major trends in consumption, savings, and borrowing. Examining consumer decisions, changes in regulation, and business practices, we identify four major themes that characterize the sector: (a) innovation that increased the choices available to consumer; (b) enhanced access in the form of broadening participation of consumers in financial activities, (c) do-it-yourself consumer finance, which allowed and forced consumers to take greater responsibility for their own financial lives, and (d) the resultant increase in household risk taking.
53 pages

Business Model Innovation and Competitive Imitation: The Case of Sponsor-Based Business Models
No. 11-003
Ramon Casadesus-Masanell and Feng Zhu
Strategy
July 2010, revised September 2011
Complete Text (Acrobat PDF Version)

Abstract:
We study sponsor-based business model innovations where a firm monetizes its product through sponsors rather than setting prices to its customer base. We analyze strategic interactions between an innovative entrant and an incumbent where the incumbent may imitate the entrant's business model innovation once it is revealed. We find that an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model, or conceal it by adopting a traditional business model. We show that the value of business model innovation may be so substantial that an incumbent may prefer to compete in a duopoly rather than to remain a monopolist.
Keywords: business model innovation; imitation; sponsor-based business model; strategic revelation; strategic concealment
56 pages

Cognitive Barriers to Environmental Action: Problems and Solutions
No. 11-046
Lisa L. Shu and Max H. Bazerman
Negotiation, Organizations & Markets
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
We explore interventions at the level of the individual and focus on recognized cognitive barriers from the behavioral decision-making literature. In particular, we highlight three cognitive barriers that impede sound individual decision making that have particular relevance to behaviors impacting the environment. First, despite claiming that they want to the leave the world in good condition for future generations, people intuitively discount the future to a greater degree than can be rationally defended. Second, positive illusions lead us to conclude that energy problems do not exist or are not severe enough to merit action. Third, we interpret events in a self-serving manner, a tendency that causes us to expect others to do more than we do to solve energy problems.
We then propose ways in which these biases could actually be used to our advantage in steering ourselves toward better judgment. Finally, we outline the key questions on the research frontier from the behavioral decision-making perspective, and debunk the myth that behavioral and neoclassical economic perspectives need be in conflict.
27 pages

Collaborating across Cultures: Cultural Metacognition & Affect-Based Trust in Creative Collaboration
No. 11-127
Roy Y.J. Chua, Michael W. Morris, and Shira Mor
Organizational Behavior
June 2011
Complete Text (Acrobat PDF Version)

Abstract:
We propose that managers' awareness of their own and others' cultural assumptions (cultural metacognition) enables them to develop affect-based trust with associates from different cultures, promoting creative collaboration. Study 1, a multi-rater assessment of managerial performance, found that managers higher in metacognitive cultural intelligence (CQ) were rated as more effective in intercultural creative collaboration by managers from other cultures. Study 2, a social network survey, found that managers lower in metacognitive CQ reported a deficit of new idea sharing in their intercultural but not intracultural ties. In Study 3, a laboratory experiment involving a collaborative task, higher metacognitive CQ engendered greater idea sharing and creative performance only when participants shared personal experiences prior to the task. The effects of metacognitive CQ in enhancing collaboration were mediated by affect-based trust. We discuss the theoretical and practical implications for understanding and promoting creativity and problem solving in multicultural global contexts.
Keywords: Intercultural Relations, Creativity, Trust, Culture, Metacognition
63 pages

A Comparative-Advantage Approach to Government Debt Maturity
No. 11-035
Robin Greenwood, Samuel G. Hanson and Jeremy C. Stein
Finance
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a simple setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk, and hence should aim to partially crowd out the private sector's use of short-term debt.
51 pages

The Consequences of Mandatory Corporate Sustainability Reporting
No. 11-100
Ioannis Ioannou and George Serafeim
Accounting and Management
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
We examine the effect of mandatory sustainability reporting on several measures of socially responsible management practices. Using data for 58 countries, we show that after the adoption of mandatory sustainability reporting laws and regulations, the social responsibility of business leaders increases. We also document that both sustainable development and employee training become a higher priority for companies, and that corporate governance improves. Furthermore, we find that companies implement more ethical practices, reduce bribery and corruption, and that managerial credibility increases. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports. We conclude with thoughts about mandatory sustainability and integrated reporting.
Keywords: sustainability reporting, mandatory reporting, corporate social responsibility, integrated reporting
45 pages

The Contingent Effect of Absorptive Capacity: An Open Innovation Analysis
No. 11-102
Andrew A. King and Karim R. Lakhani
Technology and Operations Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
Technological advancement and innovation requires the integration of both external knowledge and internal inventiveness. In this paper, we unpack the concept of absorptive capacity and separately explore the effect of different types of prior experience on the capacity to adopt external knowledge and make internal inventions. We also measure how absorptive capacity is influenced by changes in design "paths". We investigate nine open source programming contests in which 875 software programmers submit over 4.7 million lines of code. We conduct our analysis at the individual level and identify how programmers gain the ability to adopt and invent valuable code. Our evidence both confirms the theory of absorptive capacity and suggests refinements to it. We find that prior experience with both adoption and invention can indeed improve the capacity to adopt and invent valuable code, but we find that experience with adoption has the largest effect on invention capacity. We also find that major changes in the design "path" both advance and impede absorptive capacity. Changes in path allow rapid experience with alternative ideas, and this eventually aids adoption and invention capacity. However, these changes temporarily harm the ability of programmers to create valuable inventions. We discuss the implications of our findings for the literature on absorptive capacity and open and distributed innovation.
35 pages

Corporate Governance when Founders are Directors
No. 11-018
Feng Li and Suraj Srinivasan
Accounting and Management
August 2010
Complete Text (Acrobat PDF Version)

Abstract:
We examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Overall, the evidence suggests that boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.
51 pages

Corporate Social Responsibility and Access to Finance
No. 11-130
Beiting Cheng, Ioannis Ioannou, and George Serafeim
Accounting and Management
June 2011
Complete Text (Acrobat PDF Version)

Abstract:
In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to reduced agency costs, due to enhanced stakeholder engagement through CSR and reduced informational asymmetries, due to increased transparency through non-financial reporting. Using a large cross-section of firms, we show that firms with better CSR performance face significantly lower capital constraints. The results are confirmed using an instrumental variables and a simultaneous equations approach. Finally, we find that the relation is primarily driven by social and environmental performance, rather than corporate governance.
Keywords: corporate social responsibility, sustainability, capital constraints, ESG (environmental, social, governance) performance
46 pages

Course Materials for: "Being A Leader And The Effective Exercise Of Leadership - An Ontological Model"
No. 09-038
Werner H. Erhard, Michael C. Jensen, Steve Zaffron, and Kari L. Granger
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
This course is designed to leave students being leaders and exercising leadership effectively as their natural self-expression - rather than attempting to learn the characteristics, styles, and skills of noteworthy leaders, and then trying to remember and apply them where appropriate.

The course is not designed to merely leave the students with knowledge (that is not designed to leave students "knowing" about leaders and leadership and able to cogently discuss the issues surrounding leader and leadership). Rather, the course is designed to give students actual access to being a leader and the effective exercise of leadership. Our promise to the students is that if they honor their word to fulfill the requests we make of them they will leave the course being leaders and exercising leadership effectively.

The course material is based on our work over the last seven years in developing a course of the same title at the University of Rochester Simon School of Business (which course is now also taught at the US Air Force Academy, was delivered in June 2010 at Texas A&M University Mays School of Business, and at Erasmus Academie Rotterdam in June 2009, a version of which is taught at the Erasmus University Law School). The course is still under development and will be for several more years.

The research project that led to the creation of this course (and the papers and slides on leadership that are part of the course) originated from our interest in laying the foundations for a science of leadership. We agree with Warren Bennis (2002, p. 2) and Joseph Rost (1993, p. 8) who conclude respectively: "It is almost a cliché of the leadership literature that a single definition of leadership is lacking." and "The scholars do not know what it is they are studying, and the practitioners do not know what it is they are practicing."

Taking on the question of what leadership is required us to get into what it is to be a leader and what it is to exercise leadership effectively as a lived experience, rather than as a description, explanation or a theory. Getting to the core of being a leader and the actions of effective leadership led naturally to tackling the task of actually creating leaders and the natural laboratory for exploring that question was the classroom. Mark Zupan, Dean of the U. of Rochester Simon School of Business and his colleagues provided us the five-year laboratory to do this and the course was created.

For the full introductory paper to the course (the 6th of six pre-course readings): "Introductory Reading for Being A Leader and the Effective Exercise of Leadership: An Ontological Model" see: http://ssrn.com/abstract=1238158

A directory to all six of the pre-course readings can be found at: http://ssrn.com/abstract=1588288

743 pages

Crashes and Collateralized Lending
No. 11-025
Jakub W. Jurek and Erik Stafford
Finance
September 2010, revised September 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper develops a parsimonious static model for characterizing financing terms in collateralized lending markets. We characterize the systematic risk exposures for a variety of securities and develop a simple indifference-pricing framework to value the systematic crash risk exposure of the collateral. We then apply Modigliani and Miller's (1958) Proposition Two (MM) to split the cost of bearing this risk between the borrower and lender, resulting in a schedule of haircuts and financing rates. The model produces comparative statics and time-series dynamics that are consistent with the empirical features of repo market data, including the credit crisis of 2007-2008.
41 pages

Creating Leaders: An Ontological Model
No. 11-037
Werner Erhard, Michael C. Jensen, and Kari L. Granger
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
The sole objective of our ontological approach to creating leaders is to leave students actually being leaders and exercising leadership effectively as their natural self-expression. By "natural self-expression" we mean a way of being and acting in any leadership situation that is a spontaneous and intuitive effective response to what one is dealing with.

In creating leaders we employ the ontological discipline (from the Latin ontologia "science of being", see Heidegger (1927)). The ontological model of leader and leadership opens up and reveals the actual nature of being when one is being a leader and opens up and reveals the source of one's actions when exercising leadership. And ontology's associated phenomenological methodology (explained in the next paragraph) provides actionable access to what has been opened up.

The being of being a leader and the actions of the effective exercise of leadership can be accessed, researched, and taught either: 1) as being and action are observed and commented on "from the stands", specifically as these are observed by someone, and then described, interpreted and explained (third-person theory of), or 2) as being and action are actually experienced "on the court", specifically as these are actually lived (real-time first-person experience of). As a formal discipline, the "on the court" method of accessing being and action (that is, as being and action are actually lived) is named phenomenology. In short, an epistemological mastery of a subject leaves one knowing. An ontological mastery of a subject leaves one being.

Of course the students themselves do not need to study ontology; they only require the access to being and the source of action that is provided by the ontological perspective. And, they don't need to study phenomenology; they only need to be provided with the actionable pathway to the being of being a leader and the actions of effective leadership made available by the phenomenological methodology.
46 pages

CREATING LEADERS WORKSHOP: Mastering the Principles and Effective Delivery of 'The Ontological Leadership Course' (PDF File of PowerPoint Slides)
No. 11-002
Werner Erhard, Michael C. Jensen, Kari L. Granger, and Joseph J. DiMaggio, M.D.
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
This workshop is designed to support participants in gaining mastery in the delivery of our new course: "Being A Leader and the Effective Exercise of Leadership: An Ontological Model". The Workshop was delivered at the United States Air Force Academy (July 13 - 16, 2010), and was sponsored by the Kauffman Foundation, the Gruter Foundation, the United States Air Force Academy, and the Instructors.

The workshop is for scholars who are graduates of our course, "Being A Leader and the Effective Exercise of Leadership: An Ontological Model", who are now interested in teaching the course at their respective institutions.

Workshop objectives:

1. Provide participants access to the principles underlying the Ontological Leadership Course.

2. Empower and enable participants to expand their capacity to effectively deliver the Ontological Leadership Course.

3. Provide participants the opportunity to ongoingly collaborate in their delivery of the Ontological Leadership Course.

4. Provide participants an opportunity to create a community of scholars, educators, and practitioners to advance the Ontological Leadership Project.

5. Inquire into the next research frontier for the science of leadership.

The workshop aims to equip and engage scholars and educators to deliver a high-impact transformative leadership course creating leaders ready to meet the global demands of the 21st century. Workshop participants included 41 scholars and administrators from North America and Europe from various academic institutions, including the U.S. Air Force Academy (USAFA), business schools, medical schools, law schools, military institutions, and research centers. This workshop is intended to serve as a catalyst for global leadership development at the highest levels of international policy, business, academy, governance, development and security.

The Ontological Leadership Course Material is available at: http://ssrn.com/abstract=1263835
160 pages

Sustainable Cities: Oxymoron or the Shape of the Future?
No. 11-062
Annissa Alusi, Robert G. Eccles, Amy C. Edmondson, and Tiona Zuzul
Organizational Behavior , Technology and Operations Management
December 2010, revised January 2011, March 2011, April 2011
Complete Text (Acrobat PDF Version)

Abstract:
Two trends are likely to define the 21st century: threats to the sustainability of the natural environment and dramatic increases in urbanization. This paper reviews the goals, business models, and partnerships involved in eight early "ecocity" projects to begin to identify success factors in this emerging industry. Ecocities, for the most part, are viewed as a means of mitigating threats to the natural environment while creating urban living capacity, by combining low carbon and resource-efficient development with the use of information and communication technologies (ICT) to better manage complex urban systems.
27 pages

The Dark Side of Creativity: Original Thinkers Can be More Dishonest
No. 11-064
Francesca Gino and Dan Ariely
Negotiation, Organizations & Markets
January 2011
Complete Text (Acrobat PDF Version)

Abstract:
Creativity is a common aspiration for individuals, organizations, and societies. Here, however, we test whether creativity increases dishonesty. We propose that a creative personality and creativity primes promote individuals' motivation to think outside the box and that this increased motivation leads to unethical behavior. In four studies, we show that participants with creative personalities who scored high on a test measuring divergent thinking tended to cheat more (Study 1); that dispositional creativity is a better predictor of unethical behavior than intelligence (Study 2); and that participants who were primed to think creatively were more likely to behave dishonestly because of their creativity motivation (Study 3) and greater ability to justify their dishonest behavior (Study 4). Finally, a field study constructively replicates these effects and demonstrates that individuals who work in more creative positions are also more morally flexible (Study 5). The results provide evidence for an association between creativity and dishonesty, thus highlighting a dark side of creativity.
Keywords: creativity, creative thinking, dishonesty, intelligence, unethical behavior
47 pages

DEFENSE ACQUISITION REFORM: An Elusive Goal - 1960 to 2010
No. 11-120
J. Ronald Fox with Dr. David Allen, Dr. Thomas Lassman, Dr. Walton Moody, and Dr. Philip Shiman
May 2011
Complete Text (Acrobat PDF Version)

322 pages

Delay as Agenda Setting
No. 11-082
James J. Anton and Dennis A. Yao
Strategy
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
In this paper we examine a class of dynamic decision-making processes that involve endogenous commitment. Our analysis is relevant to group decision making settings as well as to hierarchical decision making settings in which, for example, subordinates attempt to influence their superiors. An inability to commit leads to the possibility of strategic delay by decision participants who differ in their preferences and are limited by the resources they can allocate to influencing decisions. We focus on sources of delay caused by the strategic interaction of decision makers over time and find that the opportunity to delay decisions leads the participants to sometimes act against their short-run interests. Two classes of activity of this type emerge which we refer to as focusing and pinning. We also explore how strategic delay alters the benefits from agenda setting.
47 pages

Delegation in Multi-Establishment Firms: Adaptation vs. Coordination in I.T. Purchasing Authority
No. 11-101
Kristina Steffenson McElheran
Technology and Operations Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper conducts one of the first large-scale, establishment-level empirical studies of delegation within firms. Recent contributions to a rapidly growing theory literature have focused on the tradeoff between adaptation and coordination in determining organizational structure, but empirical evidence is extremely limited. Theoretically, delegation of authority is expected when locally adapted choices are most important to the overall value of the firm, when local information advantages are significant, or when the cost of processing firm-wide information at the center grows too great. Centralization is predicted when the value of firm-wide coordination dominates these adaptation and information-processing concerns. Based on a novel data set containing information on establishment-level decision rights over information technology investments, I find robust conditional correlations consistent with some, but not all of these predictions. A relatively high economic value of adaptation at the establishment has a strong association with delegation to local managers, as do local information advantages and greater firm-wide diversification. In contrast, a high value of within-firm coordination as measured by the value of integrated production is negatively correlated with delegation. Surprisingly, absolute size of the firm is negatively related to delegation. The overall pattern of results highlights the need for a nuanced theoretical framework that can accommodate the full range of empirical facts.
JEL Codes: L22, D22, M15, M2
43 pages

Developing Negotiation Case Studies
No. 11-008
James K. Sebenius
Negotiation, Organizations & Markets
July 2010, revised October 2010
Complete Text (Acrobat PDF Version)

Abstract:
While a great deal of excellent advice exists for producing case studies on managerially relevant topics in general, negotiation cases have distinctive aspects that merit explicit treatment. This article offers three types of tailored advice for producing cases on negotiation and related topics (such as mediation and diplomacy) that are primarily intended for classroom discussion: 1) how to decide whether a negotiation-related case lead is worth developing; 2) how to choose the perspective and case type most suited to one's objectives; and 3) in by far the longest part of the discussion, ten nuts and bolts suggestions for structuring and producing an excellent negotiation case study.
15 pages

The distinct effects of Information Technology and Communication Technology on firm organization
No. 11-023
Nicholas Bloom, Luis Garicano, Raffaella Sadun and John Van Reenen
Strategy
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
Empirical studies on information communication technologies (ICT) typically aggregate the 'information' and 'communication' components together. We show theoretically and empirically that this is problematic. Information and communication technologies have very different effects on the decisions taken at each level of an organization. Better information access pushes decisions down, as it allows for superior decentralized decision making without an undue cognitive burden on those lower in the hierarchy. Better communication pushes decisions up, as it allows employees to rely on those above them in the hierarchy to make decisions. Using an original dataset of firms from the US and seven European countries we study the impact of ICT on worker autonomy, plant manager autonomy and span of control. Consistently with the theory we find that better information technologies (Enterprise Resource Planning, ERP, for plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span of control. By contrast, communication technologies (like data networks) decrease autonomy for both workers and plant managers. Treating technology as endogenous using instrumental variables (distance from the birthplace of ERP and heterogeneous telecommunication costs arising from different regulatory regimes) strengthen our results.
Keywords: organization, delegation, information technology, communication technology, the theory of the firm.
JEL Codes: O31, O32, O33, F23
58 pages

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans
No. 11-041
Doug J. Chung, Thomas Steenburgh, and K. Sudhir
Marketing
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
We estimate a dynamic structural model of sales force response to a bonus based compensation plan. The paper has two main methodological innovations: First, we implement empirically the method proposed by Arcidiacono and Miller (2010) to accommodate unobserved latent class heterogeneity with a computationally light two-step estimator. Second, the bonus setting helps estimate discount factors in a dynamic structural model using field data. This is because, quarterly and annual bonuses help generate the instruments necessary to identify both discount factors in a hyperbolic discounting model.

Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find clear evidence that: (1) bonuses enhance productivity; (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas; and (3) sales people exhibit present bias consistent with hyperbolic discounting. Given such present bias, frequent quarterly bonuses tied to high demand end-of-quarter months, serve as pacers to keep the sales force on track to achieve their annual sales quotas.
51 pages

Do Not Trash the Incentive! Monetary Incentives and Waste Sorting
No. 11-093
Alessandro Bucciol, Natalia Montinari, and Marco Piovesan
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper examines whether monetary incentives are an effective tool for increasing domestic waste sorting. We exploit the exogenous variation in the pricing systems experienced during the 1999-2008 decade by the 95 municipalities in the district of Treviso (Italy). We estimate with a panel analysis that pay-as-you-throw (PAYT) incentive-based schemes increase by 12.2% the ratio of sorted to total waste. This increase reflects a change in the behavior of households, who keep unaltered the production of total waste but sort it to a larger extent. In addition, we show that several factors that may discourage local administrators from adopting PAYT - illegal dumping and higher cost of management - are not important at the aggregate level. Hence, our results support the use of PAYT as an effective tool to increase waste sorting.
Keywords: Incentives, waste management, PAYT.
JEL Codes: D01, D78, Q53.
32 pages

Do US Market Interactions Affect CEO Pay? Evidence from UK Companies
No. 11-075
Joseph J. Gerakos, Joseph D. Piotroski, and Suraj Srinivasan
Accounting and Management
January 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper examines the extent that interactions with US markets impact the compensation practices of non-US firms. Using a sample of large UK companies, we find that the total compensation of UK CEOs is positively related to the extent of the firm's interactions with US markets, as captured by the percentage of total sales generated in the US, the presence of prior US acquisition activity, the presence of a US exchange listing, and CEO and director-level US board experience. More importantly, we find that exposure to US product markets is associated with the adoption of US-style compensation arrangements (i.e., incentive-based pay packages). In contrast, we find no such association with exposures to other (non-US) foreign product markets. Together, our evidence is consistent with US market interactions impacting UK compensation practices through two mechanisms: (1) to alleviate internal and external pay disparities arising from the presence of US operations and businesses (proxied by the percent US Sales and prior US acquisitions) and (2) to compensate CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environment (proxied by both US and non-US exchange listings).
55 pages

Does Mandatory IFRS Adoption Improve the Information Environment?
No. 11-029
Joanne Horton, George Serafeim and Ioanna Serafeim
Accounting and Management
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
We examine the effect of mandatory International Financial Reporting Standards ('IFRS') adoption on firms' information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast errors decrease is associated with the firm-specific differences between local GAAP and IFRS. Exploiting individual analyst level data and isolating settings where investors would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results are robust to variations in the measurement of information environment quality, forecast horizon, sample composition and tests of earnings management.
Keywords: IFRS, analysts, information environment, comparability, information quality
JEL Codes: M41, G14, G15
49 pages

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge
No. 11-052
Bo Becker, Daniel Bergstresser, and Guhan Subramanian
Finance, Negotiation, Organizations & Markets
November 2010, revised November 2011, January 2012
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Abstract:
We use the Business Roundtable's challenge to the SEC's 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC's announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC's 2010 Rule.
JEL Codes: G14, G32, G34, G38
50 pages

Driven by Social Comparisons: How Feedback about Coworkers' Effort Influences Individual Productivity
No. 11-078
Francesca Gino and Bradley R. Staats
Negotiation, Organizations & Markets
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
Drawing on theoretical insights from research on social comparison processes, this article explores how managers can use performance feedback to sustain employees' motivation and performance in organizations. Using a field experiment at a Japanese bank, we investigate the effects of valence (positive versus negative), type (direct versus indirect), and timing of feedback (one-shot versus persistent) on employee productivity. Our results show that direct negative feedback (e.g., an employee learns her performance falls in the bottom of her group) leads to improvements in employees' performance, while direct positive feedback does not significantly impact performance. Furthermore, indirect negative feedback (i.e., the employee learns she is not in the bottom of her group) worsens productivity while indirect positive feedback (i.e., the employee learns she is not in the top of her group) does not affect it. Finally, both persistently positive and persistently negative feedback lead to improvements in employees' performance. Together, our findings offer insight into the role of performance feedback in motivating productivity in repetitive tasks.
Keywords: Feedback, Framing, Learning, Motivation, Persistence, Productivity, Social comparison
36 pages

A Dynamic Perspective on Ambidexterity: Structural Differentiation and Boundary Activities
No. 11-111
Sebastian Raisch and Michael L. Tushman
Organizational Behavior
April 2011
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Abstract:
This paper explores the shifting nature of differentiation and integration in organizations attempting to explore and exploit. In a longitudinal study of six new business initiatives, we find that firms engage in a dynamic process of managing contradictory boundary activities. Boundaries between differentiated units are reinforced to enable exploitation and exploration, while corporate boundary spanners integrate these processes. The locus of integration shifts from the corporate team to lower organizational levels when the new business initiative reaches economic and cognitive legitimacy. We use these insights to revise the organizational ambidexterity concept, considering the underexplored roles of time, paradox, and locus.
41 pages

Embracing Paradox
No. 11-110
Michael L. Tushman, Wendy K. Smith, and Andy Binns
Organizational Behavior
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
Trying to resolve the paradox between innovation and the core business only weakens the CEO and dooms the company. Exceptional leaders embrace tensions associated with exploiting prior strategies even as they explore into the future.
11 pages

An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds
No. 11-094
Carolin E. Pflueger and Luis M. Viceira
Finance
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper decomposes the excess return predictability in inflation-indexed and nominal government bonds into effects from liquidity, market segmentation, real interest rate risk and inflation risk. We estimate a large and variable liquidity premium in US Treasury Inflation Protected Securities (TIPS) from the co-movement of breakeven inflation with liquidity proxies. The liquidity premium is around 70 basis points in normal times, but much larger during the early years of TIPS issuance and during the height of the financial crisis in 2008-2009. The liquidity premium explains the high excess returns on TIPS as compared to nominal Treasuries over the period 1999-2009. Liquidity-adjusted breakeven inflation appears stable, suggesting stable inflation expectations over our sample period. We find predictability in both inflation-indexed bond excess returns and in the spread between nominal and inflation-indexed bond excess returns even after adjusting for liquidity, providing evidence for both time-varying real interest rate risk premia and time-varying inflation risk premia. Liquidity appears uncorrelated with real interest rate and inflation risk premia. We test whether bond return predictability is due to segmentation between nominal and inflation-indexed bond markets but find no evidence in either the US or in the UK.
41 pages

Employee Selection as a Control System
No. 11-021
Dennis Campbell
Accounting and Management
August 2010, revised September 2010
Complete Text (Acrobat PDF Version)

Abstract:
Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision-making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision-making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an important, but understudied, element of organizational control systems.
55 pages

Entrepreneurship and the Discipline of External Finance
No. 11-098
Ramana Nanda
Entrepreneurial Management
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
I confirm the finding that the propensity to start a new firm rises sharply among those in the top five percentiles of personal wealth. This pattern is more pronounced for entrants in less capital intensive sectors. Prior to entry, founders in this group earn about 6% less compared to those who stay in paid employment. Their firms are more likely to fail early and conditional on survival, less likely to be make money. This pattern is only true for the most-wealthy individuals, and is attenuated for wealthy individuals starting firms in capital intensive industries. Taken together, these findings suggest that the spike in entry at the top end of the wealth distribution is driven by low-ability individuals who can afford to start (and sometimes continue running) weaker firms because they do not face the discipline of external finance.
36 pages

The Importance of Work Context in Organizational Learning from Error
No. 11-074
Lucy H. MacPhail and Amy C. Edmondson
Technology and Operations Management
January 2011

38 pages

An Exploration of Optimal Stabilization Policy
No. 11-113
N. Gregory Mankiw and Matthew Weinzierl
Business, Government and the International Economy
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.
36 pages

Financial guarantors and the 2007-2009 credit crisis
No. 11-051
Daniel Bergstresser, Randolph Cohen, and Siddharth Shenai
Finance
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
More than half of the municipal bonds issued between 1995 and 2009 were sold with bond insurance. During the credit crisis the perceived credit quality of the financial guarantors fell, and yields on insured bonds exceeded yields on equivalent uninsured issues. It does not appear that either property and casualty insurers or open-end municipal mutual funds were dumping insured bonds; analysis of holdings data indicates that their propensity to sell bonds was unusually low for the issues insured by troubled insurers. At least on a bond-by-bond basis, the yield inversion phenomenon is also not explained by the rapid liquidation of Tender Option Bond (TOB) programs, which disproportionately held insured issues. Finally, during the recent crisis the insured bonds have become significantly less liquid than uninsured municipal debt.
Keywords: Bond insurance, municipal securities, credit crisis.
61 pages

Financing Risk and Innovation
No. 11-013
Ramana Nanda and Matthew Rhodes-Kropf
Entrepreneurial Management
August 2010, revised March 2011, December 2011
Complete Text (Acrobat PDF Version)

Abstract:
Technological revolutions and waves of creative destruction are associated with new ventures and the destruction of mature firms, but also with the failure of numerous startups, suggesting a time of increased experimentation in the economy. We provide a model of investment into new ventures that demonstrates why some places, times and industries should be associated with a greater degree of experimentation by investors. Investors respond to increases in the forecasted probability of future funding by funding more innovative ideas. We propose that extremely novel technologies may need 'hot' financial markets to get through the initial period of discovery or diffusion.
Keywords: Innovation, Venture Capital, Investing, Experimentation, Market Cycles, Financing Risk
JEL Codes: G24, O31
51 pages

First-Party Content, Commitment and Coordination in Two-Sided Markets
No. 11-123
Andrei Hagiu and Daniel Spulber
Strategy
May 2011, revised October 2011
Complete Text (Acrobat PDF Version)

Abstract:
The strategic use of first-party content by two-sided platforms is driven by two key factors: the nature of buyer and seller expectations (favorable vs. unfavorable) and the nature of the relationship between first-party content and third-party content (complements or substitutes). As a result, first-party content is a strategic instrument that plays a dual role. On the one hand, it enables platforms facing unfavorable expectations to compensate for their difficulty in attracting third-party sellers. They should over-invest in first-party content which substitutes for third-party content relative to platforms benefitting from favorable expectations. On the other hand, platforms that benefit from favorable expectations capture a larger share of total surplus from buyers and sellers. They derive a higher return on investment in first-party content that complements third-party content relative to platforms facing unfavorable expectations. As a result, the latter under-invest in complementary first-party content. These results hold with both simultaneous and sequential entry of the two sides.
With two competing platforms - incumbent facing favorable expectations and entrant facing unfavorable expectations - and singlehoming on one side of the market, the incumbent always invests (weakly) more in first-party content relative to the case in which it is a monopolist.
33 pages

"Fit": Field Experimental Evidence on Sorting, Incentives and Creative Worker Performance
No. 11-107
Kevin J. Boudreau and Karim R. Lakhani
Technology and Operations Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
We present the results of a 10-day field experiment in which over 500 elite software developers prepared solutions to the same computational algorithmic problem. Participants were divided into two groups with identical skills distributions and exposed to the same competitive institutional setting. The "sorted" group was composed of individuals who preferred the competitive regime instead of a team-based outside option. The "unsorted" group had population-average preferences for working in the regime or the outside option. We find this sorting on this basis of institutional preferences doubled effort and the performance of solutions-controlling for skills, monetary incentives and institutional details.
Keywords: Sorting, Incentives, Institutions, Tournaments, Contests, Intrinsic Motivations, Creative Workers, Field Experiment
49 pages

Fractionalization and the municipal bond market
No. 11-128
Daniel Bergstresser, Randolph Cohen, and Siddharth Shenai
Finance
June 2011
Complete Text (Acrobat PDF Version)

Abstract:
We study the impact of ethnic and religious fractionalization on the U.S. municipal debt market, and find that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a ten basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA-, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds, but instead reflects inefficiency in the underwriting process.
Keywords: Fractionalization, municipal bonds.
44 pages

Organizational Toolmaking: Transformations in the Influence of Experts
No. 11-068
Matthew Hall, Anette Mikes, and Yuval Millo
Accounting and Management
January 2011, revised March 2011
Complete Text (Acrobat PDF Version)

Abstract:
In this study, we examine transformations in the influence of risk experts in two large UK banks over a period of six years. Our analysis highlights that a process we term toolmaking (whereby experts create tools that embody their expertise) is central to the way in which experts garner influence in complex organizational settings. We develop a framework that conceptualizes the transformations in the influence of experts via two interdependent processes. First, experts can change their knowledge from personally communicable, tacit knowledge into tool-generated, highly communicable knowledge. The second interdependent movement involves how experts develop their personal involvement in producing analysis and interpretation in important organizational decision-making forums. Based on the ability to combine and balance these two processes, we distinguish analytically among four positions of influence that experts can occupy-box-tickers, disconnected technicians, ad hoc advisors, and frame-makers-and trace the movements of experts between these positions. The findings and theoretical framework contribute to our understanding of how and why experts can become influential, complementing existing explanations focused on (a) the cognitive and political dimensions of what influence-seeking organizational actors do and (b) the structural conditions under which they operate.
34 pages

From Bench to Board: Gender Differences in University Scientists' Participation in Commercial Science
No. 11-014
Waverly W. Ding, Fiona Murray, and Toby E. Stuart
Entrepreneurial Management
August 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper examines gender differences in the participation of university life science faculty in commercial science. Based on theory and field interviews, we develop hypotheses regarding how scientists' productivity, co-authorship networks, and institutional affiliations have different effects on whether male and female faculty become "academic entrepreneurs". We then statistically examine this framework in a national sample of 6,000 life scientists whose careers span more than 20 years. We find sharp gender differences in participation in for-profit ventures, which we measure as the likelihood of joining the scientific advisory board (SAB) of a biotechnology firm. Compared to men, women life scientists are much less likely to advise for-profit biotechnology companies. We also identify factors that contour this gender difference, including scientists' co-authorship network structure and the level of support for commercial science at their universities. Surprisingly, we find that the (conditional) gender gap is largest among faculty members at the highest status institutions.
49 pages

From Social Control to Financial Economics: The Linked Ecologies of Economics and Business in Twentieth Century America
No. 11-071
Marion Fourcade and Rakesh Khurana
Organizational Behavior
January 2011
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Abstract:
As the main producers of managerial elites, business schools represent strategic research sites for understanding the formation of economic practices and representations. This article draws on historical material to analyze the changing place of economics in American business education over the course of the twentieth century. We use the Wharton School as an illustration of the earliest trends and dilemmas (c. 1900-1930), when business schools found themselves caught between their business connections and their striving for moral legitimacy in higher education. We show how several of the school's leaders were closely involved in progressive reforms and presided over the development of the empirical social sciences to address questions of labor regulation and control within manufacturing industries. Next, we look at the creation of the Carnegie Tech Graduate School of Industrial Administration after World War II. This episode illustrates the increasingly successful claims of social scientists, backed by philanthropic foundations, on business education and the growing appeal of "scientific" approaches to decision-making and management. We also show that these transformations were homologically related to changes in the prevailing mode of governance in the American economy: business schools became essential sites for the development of tools and methods (e.g., input-output approaches, linear programming, forecasting) for the management of the new large, diversified conglomerates. Finally, we argue that the rise of the Graduate School of Business at the University of Chicago from the 1960s onwards marks the decisive ascendancy of economics, and particularly financial economics, in business education over the other behavioral disciplines, as well as the decisive ascendancy of business schools as producers of economic knowledge. By following teacher-student networks, we also document the key role of business schools in diffusing "Chicago-style" economic approaches-offering support for anti-regulatory approaches and popularizing narrowly financial understandings of the firm (Fligstein 1990, 2002)-that sociologists have described as characteristic of the modern neo-liberal regime.
41 pages

The Globalization of Corporate Environmental Disclosure: Accountability or Greenwashing?
No. 11-115
Christopher Marquis and Michael W. Toffel
Organizational Behavior , Technology and Operations Management
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
Despite the increase in corporate environmental disclosure, there remains substantial heterogeneity in the extent to which corporations reveal their environmental impacts. To better understand this heterogeneity, we identify key country- and organization-level determinants of corporate environmental disclosure. We focus on institutional factors related to firms' global embeddedness to describe how external environmental pressures emanating from governments and civil society influence corporations environmental transparency. We also focus on the extent to which corporate environmental disclosure is symbolic and, in particular, what leads corporations to selectively disclose relatively benign environmental impacts to create an impression of transparency while masking their true environmental performance. We hypothesize that key organizational characteristics reflecting visibility, such as size and environmental impact, shape this type of symbolic compliance and that these relationships are moderated by institutional pressures. We test our hypotheses using a novel panel dataset of 4,646 public companies in many industries, headquartered in 46 countries during 2005-2008, when environmental disclosure increased among many global corporations. Controlling for a host of organizational, industry, and national characteristics, we find evidence to support most of our hypothesized relationships. Contributions to understanding the decoupling of globalization processes and how organizations respond to institutional change are discussed.
74 pages

Growth through Heterogeneous Innovations
No. 11-044
Ufuk Akcigit and William R. Kerr
Entrepreneurial Management
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
We study how exploration versus exploitation innovations impact economic growth through a tractable endogenous growth framework that contains multiple innovation sizes, multi-product firms, and entry/exit. Firms invest in exploration R&D to acquire new product lines and exploitation R&D to improve their existing product lines. We model and show empirically that exploration R&D does not scale as strongly with firm size as exploitation R&D. The resulting framework conforms to many regularities regarding innovation and growth differences across the firm size distribution. We also incorporate patent citations into our theoretical framework. The framework generates a simple test using patent citations that indicates that entrants and small firms have relatively higher growth spillover effects.
Keywords: Endogenous Growth, Innovation, Exploration, Exploitation, Research and Development, Patents, Citations, Scientists, Entrepreneurs.
JEL Codes: O31, O33, O41, L16.
80 pages

Historical Trajectories and Corporate Competences in Wind Energy
No. 11-112
Geoffrey Jones and Loubna Bouamane
Entrepreneurial Management
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
This working paper surveys the business history of the global wind energy turbine industry between the late nineteenth century and the present day. It examines the long-term prominence of firms headquartered in Denmark, the more fluctuating role of US-based firms, and the more recent growth of German, Spanish, Indian and Chinese firms. While natural resource endowment in wind has not been very significant in explaining the country of origin of leading firms, the existence of rural areas not supplied by grid electricity was an important motivation for early movers in both the US and Denmark. Public policy was the problem rather than the opportunity for wind entrepreneurs before 1980, but beginning with feed-in tariffs and other policy measures taken in California, policy mattered a great deal. However, Danish firms, building on inherited technological capabilities and benefitting from a small-scale and decentralized industrial structure, benefitted more from Californian public policies. The more recent growth of German, Spanish and Chinese firms reflected both home country subsidies for wind energy and strong local content policies, whilst successful firms pursued successful strategies to acquire technologies and develop their own capabilities.
82 pages

How Do Incumbents Fare in the Face of Increased Service Competition?
No. 11-084
Ryan W. Buell, Dennis Campbell, and Frances X. Frei
Accounting and Management , Technology and Operations Management
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
We explore the conditions under which service competition leads to customer defection from an incumbent and which customers are most vulnerable to its effects. We find that customers defect at a higher rate from the incumbent following increased service competition only when the incumbent offers high quality service relative to existing competitors in a local market. We provide evidence that this result is due to a sorting effect whereby the incumbent attracts service (price) sensitive customers in markets where it has supplied relatively high (low) levels of service quality in the past. Furthermore, we show that it is the high quality incumbent's most valuable customers, those with the longest tenure, most products, and highest balances, who are the most vulnerable to superior service alternatives. Along the way, we also show that firms trade-off price and service quality and that when the incumbent offers relatively low service quality in a local market, it is susceptible to the entry or expansion of inferior service (price) competitors. Our results appear to have long run implications whereby sustaining a high level of service relative to local competitors leads the incumbent to attract and retain higher value customers over time.
35 pages

The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors
No. 11-076
Jianxi Luo, Carliss Y. Baldwin, Daniel E. Whitney, and Christopher L. Magee
Finance
January 2011, revised July 2011, January 2012
Complete Text (Acrobat PDF Version)

Abstract:
Many products are manufactured in networks of firms linked by transactions, but comparatively little is known about how or why such transaction networks differ. This paper investigates the transaction networks of two large sectors in Japan at a single point in time. In characterizing these networks, our primary measure is "hierarchy," defined as the degree to which transactions flow in one direction, from "upstream" to "downstream." Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector because of the presence of numerous inter-firm transaction cycles. These cycles, in turn, reveal that a significant group of firms have two-way "vertically permeable boundaries": (1) they participate in multiple stages of an industry's value chain, hence are vertically integrated, but also (2) they allow both downstream units to purchase intermediate inputs from and upstream units to sell intermediate goods to other sector firms. We demonstrate that the 10 largest electronics firms had two-way vertically permeable boundaries while almost no firms in the automotive sector had adopted that practice.
Keywords: transactions, networks, vertical integration, hierarchy, industry architecture, innovation.
36 pages

How Foundations Think: The Ford Foundation as a Dominating Institution in the Field of American Business Schools
No. 11-070
Rakesh Khurana, Kenneth Kimura, and Marion Fourcade
Organizational Behavior
January 2011
Complete Text (Acrobat PDF Version)

Abstract:
          The question of institutional change has become central to organizational research (Powell, 2008). Recent scholarship has demonstrated, often through carefully researched cases, that institutions can and sometimes do change. According to this research, there are two primary factors that can cause institutions to change. First, institutional entrepreneurs, including individual actors or small group of actors, are able to think and act outside the confines of their institutional context, and therefore, mobilize change in directions that favor new sets of interests (for a review, see Battilana, 2010). A second factor which contributes to institutional change are the processes endogenous to the everyday functioning of institutions, such as the loose coupling between formal and informal practices or the contested meanings in the adoption of new practices (Leblibici, et. al, 1991; Lounsbury and Pollack, 2001). While both research approaches have been quite productive and provocative, some scholars have raised concerns about this turn in institutional research. They point out that there is a theoretical inconsistency between the strong reliance on individuals as the primary unit of analysis and the examination of endogenously generated processes to explain institutional change (Scott, 2008). For example, the practical deficiencies of individual agency and endogenous processes as the primary sources of institutional change become especially apparent when one considers large-scale institutions such as healthcare, academic disciplines, or social services, which are nested within or cut across a variety of institutional sectors. These institutions either operate within a highly constrained environment of norms, regulations, and practices that are taken-for-granted or in a context of pluralistic and contested demands, (D'Aunno, Succi & Alexander, 2000; Denis, Lamothe & Langley, 2001; Abbott, 1988; D'Aunno, Sutton, and Price, 1991).
          This research modestly attempts to explore a decidedly more organizational and exogenous perspective to explain institutional change. We start with a construct called dominating institutions, a class of formal organizations that are purposively designed to change other institutions. We suggest that such organizations exist and provide us with a stepping stone toward a more theoretically consistent and empirically grounded explanation for how large-scale institutional change sometimes occurs.
          The goal of this paper is to describe the structural characteristics and associated behaviors of dominating institutions as they incite change within other institutions. Their primary structure can best be described as adjacency, a space between institutional fields that provides these organizations with the advantages of connectivity across a wide variety of institutions and with a vantage point that allows them to think strategically about key intervention points for changing an institution. However, while adjacency is an important structural position, it is not, by itself, dominance. Dominance requires action. Dominating institutions exercise dominance by: (1) brokering across different institutional sectors, (2) legitimizing or stigmatizing organizations and/or their practices, and (3) creating resource dependencies with the key organizations they are trying to change.
          We carry out this research by examining a large-scale foundation and its approach to reshaping one of the largest institutional sectors within higher education. Specifically, through a historical analysis, we document the Ford Foundation's organizational characteristics, its modes operandi, and substantive decisions for reshaping America's graduate schools of management between 1952 to 1965 from a vocationally, disparate, but 'successful' field to a more academically and discipline based orientation. We frame two questions in order to anchor the scope of our investigation: What are the structural characteristics of a dominant institution? What key behaviors do dominant institutions use to allow them to significantly reshape an existing institution?
          Our paper is organized in four parts. Part one describes, in greater detail, the constructs of dominating institutions, adjacency, and dominating behaviors. Part two introduces our research context, data sources, and research methods. Part three presents the key findings of how the Ford Foundation dramatically shifted the nature of business education. Part four discusses the implications of our findings and the potential for future research on institutional change.
39 pages

The "IKEA Effect": When Labor Leads to Love
No. 11-091
Michael I. Norton, Daniel Mochon, and Dan Ariely
Marketing
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
In a series of studies in which consumers assembled IKEA boxes, folded origami, and built sets of Legos, we demonstrate and investigate the boundary conditions for what we term the "IKEA effect" - the increase in valuation of self-made products. Participants saw their amateurish creations - of both utilitarian and hedonic products - as similar in value to the creations of experts, and expected others to share their opinions. Our account suggests that labor leads to increased valuation only when labor results in successful completion of tasks; thus when participants built and then destroyed their creations, or failed to complete them, the IKEA effect dissipated. Finally, we show that labor increases valuation of completed products not just for consumers who profess an interest in "do-it-yourself" projects, but even for those who are relatively uninterested. We discuss the implications of the IKEA effect for marketing managers and organizations more generally.
34 pages

The Impact of Forward-Looking Metrics on Employee Decision Making
No. 11-106
Pablo Casas-Arce, F. Asís Martínez-Jerez and V.G. Narayanan
Accounting and Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper analyzes the effects of providing forward-looking metrics on employee decision making. We use data from a southern European bank that, in April 2002, started providing its branch managers with customer lifetime value (CLV) information about mortgage applicants. The data allows us to gauge the effects of enriching the information set of these employees in an environment where incentives and the allocation of decision rights remained unchanged. We find that CLV availability resulted in a significant shift in attention towards the more profitable client segments (the weight of the top segment in the portfolio of customers increases from 26% to 34%), but we do not find evidence of improved cross-selling (except for an increase in the sale of insurance products). Moreover, the use of CLV information did not have a negative impact on pricing, as some of the literature suggests, nor on default risk, indicating that managers increased sales to more profitable customers by providing better customer service.
45 pages

The Impact of Corporate Social Responsibility on Investment Recommendations
No. 11-017
Ioannis Ioannou and George Serafeim
Accounting and Management
August 2010
Complete Text (Acrobat PDF Version)

Abstract:
Using a large sample of publicly traded US firms over 16 years, we investigate the impact of corporate socially responsible (CSR) strategies on security analysts' recommendations. Socially responsible firms receive more favorable recommendations in recent years relative to earlier ones, documenting a changing perception of the value of such strategies by the analysts. Moreover, we find that firms with higher visibility receive more favorable recommendations for their CSR strategies and that analysts with more experience, broader CSR awareness or those with more resources at their disposal, are more likely to perceive the value of CSR strategies more favorably. Our results document how CSR strategies can affect value creation in public equity markets through analyst recommendations.
46 pages

The Impact of Supplier Reliability Tracking on Customer Demand: Model and Estimation Methodology
No. 11-034
Nathan Craig, Nicole DeHoratius, and Ananth Raman
Technology and Operations Management
September 2010, revised July 2011
Complete Text (Acrobat PDF Version)

Abstract:
To set service levels, firms must understand how changes in service affect customer demand. Supplier reliability tracking is a process whereby customers use past supplier performance to build beliefs about supplier capabilities and hence about future supplier performance. This paper presents a multi-period model of suppliers selling substitutable products to a customer that engages in supplier reliability tracking. Using this analytical model, we observe how a supplier's service level performance molds a customer's beliefs as well as how a customer's beliefs affect its order quantities. We also provide a method for estimating the impact of changes in supplier performance on customer demand. Using data from Hugo Boss, a manufacturer of branded apparel, we find increases in supplier reliability to be associated with significant increases in orders from Hugo Boss's retailer customers.
35 pages

Inducement Prizes and Innovation
No. 11-118
Liam Brunt, Josh Lerner, and Tom Nicholas
Finance, Entrepreneurial Management
May 2011, revised December 2011
Complete Text (Acrobat PDF Version)

Abstract:
We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and we also detect an impact of the prizes on the quality of contemporaneous patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only "hot" technology sectors. Prizes encouraged competition and medals were more important than monetary awards. The boost to innovation we observe cannot be explained by the re-direction of existing inventive activity.
Keywords: Awards, Patents, Contests
JEL Codes: O31, O30, N40
46 pages

Inflation-Indexed Bonds and the Expectations Hypothesis
No. 11-095
Carolin E. Pflueger and Luis M. Viceira
Finance
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflation-indexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the breakeven inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.
Keywords: TIPS, Breakeven Inflation, Return Predictability, Bond Risk Premia
33 pages

The Influence of Prior Industry Affiliation on Framing in Nascent Industries: The Evolution of Digital Cameras
No. 11-007
Mary J. Benner and Mary Tripsas
Entrepreneurial Management
July 2010, revised December 2010
Complete Text (Acrobat PDF Version)

Abstract:
New industries sparked by technological change are characterized by high uncertainty. In this paper we explore how a firm's conceptualization of products in this context, as reflected by product feature choices, is influenced by prior industry affiliation. We study digital cameras introduced from 1991-2006 by firms from three prior industries. We hypothesize and find first, that prior industry experience shapes a set of shared beliefs resulting in similar and concurrent firm behavior, second, that firms notice and imitate the behaviors of firms from the same prior industry, and third, that as firms gain experience with particular features, the influence of prior industry decreases. This study extends previous research on firm entry into new domains by examining heterogeneity in firms' framing and feature-level entry choices.
Keywords: Technological change; Innovation; Industry evolution; Dominant designs, Managerial beliefs; Digital photography
47 pages

Innovating at the World's Crossroads: How Multicultural Networks Promote Creativity
No. 11-085
Roy Y.J. Chua
Organizational Behavior
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
This research examines the effects of multicultural social networks on individuals' creative performance. Combining network analysis with experimental methods, two studies using different samples found that networks' degree of cultural heterogeneity positively predicts creativity on tasks that draw on varied cultural-knowledge resources but not on other tasks. The results also indicate that a culturally heterogeneous network increases the likelihood of receiving culture-related novel ideas from others in the network whether or not they share one's culture of origin. This finding sheds light on the mechanisms that underlie multicultural networks' effects on creativity. Theoretical and practical implications for creativity and networking are discussed.
Keywords: creativity, network, culture, diversity, multiculturalism
46 pages

Innovation and the Challenge of Novelty: The Novelty-Confirmation-Transformation Cycle in Software and Science
No. 11-096
Paul R. Carlile and Karim R. Lakhani
Technology and Operations Management
March 2011
Complete Text (Acrobat PDF Version)

Abstract:
Innovation requires sources of novelty, but the challenge is that not all sources lead to innovation, so its value needs to be determined. However, since ways of determining value stem from existing knowledge this often creates barriers to innovation. To understand how people address the challenge of novelty we develop a conceptual and an empirical framework to explain how this challenge is addressed in a software and scientific context. What is shown is that the process of innovation is a cycle where actors develop novel course of action and based on the consequences identified confirm what knowledge to transform to develop the next course of action. The performance of the process of innovation is constrained by the capacities of the artifacts and the ability of the actors to create and use artifacts to drive this cycle. By focusing on the challenge of novelty, a problem that cuts across all contexts of innovation, our goal is to develop a more generalized account of what drives the process of innovation.
Keywords: innovation, novelty, artifacts, infrastructure, software and science.
42 pages

Learning from Customers in Outsourcing: Individual and Organizational Effects
No. 11-057
Jonathan R. Clark, Robert S. Huckman, and Bradley R. Staats
Technology and Operations Management
December 2010, revised September 2011
Complete Text (Acrobat PDF Version)

Abstract:
The ongoing fragmentation of work has resulted in a narrowing of tasks into smaller and smaller pieces that can be sent outside the organization and, in many instances, around the world. Not surprisingly, this trend is shifting the boundaries of organizations. Though experience and productivity improvement may be seen as key benefits of this trend, little is known about how this shift toward outsourcing influences learning. When producing a unit of output, the content of the knowledge gained can vary dramatically from one unit to the next. One dimension along which a unit of output can vary-a dimension with particular relevance in outsourcing-is the end customer to whom it is delivered. The performance benefits of such customer experience remain largely unexamined. We explore the customer dimension of volume-based learning in the context of outsourced radiological services, where individual doctors at an outsourcing firm complete radiological reads for hospital customers. We examine more than 2.7 million cases for 1,431 customers read by 97 radiologists and find evidence supporting the benefit of accumulating customer-specific experience at the level of individual radiologists. Additionally, we find that customer depth for the entire outsourcing firm (i.e., total volume for a given customer across all radiologists at the firm) also yields learning and that the degree of customer depth moderates customer specificity at the individual level. We discuss the implications of our results for the study of learning and experience as well as for the providers and consumers of outsourced services.
Keywords: Customer specificity, Experience, Healthcare, Learning, Outsourcing
36 pages

The Institutional Logic of Great Global Firms
No. 11-119
Rosabeth Moss Kanter
General Management
May 2011
Complete Text (Acrobat PDF Version)

35 pages

Institutional Pressures and Organizational Characteristics: Implications for Environmental Strategy
No. 11-050
Magali A. Delmas and Michael W. Toffel
Technology and Operations Management
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
A broad literature has emerged over the past decades demonstrating that firms' environmental strategies and practices are influenced by stakeholders and institutional pressures. Such findings are consistent with institutional sociology, which emphasizes the importance of regulatory, normative and cognitive factors in shaping firms' decisions to adopt specific organizational practices, above and beyond their technical efficiency. Similarly, institutional theory emphasizes legitimation processes and the tendency for institutionalized organizational structures and procedures to be taken for granted, regardless of their efficiency implications. However, the institutional perspective does not address the fundamental issue of business strategy necessary to explain the persistence of substantially different strategies among firms that are subjected to comparable levels of institutional pressures. In this chapter, we present current research arguing that such firms adopt heterogeneous sets of environmental management practices despite facing common institutional pressures because organizational characteristics lead managers to interpret these pressures differently.
29 pages

The Intensive Margin of Technology Adoption
No. 11-026
Diego Comin and Martí Mestieri
Business, Government and the International Economy
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
We present a tractable model for analyzing the relationship between economic growth and the intensive and extensive margins of technology adoption. The "extensive" margin refers to the timing of a country's adoption of a new technology; the "intensive" margin refers to how many units are adopted (for a given size economy). At the aggregate level, our model is isomorphic to a neoclassical growth model, while at the microeconomic level it features adoption of firms at the extensive and the intensive margin. Based on a data set of 15 technologies and 166 countries our estimations of the model yield four main findings: (i) there are large cross-country differences in the intensive margin of adoption; (ii) differences in the intensive margin vary substantially across technologies; (iii) the cross-country dispersion of adoption lags has declined over time while the cross-country dispersion in the intensive margin has not; (iv) the cross- country variation in the intensive margin of adoption accounts for more than 40% of the variation in income per capita.
Keywords: Economic Growth, Technology Adoption, Cross-country studies.
JEL Codes: E13, O14, O33, O41.
45 pages

The international politics of IFRS harmonization
No. 11-132
Karthik Ramanna
Accounting and Management
June 2011, revised August 2011
Complete Text (HBS access only, Acrobat PDF Version)

Abstract:
The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize the jurisdictions' IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.
58 pages

Issuer Quality and the Credit Cycle
No. 11-065
Robin Greenwood and Samuel G. Hanson
Finance
January 2011, revised June 2011
Complete Text (Acrobat PDF Version)

Abstract:
We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.
46 pages

Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector
No. 11-060
Malcolm S. Salter
December 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper describes how the gaming of society's rules by corporations contributes to the problem of institutional corruption in the world of business. "Gaming" in its various forms involves the use of technically legal means to subvert the intent of society's rules in order to gain advantage over rivals, maximize reported earnings, maintain high credit ratings, preserve access to capital on favorable terms, and reap personal rewards-just mention several possible motives. It is one of the most corrosive forms of institutional corruption in business. "Institutional corruption" refers to company-sanctioned behavior and relationships that may be lawful but either harm the public interest or weaken the capacity of the institution to achieve its primary purposes. The most salient consequence of institutional corruption is diminished public trust in the governance of the institution. In this paper, I describe the twin phenomena of gaming and institutional corruption-and how the former contributes to the latter, often with the support of professional advisors at law and auditing firms. I illustrate these phenomena with examples from Enron, which (apart from outright fraud) pursued one of the greatest gaming strategies of all time. I also point to the implementation of the Dodd-Frank Act as an excellent source of clinical data pertaining to gaming in a more contemporary setting. I then discuss how gaming and other trust-destroying behavior have been encouraged by the short-term decision-making horizons of both corporate executives and managers of large investment funds, how those time horizons are largely driven by ways in which the performance of operating executives and investment fund managers is measured and rewarded, and how the directors of these entities become complicit in the gaming of society's rules and the spreading of institutional corruption. I end by suggesting possible remedies for curbing the ill effects of continued gaming of society's rules and restoring much needed public trust in the offending institutions.
39 pages

The Learning Effects of Monitoring
No. 11-053
Dennis Campbell, Marc Epstein, and Asis Martinez-Jerez
Accounting and Management
November 2010, revised April 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper investigates the relationship between monitoring, decision-making, and learning among lower level employees. We exploit a field-research setting in which business units vary in the "tightness" with which they monitor employee decisions. We find that tighter monitoring gives rise to implicit incentives in the form of sharp increases in employee termination linked to "excessive" use of decision-rights. Consistent with these implicit incentives, we find that employees in tightly monitored business units are less likely than their loosely monitored counterparts to: (1) use decision-rights; and (2) adjust for local information, including historical performance data, in their decisions. These decision-making patterns are associated with large and systematic differences in learning rates across business units. Learning is concentrated in business units with "loose monitoring" and entirely absent in those with "tight monitoring". The results are consistent with an experimentation hypothesis in which tight monitoring of decisions leads to more control but less learning.
44 pages

The Role of Organizational Scope and Governance in Strengthening Private Monitoring
No. 11-004
Lamar Pierce and Michael W. Toffel
Technology and Operations Management
July 2010, revised January 2011
Complete Text (Acrobat PDF Version)

Abstract:
Governments and other organizations often outsource activities to achieve cost savings from market competition. Yet such benefits are often accompanied by poor quality resulting from moral hazard, which can be particularly onerous when outsourcing the monitoring and enforcement of government regulation. In this paper, we argue that the considerable moral hazard associated with private regulatory monitoring can be mitigated by the scope of the monitoring organizations' product/service portfolios and by their private governance mechanisms. These organizational characteristics affect the stringency of monitoring through reputation, customer loyalty, differential impacts of government sanctions, and the standardization and internal monitoring of operations. We test our theory in the context of vehicle-emissions testing in a state in which the government has outsourced these inspections to the private sector. Analyzing millions of emissions tests, we find empirical support for our hypotheses that particular product portfolios and forms of governance can mitigate moral hazard.
42 pages

Dynamically Integrating Knowledge in Teams: Transforming Resources into Performance
No. 11-009
Heidi K. Gardner, Francesca Gino, and Bradley R. Staats
Organizational Behavior; Negotiation, Organizations & Markets
July 2010, revised September 2011
Complete Text (Acrobat PDF Version)

Abstract:
In knowledge-based environments, teams must develop a systematic approach to integrating knowledge resources throughout the course of projects in order to perform effectively. Yet, many teams fail to do so. Drawing on the resource-based view of the firm, we examine how teams can develop a knowledge-integration capability to dynamically integrate members' resources into higher performance. We distinguish among three sets of resources: relational, experiential, and structural, and propose that they differentially influence a team's knowledge-integration capability. We test our theoretical framework using data on knowledge workers in professional services, and discuss implications for research and practice.
56 pages

Leviathan as a Minority Shareholder: A Study of Equity Purchases by the Brazilian National Development Bank (BNDES), 1995-2003
No. 11-073
Sergio G. Lazzarini and Aldo Musacchio
Business, Government and the International Economy
January 2011
Complete Text (Acrobat PDF Version)

Abstract:
There is a growing literature comparing the performance of private vs. state-owned companies. Yet, there is little work examining the effects of having the government as a minority shareholder of private companies. We conduct such a study using data for 296 publicly-traded corporations in Brazil, looking at the effects of equity purchases by the National Bank for Economic and Social Development (BNDES) on firm performance between 1995 and 2003. Our fixed-effects regressions show that BNDES's purchases of equity lead to increases in return on assets and investment in fixed assets. Finally, we find that the positive effect of BNDES' equity purchases is reduced when the target firms belong to state-owned and private pyramidal groups. Therefore, our argue that having development banks owning minority stakes can have a positive effect on performance as long as they promote long-term investments and are shielded from governmental interference and potential minority shareholder expropriation.
29 pages

Making the Numbers? "Short Termism" & The Puzzle of Only Occasional Disaster
No. 11-033
Nelson P. Repenning and Rebecca M. Henderson
General Management, Strategy
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
Much recent work in strategy and popular discussion suggests that an excessive focus on "managing the numbers" --delivering quarterly earnings at the expense of longer term investments--makes it difficult for firms to make the investments necessary to build competitive advantage. "Short termism" has been blamed for everything from the decline of the US automobile industry to the low penetration of techniques such as TQM and continuous improvement. Yet a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investment to manage earnings and are rewarded for doing so. This paper presents a model that can reconcile these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates gradually over time, a firm's proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm's capability is close to a critical "tipping threshold". When the firm operates above this threshold, managing earnings smoothes revenue with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline. Our results have important implications for understanding managerial incentives and the internal processes that lead to sustained advantage.
39 pages

Mandatory IFRS Adoption and Financial Statement Comparability
No. 11-109
Francois Brochet, Alan Jagolinzer, and Edward J. Riedl
Accounting and Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
This study examines the effect of mandatory International Financial Reporting Standards (IFRS) adoption on financial statement comparability. To isolate the effects of changes in comparability, we examine changes to information asymmetry for firms domiciled in the UK. UK domestic standards that preceded IFRS adoption are considered very similar to IFRS (Bae et al. 2008); accordingly, we use the UK as a setting to isolate changes to the information environment relating to IFRS adoption that more likely to reflect changes in comparability versus information quality. If IFRS adoption improves financial statement comparability across firms, we predict this should reduce private information benefits. Empirical results confirm these predictions. Specifically, abnormal returns to two proxies for private information (insider purchases and analyst recommendation upgrades) are reduced following IFRS adoption. Similar results are obtained for subsamples that further isolate the reduction in private information as attributable to increases in comparability: firms having low amounts of reconciling items between UK GAAP and IFRS, and firms having ex ante high quality information environments. Together, the results are consistent with mandatory IFRS adoption leading to enhanced comparability.
Keywords: IFRS, comparability, private information
51 pages

From Counting Risk to Making Risk Count: Boundary-Work in Risk Management
No. 11-069
Anette Mikes
Accounting and Management
January 2011, revised March 2011
Complete Text (Acrobat PDF Version)

Abstract:
For two decades, risk management has been gaining ground in banking. In light of the recent financial crisis, several commentators concluded that the continuing expansion of risk measurement is dysfunctional (Taleb, 2007; Power, 2009). This paper asks whether the expansion of measurement-based risk management in banking is as inevitable and as dangerous as Power and others speculate. Based on two detailed case studies and 53 additional interviews with risk-management staff at five other major banks over 2001-2010, this paper shows that relentless risk measurement is contingent on what I call the "calculative culture" (Mikes, 2009a). While the risk functions of some organizations have a culture of quantitative enthusiasm and are dedicated to risk measurement, others, with a culture of quantitative scepticism, take a different path, focusing instead on risk envisionment, aiming to provide top management with alternative future scenarios and with expert opinions on emerging risk issues. In order to explain the dynamics of these alternative plots, I show that risk experts engage in various kinds of boundary-work (Gieryn, 1983, 1999), sometimes to expand and sometimes to limit areas of activity, legitimacy, authority, and responsibility.
47 pages

Measuring Teamwork in Health Care Settings: A Review of Survey Instruments
No. 11-116
Melissa A. Valentine, Ingrid M. Nembhard, and Amy C. Edmondson
Technology and Operations Management
May 2011, revised September 2011
Complete Text (Acrobat PDF Version)

Abstract:
Objective. To identify, review, and evaluate survey instruments used to assess teamwork, a process critical to delivering quality care, so as to facilitate high quality research on this topic.
Data sources. The ISI Web of Knowledge database, which includes articles from MEDLINE, Social Science Citation Index, and Science Citation Index.
Study design. We conducted a systematic review of articles published before January 2010 to identify survey instruments used to measure teamwork and determine their psychometric validity.
Data extraction. We identified relevant articles using the search terms team, teamwork, work groups, or collaboration, in combination with survey or questionnaire.
Principal findings. We found 36 scales that measured teamwork; only 9 scales met all of the criteria for psychometric validity. Twelve of the 36 scales have shown significant relationship to non-self-report outcomes of interest. Each of these 12 scales assessed some dimension of the quality of social interactions between members. All but one also assessed some dimension of the quality of task-related interactions.
Conclusions. Numerous survey instruments exist to measure teamwork. Few have demonstrated all of the psychometric properties recommended for use, and there is inconsistency in conceptualizations of teamwork. More research is needed to develop and refine measures of teamwork for reliable use by researchers and practitioners/managers.
Keywords: Teams, teamwork, psychometric properties, survey instruments
35 pages

Memory Lane and Morality: How Childhood Memories Promote Prosocial Behavior
No. 11-079
Francesca Gino and Sreedhari D. Desai
Negotiation, Organizations & Markets
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
Four experiments demonstrated that recalling memories from one's own childhood lead people to experience feelings of moral purity and to behave prosocially. In Experiment 1, participants instructed to recall memories from their childhood were more likely to help the experimenter with a supplementary task than were participants in a control condition, and this effect was mediated by self-reported feelings of moral purity. In Experiment 2, the same manipulation increased the amount of money participants donated to a good cause, and self-reported feelings of moral purity mediated this relationship. In Experiment 3, participants who recalled childhood memories judged the ethically-questionable behavior of others more harshly, suggesting that childhood memories lead to altruistic punishment. Finally, in Experiment 4, compared to a control condition, both positively-valenced and negatively-valenced childhood memories led to higher empathic concern for a person in need, which, in turn increased intentions to help.
Keywords: Childhood; Ethics; Memories; Morality; Prosocial Behavior; Purity
48 pages

Modularity for Value Appropriation - How to Draw the Boundaries of Intellectual Property
No. 11-054
Joachim Henkel and Carliss Y. Baldwin
Finance
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
The existing theory of modularity explains how modular designs create value. We extend this theory to address value appropriation. A product or process design that is modular with respect to intellectual property (IP) allows firms to better capture value in situations where knowledge and value creation are distributed across many actors. We propose a theory of IP modularity based on value maximization net of transaction and agency costs. We then use case examples to extend the theory into practical settings and derive strategic recommendations and empirical predictions.
Keywords: Modularity, value appropriation, intellectual property, open innovation, design
45 pages

Much Ado About Nothing: Expropriation and compensation in Peru and Venezuela, 1968-75
No. 11-097
Noel Maurer
Business, Government and the International Economy
March 2011
Complete Text (Acrobat PDF Version)

18 pages

Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide
No. 11-011
Jordan I. Siegel, Lynn Pyun, and B.Y. Cheon
Strategy
August 2010, revised January 2011
Complete Text (Acrobat PDF Version)

Abstract:
The organizational theory of the multinational firm holds that foreignness is a liability, and specifically that lack of embeddedness in host-country social networks is a source of competitive disadvantage; meanwhile the literature on labor market discrimination suggests that exploiting the bigotry of others can be a source of competitive advantage. We seek to turn the former literature somewhat on its head by building on insights from the latter. Specifically, we argue that multinationals wield a particularly significant competitive weapon: as outsiders, they can identify social schisms in host labor markets and exploit them for their own competitive advantage. Using two unique data sets from South Korea, we show that in the 2000s multinationals have derived significant advantage in the form of improved profitability by aggressively hiring an excluded group, women, in the local managerial labor market. Our results are economically meaningful, realistic in size, and robust to the inclusion of firm fixed effects. Multinationals, even those whose home markets discriminate against women, often show signs of having seen the strategic opportunity. Though the host market is moving toward a new equilibrium freer of discrimination, that movement is relatively slow, presenting a multiyear competitive opportunity for multinationals.
53 pages

Naiveté and Cynicism in Negotiations and Other Competitive Contexts
No. 11-066
Chia-Jung Tsay, Lisa L. Shu, and Max H. Bazerman
Negotiation, Organizations & Markets
January 2011, revised May 2011
Complete Text (Acrobat PDF Version)

Abstract:
A wealth of literature documents how the common failure to think about the self-interests of others contributes to suboptimal outcomes. Yet sometimes, an excess of cynicism appears to lead us to over-think the actions of others and make negative attributions about their motivations without sufficient cause. In the process, we may miss opportunities that greater trust might capture. We review the research on when people expect too little and or too much self-interest in the intentions of others, as contrasted with rational behavior. We also discuss the antecedents and consequences of these naïve and cynical errors, as well as some potential strategies to buffer against their effects and achieve better outcomes in competitive contexts.
42 pages

The New Face of Chinese Industrial Policy: Making Sense of Anti-Dumping Cases in the Petrochemical and Steel Industries
No. 11-042
Regina Abrami and Yu Zheng
October 2010
Complete Text (Acrobat PDF Version)

Abstract:
Why have China's petrochemical and steel industries behaved so differently in seeking trade protection through antidumping measures? We argue that the patterning of antidumping actions is best explained in terms of the political economy of economic restructuring in pillar industries and its effect on industry structures. In the petrochemical industry, the shift toward greater horizontal consolidation and vertical integration reduces the collective action problems associated with antidumping petitions among upstream companies. It also weakens downstream companies lobbying in favor of the general protection of highly integrated conglomerates. In the steel industry, by contrast, national industrial policy in the absence of exogenous economic shocks fails to weaken local state interests sufficiently. Fragmented upstream and downstream channels instead persist, with strong odds against upstream suppliers waging a successful defense of material interests.
46 pages

A New Paradigm of Individual, Group and Organizational Performance
No. 11-006
Werner Erhard, Michael C. Jensen, and The Barbados Group
July 2010
Complete Text (Acrobat PDF Version)

Abstract:
"The committee is therefore unable to draw conclusions, based on scientific evidence, on what does or does not work to enhance organizational performance"

Committee on Techniques for the Enhancement of Human Performance of the U.S. National Research Council Commission on Behavioral and Social Sciences and Education (Druckman et al. 1997)

The current model of performance, while having produced many improvements in performance during its 100 year reign, has been essentially exhausted leaving in its wake little more than a labyrinth of explanations for human performance. Given that models are constrained and shaped by the paradigm from within which they are generated, a truly new model of performance would require a new paradigm of performance.

Our new model of performance (a part of our new paradigm of performance), rather than adding more explanations for why people do what they do and why they don't do what they don't do, provides actionable access to the source of performance. This actionable access to the source of performance opens up a new realm of opportunity for study and research, and for new and more effective interventions, applications, and practices for improving individual, group, and organizational performance.
112 pages

A note on Fairness and Redistribution
No. 11-059
Rafael Di Tella and Juan Dubra
Business, Government and the International Economy
December 2010
Complete Text (Acrobat PDF Version)

Abstract:
We note some problems in Alesina and Angeletos (2005) and suggest a way to maintain the key insight of that paper, which is that a demand for fairness could lead to different economic systems such as those observed in France versus the US (multiple equilibria).
Keywords: Inequality, taxation, redistribution, political economy.
JEL Codes: D31, E62, H2, P16.
16 pages

Organizations in the Shadow of Communities
No. 11-131
Siobhan O'Mahony and Karim R. Lakhani
Technology and Operations Management
June 2011
Complete Text (Acrobat PDF Version)

Abstract:
The concept of a community form is drawn upon in many subfields of organizational theory. Although there is not much convergence on a level of analysis, there is convergence on a mode of action that is increasingly relevant to a knowledge-based economy marked by porous and shifting organizational boundaries. We argue that communities play an underappreciated role in organizational theory - critical not only to occupational identity, knowledge transfer, sense-making, social support, innovation, problem-solving and collective action but, enabled by information technology, increasingly providing socio-economic value - in areas once inhabited by organizations alone. Hence we posit that organizations may be in the shadow of communities. Rather than push for a common definition, we link communities to an organization's evolution: its birth, growth and death. We show that communities represent both opportunities and threats to organizations and conclude with a research agenda that more fully accounts for the potential of community forms to be a creator (and a possible destroyer) of value for organizations.
49 pages

Overconfidence by Bayesian Rational Agents
No. 11-049
Eric Van den Steen
Strategy
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
This paper derives two mechanisms through which Bayesian-rational individuals with differing priors will tend to be relatively overconfident about their estimates and predictions, in the sense of overestimating the precision of these estimates. The intuition behind one mechanism is slightly ironic: in trying to update optimally, Bayesian agents overweight information of which they over-estimate the precision and underweight in the opposite case. This causes overall an over-estimation of the precision of the final estimate, which tends to increase as agents get more data.
23 pages

Payout Taxes and the Allocation of Investment
No. 11-040
Bo Becker, Marcus Jacob, and Martin Jacob
Finance
October 2010, revised November 2010, March 2011, September 2011
Complete Text (Acrobat PDF Version)

Abstract:
When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). High taxes will favor firms who can finance internally. If there are no perfect substitutes for equity finance, payout taxes may thus change the investment behavior of firms. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any aggregate effects, payout taxes change the allocation of capital.
JEL Codes: G30, G31, H25.
52 pages

Platform Competition under Asymmetric Information
No. 11-080
Hanna Halaburda and Yaron Yehezkel
Strategy
February 2011, revised June 2011
Complete Text (Acrobat PDF Version)

Abstract:
In the context of platform competition in a two-sided market, we study how ex-ante uncertainty and ex-post asymmetric information concerning the value of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which result in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market.
55 pages

A Positive Approach to Studying Diversity in Organizations
No. 11-024
Lakshmi Ramarajan and David Thomas
Organizational Behavior
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
In this article, we distinguish between positive findings in diversity research and a positive approach to studying diversity. We first review and integrate research on diversity from organizational behavior, social psychology and sociology from 1998-2010 that has already documented positive findings in relation to diversity. We discuss this research using two broad categories: (1) What is positively affected by diversity? (Positive for what)? This category consists of research that has shown instances of intergroup equality, positive intergroup relations and the high performance of diverse groups. (2) When is diversity positive (Positive when)? This category describes organizational and individual level conditions under which intergroup outcomes, relations and group performance are positive. Second, we discuss a positive approach to studying diversity and describe some examples of organizational scholarship that has taken such an approach. We also discuss some of the limitations of taking a positive approach to diversity and propose some ways in which diversity scholars interested in taking a positive approach can overcome these limitations. By illuminating both positive findings in diversity research and a positive approach to studying diversity, we hope to spark more research that examines the beneficial and empowering aspects of difference for individuals and groups in organizations.
Keywords: Diversity, positive
38 pages

The Power of Political Voice: Women's Political Representation and Crime in India
No. 11-092
Lakshmi Iyer, Anandi Mani, Prachi Mishra, and Petia Topalova
Business, Government and the International Economy
March 2011, revised July 2011
Complete Text (Acrobat PDF Version)

Abstract:
Using state-level variation in the timing of political reforms, we find that an increase in female representation in local government induces a large and significant rise in documented crimes against women in India. Our evidence suggests that this increase is good news, driven primarily by greater reporting rather than greater incidence of such crimes. In contrast, we find no increase in crimes against men or gender-neutral crimes. We also examine the effectiveness of alternative forms of political representation: large scale membership of women in local councils affects crime against them more than their presence in higher level leadership positions.
Keywords: crime, women's empowerment, minority representation, voice
JEL Codes: J12, J15, J16, P16
53 pages

Preference Heterogeneity and Optimal Capital Income Taxation
No. 11-104
Mikhail Golosov, Maxim Troshkin, Aleh Tsyvinski, and Matthew Weinzierl
Business, Government and the International Economy
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
We examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. In an environment where commodity taxes are allowed to be nonlinear functions of income and consumption, we derive an analytical expression that reveals the forces determining optimal commodity taxation. We then calibrate the model to evidence on the relationship between skills and preferences and extensively examine the quantitative case for taxes on future consumption (saving). In our baseline case of a unit intertemporal elasticity, optimal capital income tax rates are 2% on average and 4.5% on high earners. We find that the intertemporal elasticity of substitution has a substantial effect on optimal capital taxation. If the intertemporal elasticity is one-third, optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, optimal rates fall to 0.6% on average and 1.6% on high earners. Nevertheless, in all cases that we consider the welfare gains of using optimal capital taxes are small.
37 pages

The Profits of Power: Commerce and Realpolitik in Eurasia
No. 11-028
Rawi Abdelal
Business, Government and the International Economy
September 2010, revised October 2010
Complete Text (Acrobat PDF Version)

58 pages

Prosocial Spending and Well-Being: Cross-Cultural Evidence for a Psychological Universal
No. 11-038
Lara B. Aknin, Christopher P. Barrington-Leigh, Elizabeth W. Dunn, John F. Helliwell, Robert Biswas-Diener, Imelda Kemeza, Paul Nyende, Claire Ashton-James, and Michael I. Norton
Marketing
September 2010
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Abstract:
This research provides the first support for a possible psychological universal: human beings around the world derive emotional benefits from using their financial resources to help others (prosocial spending). Analyzing survey data from 136 countries, we show that prosocial spending is consistently associated with greater happiness. To test for causality, we conduct experiments within two very different countries (Canada and Uganda) and show that spending money on others has a consistent, causal impact on happiness. In contrast to traditional economic thought—which places self-interest as the guiding principle of human motivation—our findings suggest that the reward experienced from helping others may be deeply ingrained in human nature, emerging in diverse cultural and economic contexts.
26 pages

The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees
No. 11-056
Ian Larkin, Lamar Pierce, and Francesca Gino
Negotiation, Organizations & Markets
December 2010, revised May 2011, July 2011
Complete Text (Acrobat PDF Version)

Abstract:
Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. We instead focus on the strategic compensation of non-executive employees, arguing that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance-based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance-based compensation, building a theoretical framework predicting more prominent use of team-based, seniority-based, and flatter compensation. We argue that compensation is strategic not only in motivating and attracting the worker being compensated, but also in its impact on peer workers and the firm's complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory.
Keywords: compensation; pay; incentives; principal-agent models; motivation; psychology
43 pages

When Smaller Menus Are Better: Variability in Menu-Setting Ability
No. 11-086
David Goldreich and Hanna Halaburda
Strategy
February 2011, revised April 2011, August 2011, December 2011
Complete Text (Acrobat PDF Version)

Abstract:
Are large menus better than small menus? Recent literature argues that individuals' apparent preference for smaller menus can be explained by choosers' behavioral biases or informational limitations. These explanations imply that absent behavioral or informational effects, larger menus would be objectively better. However, in an important economic context ― 401(k) pension plans ― we find that larger menus are objectively worse than smaller menus, as measured by the maximum Sharpe ratio achievable. We propose a model in which menu setters differ in their ability to pre-select the menu. We show that when the cost of increasing the menu size is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior. This results in a negative relation between menu size and menu quality: smaller menus are better than larger menus.
Keywords: menu, menu setting, choice, pension plans, 401(k)
JEL Codes: D01, G23
33 pages

Quantity vs. Quality: Exclusion By Platforms With Network Effects
No. 11-125
Andrei Hagiu
Strategy
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper provides a simple model of platforms with direct network effects, in which users value not just the quantity (i.e. number) of other users who join, but also their average quality in some dimension. A monopoly platform is more likely to exclude low-quality users when users place more value on average quality and less value on total quantity. With competing platforms, the effect of user preferences for quantity is reversed. Furthermore, exclusion incentives depend in a non-trivial way on the proportion of high-quality users in the overall population and on their opportunity cost of joining the platform relative to low-quality users. The net effect of these two parameters depends on whether they have a stronger impact on the gains from exclusion (higher average quality) or on its costs (lower quantity).
Keywords: multi-sided platforms, network effects, exclusion, quality and quantity.
JEL Codes: L1, L2, L8
24 pages

Regulating for Legitimacy: Consumer Credit Access in France and America
No. 11-047
Gunnar Trumbull
Business, Government and the International Economy
November 2010
Complete Text (Acrobat PDF Version)

Abstract:
Theories of legitimate regulation have emphasized the role of governments either in fixing market failures to promote greater efficiency, or in restricting the efficient functioning of markets in order to pursue public welfare goals. In either case, features of markets serve to justify regulatory intervention. I argue that this causal logic must sometimes be reversed. For certain areas of regulation, its function must be understood as making markets legitimate. Based on a comparative historical analysis of consumer lending in the United States and France, I argue that national differences in the regulation of consumer credit had their roots in the historical conditions by which the small loan sector came to be legitimized. Americans have supported a liberal regulation of credit because they have been taught that access to credit is welfare promoting. This perception emerged from an historical coalition between commercial banks and NGOs that promoted credit as the solution to a range of social ills. The French regulate credit tightly because they came to see credit as both economically risky and a source of reduced purchasing power. This attitude has its roots in the early postwar lending environment, in which loans were seen to be beneficial only if they were accompanied by strong government protections. These cases suggest that national differences in regulation may trace to historically contingent conditions under which markets are constructed as legitimate.
38 pages

Reversing the Queue: Performance, Legitimacy, and Minority Hiring
No. 11-032
Andrew Hill and David Thomas
Organizational Behavior
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
Studies of minority hiring have found that poor-performing firms or firms in highly competitive contexts are more likely to hire minority candidates. However, most work has examined hiring for entry and mid-level positions, not senior management. Management positions differ in terms of the amount of uncertainty in identifying candidates qualified for the job; in the intensity of external evaluations of both managerial and firm performance; and in the level of accountability for that performance. Furthermore, the influence of senior minority managers on hiring practices may differ substantially, depending on where a manager sits in the firm's hierarchy. Examining hiring practices on coaching staffs of teams in America's National Football League, from 1970-2007, we find that better-performing teams are less likely to hire minorities to fill lower-level and mid-level coaching positions (as predicted by prior literature on labor queues), but that such teams are more likely to hire minorities into leadership positions. We also find that minority head coaches hire more minorities for subordinate coaching jobs, but that the presence of a minority offensive or defensive coordinator (with a white head coach) is a significant, negative predictor of minority hiring in junior and mid-level positions.
42 pages

Risky Trust: How Multi-entity Teams Develop Trust in a High Risk Endeavor
No. 11-089
Faaiza Rashid and Amy C. Edmondson
Technology and Operations Management
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper explicates the challenge of risky trust, which we define as trust that exists between parties vulnerable to high economic, legal or reputational risks at individual or organizational levels. Drawing from analyses of data collected in a grounded case study of a multi-million dollar construction project, we identify dimensions, antecedents and behavioral consequences of risky trust. Undertaken in the United States construction industry, a context known for its lack of trust, our study offers insights for trust repair.
38 pages

Schumpeterian competition and diseconomies of scope; illustrations from the histories of Microsoft and IBM
No. 11-077
Timothy Bresnahan, Shane Greenstein, and Rebecca Henderson
General Management, Strategy
January 2011
Complete Text (Acrobat PDF Version)

Abstract:
We address a longstanding question about the causes of creative destruction. Dominant incumbent firms, long successful in an existing technology, are often much less successful in new technological eras. This is puzzling, since a cursory analysis would suggest that incumbent firms have the potential to take advantage of economies of scope across new and old lines of business and, if economies of scope are unavailable, to simply reproduce entrant behavior by creating a "firm within a firm." There are two broad streams of explanation for incumbent failure in these circumstances. One posits that incumbents fear cannibalization in the market place, and so under-invest in the new technology. The second suggests that incumbent firms develop organizational capabilities and cognitive frames that make them slow to "see" new opportunities and that make it difficult to respond effectively once the new opportunity is identified. In this paper we draw on two of the most important historical episodes in the history of the computing industry, the introduction of the PC and of the browser, to develop a third hypothesis. Both IBM and Microsoft, having been extremely successful in an old technology, came to have grave difficulties competing in the new, despite some dramatic early success. We suggest that these difficulties do not arise from cannibalization concerns nor from inherited cognitive frames. Instead they reflect diseconomies of scope rooted in assets that are necessarily shared across both businesses. We show that both Microsoft and IBM were initially very successful in creating free standing business units that could compete with entrants on their own terms, but that as the new businesses grew, the need to share key firm level assets imposed significant costs on both businesses and created severe organizational conflict. In IBM and Microsoft's case this conflict eventually led to control over the new business being given to the old and that in both cases effectively crippled the new business.
70 pages

Search Diversion, Rent Extraction and Competition
No. 11-124
Andrei Hagiu and Bruno Jullien
Strategy
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper studies search diversion by competing intermediaries connecting consumers with third-party stores. First, we show that endogenizing store entry leads to more search diversion when intermediaries cannot price discriminate among stores because the intermediaries' incentives are aligned with the marginal stores. Second, competition among intermediaries may lead to more or less search diversion relative to monopoly, depending on whether consumers multihome and stores singlehome or vice-versa.
Keywords: Market Intermediation, Search, Two-Sided Markets, Platform Design, Platform Competition.
JEL Codes: L1, L2, L8
30 pages

Signaling to Partially Informed Investors in the Newsvendor Model
No. 11-105
Vishal Gaur, Richard Lai, Ananth Raman, and William Schmidt
Technology and Operations Management
April 2011
Complete Text (Acrobat PDF Version)

Abstract:
We investigate a puzzling phenomenon in which firms make investment decisions that purposefully do not maximize expected profits. Using an extension to the newsvendor model, we focus on a relatively common scenario in which the firm's investor has imperfect information concerning the quality of the firm's investment opportunities. We apply Perfect Bayesian equilibrium solution concepts and confirm that over a range of reasonable model parameters the firm's investment decision does not maximize expected profits. Surprisingly, this includes instances in which a firm with a higher quality investment opportunity finds it attractive to underinvest, thereby behaving as if she faces a lower quality investment opportunity. This is particularly interesting as prior research in the finance literature has shown that firms will overinvest in high quality projects when investors have imperfect information about the quality of the firm's opportunities. While we conduct our analysis in the context of an inventory stocking decision, our model is generalizable to other types of capacity investment decisions.
27 pages

Managerial practices that promote voice and taking charge among frontline workers
No. 11-005
Julia Adler-Milstein, Sara J. Singer, and Michael W. Toffel
Technology and Operations Management
July 2010, revised August 2010, September 2011
Complete Text (Acrobat PDF Version)

Abstract:
Process-improvement ideas often come from frontline workers who speak up by voicing concerns about problems and by taking charge to resolve them. We hypothesize that organization-wide process-improvement campaigns encourage both forms of speaking up, especially voicing concern. We also hypothesize that the effectiveness of such campaigns depends on the prior responsiveness of line managers. We test our hypotheses in the healthcare setting, in which problems are frequent. We use data on nearly 7,500 reported incidents extracted from an incident-reporting system that is similar to those used by many organizations to encourage employees to communicate about operational problems. We find that process-improvement campaigns prompt employees to speak up and that campaigns increase the frequency of voicing concern to a greater extent than they increase taking charge. We also find that campaigns are particularly effective in eliciting taking charge among employees whose managers have been relatively unresponsive to previous instances of speaking up. Our results therefore indicate that organization-wide campaigns can encourage voicing concerns and taking charge, two important forms of speaking up. These results can enable managers to solicit ideas from frontline workers that lead to performance improvement.
43 pages

Advertising Disclosures: Measuring Labeling Alternatives in Internet Search Engines
No. 11-048
Benjamin Edelman and Duncan S. Gilchrist
Negotiation, Organizations & Markets
November 2010, revised January 2011, January 2012
Complete Text (Acrobat PDF Version)

Abstract:
In an online experiment, we measure users' interactions with search engines, both in standard configurations and in modified versions with clearer labels identifying search engine advertisements. In particular, for a random subset of users, we change "Sponsored links" or "Ads" labels to instead read "Paid Advertisements." Relative to users receiving the "Sponsored link" or "Ad" labels, users receiving the "Paid Advertisement" label click 25% and 27% fewer advertisements, respectively. Users seeing "Paid Advertisement" labels also correctly report that they click fewer advertisements, controlling for the number of advertisements they actually click. Results are most pronounced for commercial searches, and for vulnerable users with low education and little online experience.
Keywords: Internet advertising, search engines, disclosure, regulation, consumer protection, survey methods
JEL Codes: L51, L86, M37, M38, C83
27 pages

Emergent Design: Creating a New Business in a Nascent Industry
No. 11-099
Tiona Zuzul and Amy C. Edmondson
Technology and Operations Management
March 2011, revised April 2011, January 2012
Complete Text (Acrobat PDF Version)

Abstract:
This paper reports on a field study of the founding of a new company in a nascent industry. We examine how the company's founders, facing the high ambiguity inherent in very early phases of a new industry, developed an idea for a new venture. Our qualitative data reveal the company's founding as a social, integrative process that unfolded through a series of collaborative, ad-hoc interactions. By aggregating previously identified problems in several existing industries, the founders articulated an innovative idea for a new venture in a nascent industry. The seeds of the new venture existed in the company's founders' disparate beliefs about actionable problems, but the idea that formed the venture was an innovative integration of these problems. We develop a process model that explains how, under conditions of ambiguity, new businesses can take shape through emergent design: a collaborative social exchange that resembles the innovation process. We identify three factors-psychological safety, cognitive flexibility, and psychological ownership - that enable the three steps that comprise this process. By illuminating the formation process of an entrepreneurial organization, we contribute to organizational literatures on entrepreneurship, collective decision-making, and innovation.
41 pages

Specialization and Variety in Repetitive Tasks: Evidence from a Japanese Bank
No. 11-015
Bradley R. Staats and Francesca Gino
Negotiation, Organizations & Markets
August 2010
Complete Text (Acrobat PDF Version)

Abstract:
Sustaining operational productivity in the completion of repetitive tasks is critical to many organizations' success. Yet research points to two different work-design related strategies for accomplishing this goal: specialization to capture the benefits of repetition or variety to keep workers motivated and allow them to learn. In this paper, we investigate how these two strategies may bring different benefits within the same day and across days. Additionally, we examine the impact of these strategies on both worker productivity and workers' likelihood of staying at a firm. For our empirical analyses, we use two and a half years of transaction data from a Japanese bank's home loan application processing line. We find that over the course of a single day, specialization, as compared to variety, is related to improved worker productivity. However, when we examine workers' experience across days we find that variety, or working on different tasks, helps improve worker productivity. We also find that workers with higher variety are more likely to stay at the firm. Our results identify new ways to improve operational performance through the effective allocation of work.
Keywords: Job Design, Learning, Productivity, Specialization, Turnover, Variety, Work Fragmentation
34 pages

The Surprising Power of Age-Dependent Taxes
No. 11-114
Matthew Weinzierl
Business, Government and the International Economy
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper provides a new, empirically-driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labor income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. PSID, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers, and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0.6 and 1.5 percent of aggregate annual consumption, and it captures more than 60 percent of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto-improving, the welfare gain is nearly as large.
49 pages

Technology Diffusion and Postwar Growth
No. 11-027
Diego Comin and Bart Hobijn
Business, Government and the International Economy
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
In the aftermath of World War II, the world's economies exhibited very different rates of economic recovery. We provide evidence that those countries that caught up the most with the U.S. in the postwar period are those that also saw an acceleration in the speed of adoption of new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. We interpret this as supportive of the interpretation that technology transfers from the U.S. to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.
Keywords: wars, economic growth, technology adoption, cross-country studies.
JEL Codes: E13, O14, O33, O41.
62 pages

Temptation at work
No. 11-090
Alessandro Bucciol, Daniel Houser, and Marco Piovesan
February 2011
Complete Text (Acrobat PDF Version)

Abstract:
To encourage worker productivity offices prohibit Internet use. Consequently, many employees delay Internet activity to the end of the workday. Recent work in social psychology, however, suggests that using willpower to delay gratification can negatively impact performance. We report data from an experiment where subjects in a Willpower Treatment are asked to resist the temptation to join others in watching a humorous video for 10 minutes. In relation to a baseline treatment that does not require willpower, we show that resisting this temptation detrimentally impacts economic productivity on a subsequent task.
Keywords: temptation, willpower, lab experiment
JEL Codes: C93, D01.
15 pages

Testing Coleman's Social-Norm Enforcement Mechanism: Evidence from Wikipedia
No. 11-055
Mikolaj Jan Piskorski and Andreea Gorbatai
Strategy
December 2010, revised September 2011
Complete Text (Acrobat PDF Version)

Abstract:
Since Durkheim, sociologists have believed that dense network structures lead to fewer norm violations. Coleman (1990) proposed one explanatory mechanism, arguing that dense networks provide an opportunity structure to reward those who punish norm violators, leading to more frequent punishment and in turn fewer norm violations. Despite ubiquitous scholarly references to Coleman's theory, little empirical work has directly tested it in large-scale natural settings with longitudinal data. We undertake such a test using records of norm violations during the editing process on Wikipedia, the largest user-generated on-line encyclopedia. These data allow us to track all three elements required to test Coleman's mechanism: norm violations, punishments for such violations and rewards for those who punish violations. The results are broadly consistent with Coleman's mechanism.
76 pages

The Three Foundations of A Great Life, Great Leadership, and A Great Organization
No. 11-122
Michael C. Jensen
May 2011
Complete Text (Acrobat PDF Version)

Abstract:
I argue here that the three factors my co-authors and I identify as constituting the foundation for being a leader and the effective exercise of leadership can also be seen as the foundations not only for great leadership, but also for a high quality personal life and an extraordinary organization. One can see this as a "value free" approach to values because, 1) integrity as we define it (being whole and complete) is a purely positive proposition, 2) authenticity is also a purely positive proposition (being and acting consistent with who you hold yourself out to be for others and who you hold yourself to be for yourself), and 3) being committed to something bigger than oneself is also a purely positive proposition (that says nothing about what that commitment should be other than it be bigger than oneself).

For an application of these principles to the Goldman Sach's experience with the Abacus Mortgage Backed Securities Scandal see the appendix to the following talk: http://ssrn.com/abstract=1640302

Given as the Commencement address at the McDonough School of Business, Georgetown University Commencement Ceremonies, May 21, 2011. Video of the ceremonies (this address starts at about 10 minutes) is available at: http://www.georgetown.edu/video/1242670572193.html

Background:
This address is based on joint work with Werner Erhard (especially our leadership research program conducted with Steve Zaffron and Kari Granger over the last eight years). That research is designed to discover what it actually takes to create leaders - that is, to leave participants at the end of the course being leaders and effectively exercising leadership as their natural self expression.

Access to the full 795 pages of the slide-deck textbook and other material used in the Panchgani, India course taught in November 22-27, 2011 is available at: http://ssrn.com/abstract=1263835
Keywords: Values, Integrity, Authenticity, Bigger Than Oneself, Virtue, Normative, Positive
JEL Codes: D29, D63, D64, L21, M14, Z1
9 pages

To Groupon or Not to Groupon: The Profitability of Deep Discounts
No. 11-063
Benjamin Edelman, Sonia Jaffe, and Scott Duke Kominers
Negotiation, Organizations & Markets
December 2010, revised June 2011, October 2011
Complete Text (Acrobat PDF Version)

Abstract:
We examine the profitability and implications of online discount vouchers, a new marketing tool that offers consumers large discounts when they prepay for participating merchants' goods and services. Within a model of repeat experience good purchase, we examine two mechanisms by which a discount voucher service can benefit affiliated merchants: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers who have access to vouchers must systematically differ from―and typically be lower than―those of consumers who do not have access to vouchers. Offering vouchers is more profitable for merchants which are patient or relatively unknown, and for merchants with low marginal costs. Extensions to our model accommodate the possibilities of multiple voucher purchases and merchant price re-optimization.
Keywords: voucher discounts, Groupon, experience goods, repeat purchase
15 pages

Top Executive Background and Financial Reporting Choice
No. 11-088
Francois Brochet and Kyle Welch
Accounting and Management
February 2011, revised November 2011
Complete Text (Acrobat PDF Version)

Abstract:
We study the role of executive functional background in explaining management discretion in financial reporting. Taking goodwill impairment as our reporting setting, we focus on top executives (CEOs and CFOs) whose employment history includes experience in investment banking, private equity, venture capital or management consulting, as we expect these executives to have unique human capital and reputation concerns with respect to acquisitions and valuation modeling related to fair-value reporting. On average, we document that CFOs with prior transaction experience impair goodwill more frequently and in smaller amounts than other executives. Further investigation suggests that CFOs with prior transaction experience report goodwill that is more value relevant. This is consistent with CFO valuation expertise helping impair goodwill in a more informative manner. In contrast, CEOs with prior transaction experience appear to be subject to agency conflicts that affect their propensity to impair goodwill. Overall, our results not only suggest that executive functional background is a significant explanatory factor of financial reporting discretion, but also that a better understanding of its effect relies upon analyses of specific settings and predictions grounded in upper echelons theory and agency theory.
Keywords:goodwill impairment; executive background.
40 pages

The Unbundling of Advertising Agency Services: An Economic Analysis
No. 11-039
Mohammad Arzaghi, Ernst R. Berndt, James C. Davis, and Alvin J. Silk
September 2010
Complete Text (Acrobat PDF Version)

Abstract:
We address a longstanding puzzle surrounding the unbundling of services occurring over several decades in the U.S. advertising agency industry: What accounts for the shift from bundling to unbundling of services and the slow pace of change? Using Evans and Salinger's (2005, 2008) cost-based theory of bundling, we develop a simple model of an agency's decision to unbundle as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale available from providing media services. The key predictions of the model are supported by an econometric analysis of cross-sectional and pooled data from the quinquenial U.S. Censuses conducted between 1982 and 2007. Agencies are more likely to unbundle with increasing size and diversification but are less likely to do so with increasing age. Longitudinal growth in unbundling is partially explained by increases in media prices over time.
Keywords: Unbundling, Advertising Agencies
JEL Codes: M37, L84, D4
58 pages

Performance Tradeoffs in Team Knowledge Sourcing
No. 11-031
Bradley R. Staats, Melissa A. Valentine, and Amy C. Edmondson
Technology and Operations Management
September 2010, revised December 2010, May 2011, and October 2011
Complete Text (Acrobat PDF Version)

Abstract:
This research examines how teams organize knowledge sourcing (obtaining access to others' knowledge or expertise) and investigates the performance trade-offs involved in two approaches to knowledge sourcing in teams. One approach a team can take is to specialize, such that a small number of members source knowledge on behalf of the team. This specialized knowledge-sourcing approach lowers search costs. The other approach has most or all team members engaging in knowledge sourcing. This broad approach means that more team members interact directly with the knowledge source, and thus may understand the knowledge better. These options present a sourcing paradox: teams cannot reap the advantages of specialized sourcing and the advantages of broad sourcing. They face performance tradeoffs. Further under some conditions performance tradeoffs will be more pronounced. Specifically, specialized knowledge sourcing depends on within team knowledge sharing, and so conditions that hinder knowledge sharing in a team are likely to reduce the effectiveness of the specialized approach. Using archival data from several hundred software development projects in an Indian software services firm, we find support for most of our hypotheses. Our findings offer insight for theory and practice into how team organization, organizational knowledge resources, and within-team knowledge sharing can aid team performance.
Keywords: Knowledge Management, Knowledge Sharing, Knowledge Sourcing, Learning, Performance Tradeoffs, Teams
35 pages

Valuation when Cash Flow Forecasts are Biased
No. 11-036
Richard S. Ruback
Finance
October 2010
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Abstract:
This paper focuses adaptations to the discount cash flow (DCF) method when valuing forecasted cash flows that are biased measures of expected cash flows. I imagine a simple setting where the expected cash flows equal the forecasted cash flows plus an omitted downside. When the omitted downside is temporary, the adjustment is to deflate the forecasts and to set the discount rate equal to the cost of capital. However, when the downside is permanent, the adjustment is to deflate the cash flows and to increase the discount rate so that it includes the cost of capital plus the probability of a downside.
29 pages

A 'Value-Free' Approach To Values (PDF file of PowerPoint Slides)
No. 11-010
Michael C. Jensen and Werner Erhard
October 2010
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Abstract:
We argue here that the three factors we identify as constituting the foundation for being a leader and the effective exercise of leadership can also be seen as "A 'Value-Free' Approach to Values" that proves to be very effective in allowing students to acquire the foundations not only for great leadership, but also for a high quality personal life and an extraordinary organization.

We characterize this approach as "value free" because, 1) integrity as we define it (being whole and complete) is a purely positive proposition, 2) authenticity is also a purely positive proposition (being and acting consistent with who you hold yourself out to be for others and who you hold yourself out to be for yourself), and 3) being committed to something bigger than oneself is also a purely positive proposition (that says nothing about what that commitment should be other than that it be bigger than oneself).

This presentation is based on our leadership research program conducted over the last seven years. That research was designed to discover what it actually takes to create leaders - that is, to leave students at the end of the course being leaders and effectively exercising leadership as their natural self expression. The current version of the course materials can be viewed at: http://ssrn.com/abstract=1263835
42 pages

Venture Capital Investment in the Clean Energy Sector
No. 11-020
Shikhar Ghosh and Ramana Nanda
Entrepreneurial Management
August 2010
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Abstract:
We examine the extent to which venture capital is adequately positioned for the rapid commercialization of clean energy technologies in the United States. While there are several startups in clean energy that are well-suited to the traditional venture capital investment model, our analysis highlights a number of structural challenges related to VC investment in the sector that are particularly acute for startups involved in the production of clean energy. One of key bottlenecks threatening innovation in energy production is the inability of VCs to exit their investments at the appropriate time. This hurdle did exist in industries such as biotechnology and communications networking that faced a similar problem when they first emerged, but was ultimately overcome by changes in the innovation ecosystem. However, incumbents in the oil and power sector are different in two respects. First, they are producing a commodity and hence face little end-user pressure to adopt new technologies. Second, they do not tend to feel as threatened by potential competition from clean energy startups, given the market structure and regulatory environment in the energy sector. We highlight that the problem is unlikely to get solved without the active involvement of the government. Even if it does, historical experience suggests it may take several years.
22 pages

What Do CEOs Do?
No. 11-081
Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun
Strategy
February 2011
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Abstract:
We develop a methodology to collect and analyze data on CEOs' time use. The idea - sketched out in a simple theoretical set-up - is that CEO time is a scarce resource and its allocation can help us identify the firm's priorities as well as the presence of governance issues. We follow 94 CEOs of top-600 Italian firms over a pre-specified week and record the time devoted each day to different work activities. We focus on the distinction between time spent with insiders (employees of the firm) and outsiders (people not employed by the firm). Individual CEOs differ systematically in how much time they spend at work and in how much time they devote to insiders vs. outsiders. We analyze the correlation between time use, managerial effort, quality of governance and firm performance, and interpret the empirical findings within two versions of our model, one with effective and one with imperfect corporate governance. The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneficial to the firm and more beneficial to the CEO and that the CEO spends more time with outsiders when governance is poor.
34 pages

What Drives Corporate Social Performance? International Evidence from Social, Environmental and Governance Scores
No. 11-016
Ioannis Ioannou and George Serafeim
Accounting and Management
August 2010
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Abstract:
We investigate the institutional drivers of Corporate Social Performance (CSP) by focusing on its three fundamental components: social, environmental and governance performance. Using a large cross-section of firms from 42 countries over 7 years, we are able to explain 41, 46 and 63% of the variation in social performance, environmental performance, and corporate governance respectively, with observable firm, industry and institutional factors. More specifically, we hypothesize that country institutions have a profound influence on CSP. We find that political institutions, followed by legal and labor market institutions are the most important country determinants of social and environmental performance. In contrast, legal institutions, followed by political institutions are the most important country determinants of governance. Capital market institutions appear to be less important drivers of CSP. Our results provide insights on the demand and supply forces that determine CSP internationally.
51 pages

What Makes the Bonding Stick? A Natural Experiment Involving the U.S. Supreme Court and Cross-Listed Firms
No. 11-072
Amir N. Licht, Christopher Poliquin, Jordan I. Siegel, and Xi Li
Strategy
January 2011, revised February 2011, December 2011
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Abstract:
Using a natural experiment to overcome the empirical challenges facing the debate over the bonding hypothesis, we analyze markets' reaction to a radical change in the law governing U.S.-listed foreign firms. On March 29, 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S. antifraud regime and thus exclude the overwhelming majority of investors in U.S.-listed foreign firms from the protection of this regime. This event nonetheless was met with either indifferent or positive, but never negative, reactions. Among other things, we find insignificant or positive abnormal returns, a reduction in the price premium for U.S.-purchased equities, and no change in bid-ask spreads or the proportion of U.S. trading volume. These results challenge the legal bonding hypothesis while suggesting that the U.S. regime of civil liability as currently designed may not have been seen as a source of economic value.
Keywords: cross-listing, corporate governance, civil liability, bonding
JEL Codes: G15, G18, G38
68 pages

When Does a Platform Create Value by Limiting Choice?
No. 11-030
Ramon Casadesus-Masanell and Hanna Halaburda
Strategy
September 2010, revised January 2011
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Abstract:
We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (to better satisfy their individual preference for variety, users have an incentive to consume more applications than the number that maximizes joint utility); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the allocation that maximizes users' utility); eliminate equilibria that give lower utility to the users; and reduce the severity of the coordination problem faced by users.
Keywords: platform governance, direct network effects, indirect network effects, complements, tragedy of the commons, equilibrium selection, coordination, foresight.
JEL Codes: D21, D42, L12, L82, L86
58 pages

When power makes others speechless: The negative impact of leader power on team performance
No. 11-087
Leigh Plunkett Tost, Francesca Gino, and Richard P. Larrick
Negotiation, Organizations & Markets
February 2011
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Abstract:
We examine the impact of subjective power on leadership behavior and demonstrate that the psychological effect of power on leaders spills over to impact team effectiveness. Specifically, drawing from the approach/inhibition theory of power, power-devaluation theory, and organizational research on the antecedents of employee voice, we argue that a leader's experience of heightened power produces verbal dominance, which reduces perceptions of leader openness and team open communication. Consequently, there is a negative effect of leader power on team performance. Three studies find consistent support for this argument. The implications for theory and practice are discussed.
Keywords: Power; Leadership; Teams; Communication; Talking; Dominance; Team Performance; Learning
48 pages

When to Sign on the Dotted Line? Signing First Makes Ethics Salient and Decreases Dishonest Self-Reports
No. 11-117
Lisa L. Shu, Nina Mazar, Francesca Gino, Dan Ariely, and Max H. Bazerman
Negotiation, Organizations & Markets
May 2011
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Abstract:
Many business and governmental interactions are based upon trust with the assumption that all actors generally comply with social and moral norms. Proof of compliance is typically provided through signature-e.g., at the end of tax returns or insurance policy forms. Yet even when people care about morality and want to be seen as ethical by others, they sometimes transgress when beneficial to their own self-interest, at great cost to economies across the globe. This paper focuses on testing an easy-to-implement method to discourage dishonesty: signing at the beginning rather than at the end of a self-report, as is the current common practice. Using both field and lab experiments, we find that signing before rather than after having faced the opportunity to cheat raises the saliency of ethics and morality, and leads to significant reductions in dishonesty.
Keywords: Cheating, Dishonesty, Ethics, Morality, Saliency, Signing, Signature
38 pages

Who Is Governing Whom? Senior Managers, Governance and the Structure of Generosity in Large U.S. Firms
No. 11-121
Christopher Marquis and Matthew Lee
Organizational Behavior
May 2011
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Abstract:
We examine how organizational structure influences strategies over which corporate leaders have significant discretion. Corporate philanthropy is our setting to study how a differentiated structural element, the corporate foundation, constrains the influence of individual senior managers and directors on corporate strategy. Our analysis of Fortune 500 firms from 1996 to 2006 shows that leader characteristics at both the senior management and director levels affect corporate philanthropic contributions. We also find that organizational structure constrains the philanthropic influence of board members, but not senior managers, a result that is contrary to what existing theory would predict. We discuss how these findings advance understanding of how organizational structure and corporate leadership interact, and how organizations can more effectively realize the strategic value of corporate social responsibility activities.
55 pages

Why fears about municipal credit are overblown
No. 11-129
Daniel Bergstresser and Randolph Cohen
Finance
June 2011
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Abstract:
Highly publicized predictions of 50-100 municipal defaults have caused anxiety among municipal bond investors. While there is some chance that negative investor sentiment will lead to further spread widening, the probability of the kind of widespread default that would be required to justify current municipal bond yields is low. In this paper we document the reasons why the fears of widespread municipal default during the current recession are overblown.
Keywords: Municipal bonds.
49 pages

With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship
No. 11-108
Josh Lerner and Ulrike Malmendier
Finance, Entrepreneurial Management
April 2011
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Abstract:
To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background, but in a more complex way than the literature has previously suggested: A higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.
56 pages

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