HBS Working Papers: 2011-2012 - Faculty & Research

HBS Working Papers Collection

2011-2012

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Are there too many safe securities? Securitization and the incentives for information production
No. 12-037
Samuel G. Hanson and Adi Sunderam
Finance
November 2011
Complete Text (Acrobat PDF Version)

Abstract:
We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting scarcity of informed investors exacerbates market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators bene.t from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.
56 pages

Author-Level Eigenfactor Metrics: Evaluating the Influence of Authors, Institutions and Countries within the SSRN community
No. 12-068
Jevin D. West, Michael C. Jensen, Ralph J. Dandrea, Gregg Gordon, and Carl T. Bergstrom
February 2012
Complete Text (Acrobat PDF Version)

Abstract:
In this paper, we show how the Eigenfactor® score, originally designed for ranking scholarly journals, can be adapted to rank the scholarly output of authors, institutions, and countries based on author-level citation data. Using the methods described herein, we provide Eigenfactor rankings for 84,808 disambiguated authors of 240,804 papers in the Social Science Research Network (SSRN)|a pre and post-print archive devoted to the rapid dissemination of scholarly research in the social sciences and humanities. As an additive metric, the Eigenfactor scores are readily computed for collectives such as departments or institutions as well. We show that a collective's Eigenfactor score can be computed either by summing the Eigenfactor scores of its members, or by working directly with a collective-level cross-citation matrix. To illustrate, we provide Eigenfactor rankings for institutions and countries in the SSRN repository. With a network-wide comparison of Eigenfactor scores and download tallies, we demonstrate that Eigen- factor scores provide information that is both different from and complementary to that provided by download counts. We see author-level ranking as one filter for navigating the scholarly literature, and note that such rankings generate incentives for more open scholarship, as authors are rewarded for making their work available to the community as early as possible and prior to formal publication.
Keywords: Eigenfactor Metrics, Author-Level Eigenfactor Score, SSRN, Author Rankings, Institutional Rankings, Citation Networks
17 pages

Behavioral Ethics: Toward a Deeper Understanding of Moral Judgment and Dishonesty
No. 12-054
Max H. Bazerman and Francesca Gino
Negotiation, Organizations & Markets
January 2012
Complete Text (Acrobat PDF Version)

Abstract:
Early research and teaching on ethics focused on either a moral development perspective or philosophical approaches, and used a normative approach by focusing on the question of how people should act when resolving ethical dilemmas. In this paper, we briefly describe the traditional approach to ethics and then present a (biased) review on the behavioral approach to ethics. We define behavioral ethics as the study of systematic and predictable ways in which individuals make ethical decisions and judge the ethical decisions of others that are at odds with intuition and the benefits of the broader society. By focusing on a descriptive rather than a normative approach to ethics, behavioral ethics is better suited than traditional approaches to address the increasing demand from society for a deeper understanding of what causes even good people to cross ethical boundaries.
Keywords: Morality; Ethical Decision Making; Corruption; Behavioral Decision Research; Unethical Behavior
43 pages

Breaking Them In or Revealing Their Best? Reframing Socialization Around Newcomer Self Expression
No. 12-067
Dan Cable, Francesca Gino, and Brad Staats
Negotiation, Organizations & Markets
February 2012
Complete Text (Acrobat PDF Version)

Abstract:
Socialization theory has focused on enculturating new employees such that they develop pride in their new organization and internalize its values. Drawing on authenticity research, we propose that socialization leads to more effective employment relationships when it starts with newcomers expressing their personal identities. In a field experiment carried out in a large business process outsourcing company, we found that socialization focused on personal identity (emphasizing newcomers' unique perspectives and strengths) led to significantly greater customer satisfaction and greater employee retention after six months, compared to (a) socialization that focused on organizational identity (emphasizing pride from organizational affiliation) and (b) the organization's traditional approach which focused primarily on skills training. To confirm causation and explore the mechanisms underlying the effects, we replicated the results in a laboratory experiment. We found that individuals working temporarily as part of a research team were more engaged and satisfied with their work, performed their tasks more effectively and were also more likely to return to work when initial socialization focused on personal rather than organizational identity. In addition, authentic self expression mediated these relationships. We call for a new direction in socialization theory examining how both organizations and employees benefit by encouraging authentic self-expression.
Keywords: Socialization; Authenticity; Self-Expression; Identity; Onboarding tactics
55 pages

Carbon Tariffs: Impacts on Technology Choice, Regional Competitiveness, and Global Emissions
No. 12-029
David F. Drake
Technology and Operations Management
October 2011
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Abstract:
Carbon regulation is intended to reduce global emissions, but there is growing concern that such regulation may simply shift production to unregulated regions, potentially increasing overall carbon emissions in the process. Carbon tariffs have emerged as a possible mechanism to address this concern by imposing carbon costs on imports at the regulated region's border. Advocates claim that such a mechanism would level the playing field whereas opponents argue that such a tariff is anti-competitive. This paper analyzes how carbon tariffs affect technology choice, regional competitiveness, and global emissions through a model of imperfect competition between "domestic" (i.e., carbon-regulated) firms and "foreign" (i.e., unregulated) firms, where domestic firms have the option to offshore production and the number of foreign entrants is endogenous. Under a carbon tariff, results indicate that foreign firms would adopt clean technology at a lower emissions price than domestic producers, with the number of foreign entrants increasing in emissions price only over intervals where offshore foreign firms hold this technology advantage. Further, domestic firms would only offshore production under a carbon tariff to adopt technology strictly cleaner than technology utilized domestically. As a consequence, under a carbon tariff, foreign market share is non-monotonic in emissions price, and global emissions conditionally decrease. Without a carbon tariff, foreign share monotonically increases in emissions price, and a shift to offshore production results in a strict increase in global emissions.
Keywords: Carbon regulation; Carbon leakage; Technology choice; Imperfect competition
43 pages

Caste and Entrepreneurship in India
No. 12-028
Lakshmi Iyer, Tarun Khanna, and Ashutosh Varshney
Business, Government and the International Economy, Strategy
October 2011
Complete Text (Acrobat PDF Version)

Abstract:
It is now widely accepted that the lower castes have risen in Indian politics. Has there been a corresponding change in the economy? Using comprehensive data on enterprise ownership from the Economic Censuses of 1990, 1998 and 2005, we document substantial caste differences in entrepreneurship across India. The Scheduled Castes and Scheduled Tribes are significantly under-represented in the ownership of enterprises and the share of the workforce employed by them. These differences are widespread across all states, have decreased very modestly between 1990 and 2005, and cannot be attributed to broad differences in access to physical or human capital.
33 pages

CEO Bonus Plans: And How to Fix Them
No. 12-022
Kevin J. Murphy and Michael C. Jensen
October 2011
Complete Text (Acrobat PDF Version)

Abstract:
Almost all CEO and executive bonus plans have serious design flaws that limit their benefits dramatically. Such poorly designed executive bonus plans destroy value by providing incentives to manipulate the timing of earnings, mislead the board about organizational capabilities, take on excessive (or insufficient) risk, forgo profitable projects, and ignore the cost of capital. We describe the causes of the problems associated with widely prevalent executive bonus plans, and offer our recommendations for fixing them. We focus on choosing the right performance measure, determining how performance thresholds, targets, or benchmarks are set, and defining the pay-performance relation and how the relation changes over time.
55 pages

Competition and Illicit Quality
No. 12-071
Victor Manuel Bennett, Lamar Pierce, Jason A. Snyder, and Michael W. Toffel
Technology and Operations Management
February 2012
Complete Text (Acrobat PDF Version)

Abstract:
Competition among firms can have many positive outcomes, including decreased prices and improved quality. Yet competition can have a darker side when firms can gain competitive advantage through illicit and corrupt activities. In this paper, we argue that competition can lead organizations to provide illicit quality that satisfies customer demand but violates laws and regulations and that this outcome is particularly likely when price competition is restricted. Using 28 million vehicle emissions tests from more than 11,000 facilities, we show that increased competition is associated with greater inspection leniency, a form of illicit quality that customers value but is illegal and socially costly. Firms with greater numbers of local competitors pass customers at considerably higher rates and are more likely to lose customers they fail to pass, suggesting that the alternatives that competition provides to customers intensify pressure to illegally provide leniency. We also show that, at least in contexts when pricing is restricted, firms use illicit quality as an entry strategy.
34 pages

The Cost of Capital for Alternative Investments
No. 12-013
Jakub W. Jurek and Erik Stafford
Finance
September 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper studies the cost of capital for alternative investments. We document that the risk profile of the aggregate hedge fund universe can be accurately matched by a simple index put option writing strategy that offers monthly liquidity and complete transparency over its state-contingent payoffs. The contractual nature of the put options in the benchmark portfolio allows us to evaluate appropriate required rates of return as a function of investor risk preferences and the underlying distribution of market returns. This simple framework produces a number of distinct predictions about the cost of capital for alternatives relative to traditional mean-variance analysis.
41 pages

De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution
No. 12-063
Benjamin Lockwood and Matthew Weinzierl
Business, Government and the International Economy
January 2012
Complete Text (Acrobat PDF Version)

Abstract:
Preferences over consumption and leisure play no role in the standard optimal tax model, which attributes all variation in earnings to differences in income-earning ability. We show how to incorporate these preferences, which like ability are publicly unobservable, into the standard model in a tractable way. In this more general model, the policy designer must guess at the relative importance of ability and preferences in explaining variation in earnings. We show that such preferences could, in principle, increase or decrease optimal redistribution. In the most plausible specifications of the model, however, the result is clear: greater variation in preferences lowers the optimal extent of redistribution. To generate more redistribution than in standard results, one must assume that the desire for income is inversely related to income earned. This result holds even when the conventional model accurately describes the average individual, and it suggests one potential resolution to the puzzle of why observed redistribution is in some cases weaker than conventional theory would suggest. We then establish a new empirical finding that confirms this model's central policy prediction across developed countries and U.S. states. In countries and states with more heterogeneous tastes for consumption relative to leisure, redistribution is statistically significantly lower.
28 pages

Discretion Within the Constraints of Opportunity: Gender Homophily and Structure in a Formal Organization
No. 12-050
Adam M. Kleinbaum, Toby E. Stuart, and Michael L. Tushman
Entrepreneurial Management, Organizational Behavior
December 2011
Complete Text (Acrobat PDF Version)

Abstract:
Homophily in social relations is widely documented. We know that homophily results from both individual preferences and uneven opportunities for interaction, but how these two mechanisms interact in formal organizations is not well understood. We argue that organizational structures and geography delimit opportunities for interaction, but that within the opportunity sets created by business units, job functions and offices, actors have a greater level of discretion to choose their interaction partners. Therefore, we expect to observe more homophilous interactions within these structures than across their boundaries. We test this argument using a dataset consisting of millions of e-mails exchanged among thousands of employees in a large information technology firm. We find significant interaction effects between being of the same sex and being in the same business unit or same office on dyadic communication rates, though not with same job function. In an extension, we find that men's communication patterns are consistent with this theory, but that women communicate differently: relative to male-male and male-female pairings, female-female interactions are much more likely to occur across organizational boundaries. These findings have implications for research on homophily, gender, and formal and informal structure in organizations.
37 pages

Does Planning Regulation Protect Independent Retailers?
No. 12-044
Raffaella Sadun
Strategy
December 2011
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Abstract:
Entry regulations against big-boxes have been introduced in many countries to protect independent retailers. Analyzing a planning reform launched in the U.K. in the 1990s, I show that entry regulations may in fact accelerate the decline of independents by increasing the attractiveness of smaller in-town store formats for retail chains. The causal impact of planning regulation is estimated using variation in local political control across the U.K., which exogenously affects the ease of entry for big-boxes in this specific institutional framework. The analysis shows that up to 17% of the independents' employment decline between 1998 and 2004 can be attributed to the regulatory reform.
Keywords: Zoning, Location, Retail, Regulation
JEL Codes: K2, L10, L81, L51
60 pages

Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations
No. 12-011
Nemit O. Shroff, Rodrigo S. Verdi, and Gwen Yu
Accounting and Management
September 2011
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Abstract:
This paper examines how the external information environment in which foreign subsidiaries operate affects investment decisions in multinational corporations. We hypothesize and find that foreign subsidiaries in country-industries with more transparent information environments better translate the local growth opportunities into investments. This result is consistent with the information environment helping MNCs monitor the subsidiary's investment decision. Cross-sectional tests show that the effect is larger when there is greater "distance" between the parent and the subsidiary. Our results suggest that the external information environment helps mitigate agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.
44 pages

The Dynamic Effects of Bundling as a Product Strategy
No. 12-043
Timothy Derdenger and Vineet Kumar
Marketing
December 2011
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Abstract:
Several key questions in bundling have not been empirically examined: Do consumers value bundles over and beyond their component products, indicating synergy? Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from micro-foundations to capture the essentials of our setting, i.e. the handheld video game console market. In doing so, we provide a framework to understand the dynamic, long-term impacts of bundling on demand. We find that hardware sales diminish in the absence of bundling, and consumers who had previously purchased bundles may not always purchase pure consoles, even though consoles may be cheaper than bundles. The type of bundling chosen is critical to extracting value from consumers, with pure bundling performing significantly worse than both mixed bundling and pure components. We find that consumers perceive a negative synergy between the components of a bundle. Modeling the dynamic nature of durable good purchases also helps us uncover a finding that contradicts prior static models: positive correlation between products enables bundling to be more effective than negative correlation.
49 pages

The Dynamics of Firm Lobbying
No. 12-034
William R. Kerr, William Lincoln, and Prachi Mishra
Entrepreneurial Management
October 2011
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Abstract:
We study the determinants of the dynamics of firm lobbying behavior using a panel data set covering 1998-2006. Our data exhibit three striking facts: (i) few firms lobby, (ii) lobbying status is strongly associated with firm size, and (iii) lobbying status is highly persistent over time. Estimating a model of a firm's decision to engage in lobbying, we find significant evidence that up- front costs associated with entering the political process help explain all three facts. We then exploit a natural experiment in the expiration in legislation surrounding the H-1B visa cap for high-skilled immigrant workers to study how these costs affect firms' responses to policy changes. We find that companies primarily adjusted on the intensive margin: the firms that began to lobby for immigration were those who were sensitive to H-1B policy changes and who were already advocating for other issues, rather than firms that became involved in lobbying anew. For a firm already lobbying, the response is determined by the importance of the issue to the firm's business rather than the scale of the firm's prior lobbying efforts. These results support the existence of significant barriers to entry in the lobbying process.
Keywords: lobbying, political economy, immigration, H-1B.
JEL Codes: D72, D73, D78, F22, F23, J61, O31, O38.
45 pages

Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO
No. 12-056
Felix Oberholzer-Gee and Julie Wulf
Strategy
January 2012
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Abstract:
Performance-based pay is an important instrument to align the interests of managers with the interests of shareholders. However, recent evidence suggests that high-powered incentives also provide managers with incentives to manipulate the firm's reported earnings. The previous literature has focused primarily on Chief Executive Officers, but managers further down in the firm hierarchy-division managers and Chief Financial Officers-- are likely to have similar incentives, and perhaps even greater opportunity to influence reported earnings in a manner that maximizes these managers' personal income. Moreover, previous research focuses on equity incentives and largely ignores other elements of incentive pay. We contribute to this literature by analyzing all forms of incentive pay for several types of managerial positions and include additional measures of earnings manipulation--end-of-year excess sales and class action litigation-in addition to the standard measure of discretionary accounting accruals. We find that the association between high-powered incentives and earnings manipulation varies by both type of incentive pay and position. Our findings have important policy implications and suggest that compensation committees should review pay policies of other managerial positions in addition to CEOs. Importantly, if the committees wanted to weaken incentive pay to get more truthful reporting, diluting the CFO's bonus and stock options would be one place to start.
Keywords: Compensation, Incentive Pay, Earnings Management, Gaming, Fraud, Shareholder Litigation, Division Managers, CFO
JEL Codes: G30, J33, K22, M41, M52
38 pages

Engaging Supply Chains in Climate Change
No. 12-026
Chonnikarn (Fern) Jira and Michael W. Toffel
Technology and Operations Management
October 2011
Complete Text (Acrobat PDF Version)

Abstract:
Suppliers are increasingly being asked to share information about their vulnerability to climate change and their strategies to reduce greenhouse gas emissions. They vary widely in their responses. We theorize and empirically identify several factors associated with suppliers being especially willing to share this information with buyers, focusing on attributes of the buyers seeking this information and of the suppliers being asked to provide it. We test our hypotheses using data from the Carbon Disclosure Project's Supply Chain Project, a collaboration of multinational corporations requesting such information from thousands of suppliers in 46 countries. We find evidence that suppliers are more likely to share this information when requests for information from buyers are more prevalent, when buyers appear committed to using the information, and when suppliers belong to a competitive industry. Moreover, we found evidence that these three factors also influenced the comprehensiveness of the information suppliers shared and whether they would also share the information publicly. Finally, we found that suppliers in countries with greenhouse gas regulations were more likely to include quantitative emissions data and reduction targets in the information they shared.
Keywords: Econometric Analysis; Empirical Research; Environmental Operations; Sustainable Operations, OM-Organizational Behavior Interface; Supply Chain Management, Risk Management
34 pages

Ethnic Innovation and U.S. Multinational Firm Activity
No. 12-006
C. Fritz Foley and William R. Kerr
Finance, Entrepreneurial Management
August 2011
Complete Text (Acrobat PDF Version)

Abstract:
This paper studies the impact that immigrant innovators have on the global activities of U.S. firms by analyzing detailed data on patent applications and on the operations of the foreign affiliates of U.S. multinational .rms. The results indicate that increases in the share of a firm's innovation performed by inventors of a particular ethnicity are associated with increases in the share of that firm's affiliate activity in their native countries. Ethnic innovators also appear to facilitate the disintegration of innovative activity across borders and to allow U.S. multinationals to form new affiliates abroad without the support of local joint venture partners. Thus, this paper points out that immigration can enhance the competitiveness of multinational firms.
Keywords: Foreign Direct Investment, Technology Transfer, Patents, Innovation, Research and Development, Immigration, Migration, Networks, Diasporas.
JEL Codes: F22, F23, J44, J61, O31, O32, O33, O57.
35 pages

The Evolving Basis for Legitimacy of the World Trade Organization: Dispute Settlement and the Rebalancing of Global Interests
No. 12-041
Arthur Daemmrich
Business, Government and the International Economy
December 2011
Complete Text (Acrobat PDF Version)

Abstract:
The World Trade Organization (WTO) features prominently in studies of international institutions, although it is often over-simplified either as a tool of rich world domination over the global South or as the only stop-gap preventing a breakdown in the international system. This article analyzes how the WTO has sought legitimacy for itself and for the underlying institution of free trade in the midst of questions regarding its organizational mandate and the management of international trade negotiations. Initially, legitimacy appeared to derive from an expanding membership and the lowering of tariffs in progressively more categories of goods and services. More recently, legitimacy comes from institutional deepening by means of dispute resolution procedures and rulings by the dispute settlement body. This shift, it is argued, raises foundational questions of expertise, the relationship of models to real-world outcomes, and methods for bounding disputes over scientific and economic facts. Based on a case study of Brazil's interaction with the WTO - especially in a decade-long claim against U.S. cotton subsidies - and a trend analysis of over 400 total WTO disputes, I argue that the WTO dispute process is helping to legitimize the institution of free trade through its public display of rational authority and neutral expertise. At the same time, dispute panels have begun to pass judgment on issues of scientific and econometric uncertainty. As a result, the basis for dispute judgment and the broader legitimacy of the WTO is shifting from questions of representation that have long drawn the attention of critics and WTO leaders to epistemological issues, especially concerning the basis of expertise and the design of econometric models. This article provides insights on the resolution of disputes in global trade while contributing to our understanding of the evolving role of scientific and econometric modeling at international organizations.
34 pages

Expectations, Network Effects and Platform Pricing
No. 12-045
Andrei Hagiu and Hanna Halaburda
Strategy
December 2011
Complete Text (Acrobat PDF Version)

Abstract:
In markets with network effects, users must form expectations about the total number of users who join a given platform. In this paper, we distinguish two ways in which rational expectations can be formed, which correspond to two different types of users-sophisticated and unsophisticated. Only sophisticated users adjust their expectations in response to platforms' price changes. We study the effect of the fraction of sophisticated users on platform profits. A monopoly platform's profits are always increasing in the fraction of sophisticated users. The profits of competing platforms in a market of fixed size are decreasing in the fraction of sophisticated users. When market expansion is introduced, the fraction of sophisticated users that maximizes competing platforms' profits may be positive and is strictly lower than 1. We also investigate the possibility of platforms investing in "educating" unsophisticated users. In a competitive environment, such education is a public good among platforms and therefore the equilibrium level is lower than the one that would maximize joint industry profits.
26 pages

Expertise Dissensus: A Multi-level Model of Teams' Differing Perceptions about Member Expertise
No. 12-070
Heidi K. Gardner and Lisa Kwan
Organizational Behavior
February 2012
Complete Text (Acrobat PDF Version)

Abstract:
Why do some teams fail to convert members' knowledge into valued outcomes? We propose that members' differing perceptions of each other's levels of expertise is a critical factor. To capture this phenomenon, we introduce the concept of expertise dissensus, a team property that reflects the variance in team members' perceptions of one another's levels of expertise. We argue that it matters how team members perceive all others' expertise - not just how they view the most expert team member -and develop and test a multi-level model to explain how expertise dissensus affects team processes and outcomes. We further advance theory by investigating the effects of expertise dissensus on all dimensions of team effectiveness: team performance, team viability, and individual member development (Hackman, 1987).
Keywords: Dissensus, expertise perceptions, knowledge-based, multi-level, team effectiveness
43 pages

Fairness, Efficiency and Flexibility in Organ Allocation for Kidney Transplantation
No. 12-025
Dimitris Bertsimas, Vivek F. Farias, and Nikolaos Trichakis
Technology and Operations Management
October 2011
Complete Text (Acrobat PDF Version)

Abstract:
We propose a scalable, data-driven method for designing national policies for the allocation of deceased donor kidneys to patients on a waiting list, in a fair and efficient way. We focus on policies that have the same form as the one currently used in the U.S. In particular, we consider policies that are based on a point system, which ranks patients according to some priority criteria, e.g., waiting time, medical urgency, etc., or a combination thereof. Rather than making specific assumptions about fairness principles or priority criteria, our method offers the designer the flexibility to select his desired criteria and fairness constraints from a broad class of allowable constraints. The method then designs a point system that is based on the selected priority criteria, and approximately maximizes medical efficiency, i.e., life year gains from transplant, while simultaneously enforcing selected fairness constraints.
Among the several case studies we present employing our method, one case study designs a point system that has the same form, uses the same criteria and satisfies the same fairness constraints as the point system that was recently proposed by U.S. policymakers. In addition, the point system we design delivers an 8% increase in extra life year gains. We evaluate the performance of all policies under consideration using the same statistical and simulation tools and data as the U.S. policymakers use. Other case studies perform a sensitivity analysis (for instance, demonstrating that the increase in extra life year gains by relaxing certain fairness constraints can be as high as 30%), and also pursue the design of policies targeted specifically at remedying criticisms leveled at the recent point system proposed by U.S. policymakers.
47 pages

The Flexible Substitution Logit: Uncovering Category Expansion and Share Impacts of Marketing Instruments
No. 12-012
Qiang Liu, Thomas J. Steenburgh, and Sachin Gupta
Marketing
September 2011
Complete Text (Acrobat PDF Version)

Abstract:
Different instruments are relevant for different marketing objectives (category demand expansion or market share stealing). To help brand managers make informed marketing mix decisions, it is essential that marketing mix models appropriately measure the different effects of marketing instruments. Discrete choice models that have been applied to this problem might not be adequate because they possess the Invariant Proportion of Substitution (IPS) property, which imposes counter-intuitive restrictions on individual choice behavior. Indeed our empirical application to prescription writing choices of physicians in the hyperlipidemia category shows this to be the case. We find that three commonly used models that all suffer from the IPS restriction - the homogeneous logit model, the nested logit model, and the random coefficient logit model - lead to counter-intuitive estimates of the sources of demand gains due to increased marketing investments in Direct-to-Consumer Advertising (DTCA), detailing, and Meetings and Events (M&E). We then propose an alternative choice model specification that relaxes the IPS property - the so-called "flexible substitution" logit (FSL) model. The (random coefficient) FSL model predicts that sales gains from DTCA and M&E come primarily from the non-drug treatment (87.4% and 70.2% respectively), whereas gains from detailing come at the expense of competing drugs (84%). By contrast, the random coefficient logit model predicts that gains from DTCA, M&E and detailing all would come largely from competing drugs.
40 pages

A framework for research on corporate accountability reporting
No. 12-021
Karthik Ramanna
Accounting and Management
September 2011
Complete Text (Acrobat PDF Version, HBS internal access only)

Abstract:
In January 2013, Harvard Business School, in collaboration with the Journal of Accounting & Economics, will host a conference on research in corporate accountability reporting to address the "growing number of for-profit corporations across the world [that] have started voluntarily augmenting their annual financial reports with reports on 'corporate sustainability,' 'corporate social responsibility,' and 'corporate environmental performance'..." This paper provides some conceptual framing on the phenomenon of corporate accountability reporting. In particular, such reporting is seen as arising from a delegator's (e.g., a citizenry) demand to hold a delegate (e.g., shareholders) to account. When effective, corporate accountability reporting can internalize certain externalities into resource allocation decisions by management, shareholders, and other stakeholders. However, doing so will not always serve shareholders' interests. I leverage the positive accounting literature's current understanding of properties of financial reports to develop some basic hypotheses on corporate accountability reporting. I argue that an accountability reporting system is likely to be more useful if it: (1) accommodates for a delegate's information advantage over her delegator; (2) produces periodic performance and position reports; and (3) has a mutually agreeable due process to match across periods the actions of delegates and the outcomes of those actions. Further refinement and tests of these hypotheses are likely to help us better understand some of the fundamental questions in corporate accountability reporting.
40 pages

From Single Deals to Negotiation Campaigns
No. 12-046
David A. Lax and James K. Sebenius
Negotiation, Organizations & Markets
December 2011
Complete Text (Acrobat PDF Version)

Abstract:
Negotiation scholars typically take the individual deal, or a few linked deals, as the unit of analysis. While analyzing one deal requires a familiar conceptual framework, doing the same for a broader "negotiation campaign" calls for a different focus and set of concepts: how to orchestrate a large number of subsidiary deals, often grouped into modular "fronts", in order to realize an ultimate "target agreement" with sufficient support to be sustainable. For example, generating the backing necessary from several organizational units for a proposed project to be approved may call for a small-scale "internal" negotiation campaign. A final cross-border merger agreement may represent the culmination of a massive negotiation campaign with multiple, related fronts: financial, shareholder, internal corporate, labor, supplier, political, and regulatory. Complex sales with long cycles and many influential parties as well as major diplomatic initiatives may call more for crafting negotiation campaigns for than doing solo deals. Analysis of negotiation campaigns builds on familiar concepts such as linkage and coalition building. In many cases, however, the parties relevant to a campaign as well as the fronts may not be obvious a priori and may represent choice variables rather than givens for the analysis. Beyond identifying and specifying parties and fronts, negotiation campaign analysis and design calls for assessing interdependencies among fronts, deciding on separation v. combination of fronts, parallel v. sequential tactical emphasis, as well as information revelation v. concealment at different stages of the campaign.
Keywords: Negotiation, Dealmaking, Negotiation Campaign, Fronts, Sequencing, Linkage, Information Revelation
30 pages

Got Local Food?
No. 12-058
Baris Ata, Deishin Lee, and Mustafa H. Tongarlak
Technology and Operations Management
January 2012
Complete Text (Acrobat PDF Version)

Abstract:
We study the operational tradeoffs of a retailer and farmers in a fresh produce supply chain to determine the equilibrium supply chain structure. These operational tradeoffs arise as a result of the geographic constraints posed by the availability of arable land and the spatial population distribution. We model the interdependent operating decisions of a retailer and farmers and show that technological advances in transportation, spatial characteristics of population distributions, and advances in farming technologies has led to a dominant economies-of-scale model of production, distribution, and retailing in fresh produce supply. When farm capacities are asymmetric, the small local farmer has a disadvantage and can be completely squeezed out of the supply chain if the large farm has enough capacity to _ll demand. However, we quantify how backhauling and vertical differentiation can increase the retailer's margin for local food, thus increasing the small local farmer's competitiveness. We also show how the local farmer can leverage polyculture farming, a farming practice that increases the resilience and yield of crops, to mitigate risk of weather or pest damage, increasing his competitiveness.
41 pages

How Firms Respond to Mandatory Information Disclosure
No. 12-001
Anil R. Doshi, Glen W.S. Dowell, and Michael W. Toffel
Technology and Operations Management
July 2011
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Abstract:
We explore which organizations are particularly likely to resist, or acquiesce to, new institutional pressures that arise from mandatory information disclosure regulations. We hypothesize that when information is disclosed about organizational performance, certain organizational characteristics amplify pressures to improve. Examining organizational responses to a change in a prominent information disclosure program, we provide some of the first empirical evidence characterizing organizations' heterogeneous responses to information disclosure regulations. We find that private ownership and proximity to headquarters and corporate siblings are associated with superior performance trends following information disclosure. We also find that regional density moderates effect of establishment size on performance improvement. We find no evidence that capability transfers are associated with performance improvement. We highlight implications for institutional theory, managers, and policymakers.
Keywords: information disclosure, institutional theory, empirical analysis, Toxics Release Inventory, environmental strategy, mandatory disclosure.
51 pages

The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance
No. 12-035
Robert G. Eccles, Ioannis Ioannou, and George Serafeim
Organizational Behavior, Accounting and Management
November 2011
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Abstract:
We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies many years ago - termed as High Sustainability companies - exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies - termed as Low Sustainability companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources.
57 pages

The impact of horizontal mergers and acquisitions in price competition models
No. 12-031
Awi Federgruen and Margaret Pierson
Technology and Operations Management
October 2011
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Abstract:
The question of what impact mergers and acquisitions have on key equilibrium performance measures is fundamental to our understanding of competitive dynamics in an oligopolistic industry. We address these questions in the context of price competition models with differentiated goods and asymmetric firms allowing for general non-linear demand and cost functions merely assuming that both the pre- and post-merger competition games are supermodular along with two minor technical conditions. We show that, in the absence of cost synergies, post-merger equilibrium prices exceed their pre-merger levels. Moreover, the post-merger equilibrium profit of the merged firms exceeds the aggregate of the premerger equilibrium profits of the merging firms. The equilibrium profit of the non-merging firms increases as well. We establish our results, at first, for settings where each firm in the industry offers a single product; we then generalize them to industries with multi-product firms. We also derive conditions under which cost synergies, by themselves, result in lower equilibrium prices than otherwise observe post-merger, and discuss how the combined effect of increased market concentration and cost synergies can be assessed efficiently.
18 pages

The Impact of Modularity on Intellectual Property and Value Appropriation
No. 12-040
Carliss Y. Baldwin and Joachim Henkel
Finance
December 2011
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Abstract:
Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation is made possible by the modularity of the underlying product or process. But despite the documented technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. This paper brings together the theory of modularity from the engineering and management literatures with the modern economic theory of property rights and relational contracts to address the question of value appropriation. It defines three generic threats to intellectual property (IP) and models the interactive impact of modularity and state-sanctioned IP rights on these threats. It identifies strategies for capturing value in so-called "open systems" in which IP is distributed among several parties. It shows why open systems should be designed as modular systems. Finally, it analyzes in detail the strategy of capturing value by maintaining exclusive control of an essential module in an open system.
Keywords: Modularity, value appropriation, intellectual property, open innovation, design
45 pages

Income Inequality and Social Preferences for Redistribution and Compensation Differentials
No. 12-048
William R. Kerr
Entrepreneurial Management
December 2011
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Abstract:
In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution.
Keywords: Inequality, Social Preferences, Social Norms, Redistribution, Welfare, Class Warfare.
JEL Codes: D31, D33, D61, D63, D64, D72, H23, H53, I38, J31, R11.
48 pages

Inside the Black Box of the Corporate Staff: An Exploratory Analysis Through the Lens of E-Mail Networks
No. 12-051
Adam M. Kleinbaum and Toby Stuart
Entrepreneurial Management
December 2011
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Abstract:
The corporate staff is central in theories of the multi-business firm, but empirical evidence on its function is limited. In this paper, we examine the high-level role of two units of a corporate staff through analysis of electronic communications. We find sharp cross-sectional differences in communication patterns: relative to people in the line organization, staff members are more central in the corporate e-mail network and possess broader networks. However, much of this difference is attributed to who sorts into jobs in the corporate staff, rather than being caused by employment in the corporate staff per se. Results suggest that once people receive the "corporate imprimatur" on their network structures, they retain it even when they move back to the line organization.
Keywords: social networks, corporate headquarters, corporate strategy, organizational structure, causal analysis
43 pages

Intermediaries for the IP market
No. 12-023
Andrei Hagiu and David Yoffie
Strategy
October 2011
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Abstract:
During the past decade, a variety of intermediaries have emerged to facilitate the trading of patents: brokers, non-practicing entities (NPEs), defensive aggregators, online platforms, auctions and unique entities such as Intellectual Ventures. We discuss the fundamental causes for the lack of liquidity in the IP market and analyze the merits and shortcomings of the various business models used by patent intermediaries. A key conclusion is that platform-type intermediaries (who facilitate transactions without taking possession of assets) have struggled, whereas merchant-type intermediaries (who acquire patents and seek to monetize them directly) have reached significant scale and influence in the technology industries that fall under the incidence of their assets. We also discuss some efficiency issues raised by the growing prominence of patent merchants.
30 pages

Investment Cycles and Startup Innovation
No. 12-032
Ramana Nanda and Matthew Rhodes-Kropf
Entrepreneurial Management
October 2011
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Abstract:
We find that VC-backed firms receiving their initial investment in hot markets are less likely to IPO, but conditional on going public are valued higher on the day of their IPO, have more patents and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is true even for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in shifting investments to more novel startups - by lowering the cost of experimentation for early stage investors and allowing them to make riskier, more novel, investments.
Keywords: Venture Capital, Innovation, Market Cycles, Financing Risk
JEL Codes: G24, G32
34 pages

Learning from My Success and From Others' Failure: Evidence from Minimally Invasive Cardiac Surgery
No. 12-065
Diwas KC, Bradley R. Staats, and Francesca Gino
Negotiation, Organizations & Markets
January 2012
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Abstract:
Learning from past experience is central to an organization's adaptation and survival. A key dimension of prior experience is whether the outcome was successful or unsuccessful. While empirical studies have investigated the effects of success and failure in organizational learning, to date the phenomenon has received little attention at the individual level. Drawing on attribution theory in psychology, we investigate how individuals learn from both failure and success from their own past experience as well as the experience of others. For our empirical analyses we use ten years of data from 71 cardiothoracic surgeons who completed over 6,500 procedures using a new technology for cardiac surgery. We find that individuals learn more from their own successes than from their own failures, while they learn more from the failures of others than they do from others' successes. We also find that individuals' prior successes and others' failures can help individuals to overcome their inability to learn from their own failures. Together, these findings offer both theoretical and practical insights into how individuals learn directly from their prior experience and indirectly from the experience of others.
Keywords: Failure, Healthcare, Knowledge Work, Learning, Quality, Attribution theory
34 pages

Local Industrial Structures and Female Entrepreneurship in India
No. 12-036
Ejaz Ghani, William R. Kerr, and Stephen O'Connell
Entrepreneurial Management
November 2011
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Abstract:
We analyze the spatial determinants of female entrepreneurship in India in the manufacturing and services sectors. We focus on the presence of incumbent female-owned businesses and their role in promoting higher subsequent female entrepreneurship relative to male entrepreneurship. We find evidence of agglomeration economies in both sectors, where higher female ownership among incumbent businesses within a district-industry predicts a greater share of subsequent entrepreneurs will be female. Moreover, higher female ownership of local businesses in related industries (e.g., those sharing similar labor needs, industries related via input-output markets) predict greater relative female entry rates even after controlling for the focal district-industry's conditions. The core patterns hold when using local industrial conditions in 1994 to instrument for incumbent conditions in 2000-2005. The results highlight that the traits of business owners in incumbent industrial structures influence the types of entrepreneurs supported.
Keywords: Female, gender, entrepreneurship, agglomeration, cluster, business networks, development, India, South Asia.
JEL Codes: J16, L10, L26, L60, L80, M13, O10, R00, R10, R12
40 pages

Management Practices Across Firms and Countries
No. 12-052
Nicholas Bloom, Christos Genakos, Raffaella Sadun, and John Van Reenen
Strategy
December 2011
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Abstract:
For the last decade we have been using double-blind survey techniques and randomized sampling to construct management data on over 10,000 organizations across twenty countries. On average, we find that in manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China and India tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are worse managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the heterogeneity in the spread of performance in these sectors. One factor linked to this variation is ownership. Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder and private-equity owned firms are typically well managed. Stronger product market competition and higher worker skills are associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance based promotion.
Keywords: management, organization, and productivity
JEL Codes: L2, M2, O14, O32, O33
53 pages

Managing Political Risk in Global Business: Beiersdorf 1914-1990
No. 12-003
Geoffrey Jones and Christina Lubinski
Entrepreneurial Management
July 2011
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Abstract:
This working paper examines corporate strategies of political risk management during the twentieth century. It focuses especially on Beiersdorf, a German-based pharmaceutical and skin care company. During World War 1 the expropriation of its brands and trademarks revealed its vulnerability to political risk. Following the advent of the Nazi regime in 1933, the largely Jewish owned and managed company, faced a uniquely challenging combination of home and host country political risk. The paper reviews the firm's responses to these adverse circumstances, challenging the prevailing literature which interprets so-called "cloaking" activities as one element of businesses' cooperation with the Nazis. The paper departs from previous literature in assessing the outcomes of the company's strategies after 1945. It examines the challenges and costs faced by the company in recovering the ownership of its brands. While the management of distance became much easier over the course of the twentieth century because of communications improvements, this working paper shows that the costs faced by multinational corporations in managing governments and political risk grew sharply.
Keywords: political risk, multinationals, expropriation, trademarks
58 pages

Market Competition, Government Efficiency, and Profitability Around the World
No. 12-010
Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu
Accounting and Management
August 2011
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Abstract:
We examine how cross-country differences in product, capital, and labor market competition, and government efficiency affect the rate of mean reversion of corporate profitability. Using a sample of 42,337 unique firms from 49 countries, we find that corporate profitability mean reverts faster in countries where product and capital markets are more competitive. Moreover, holding constant product, capital, and labor market competition we find that profitability mean reverts faster in countries with less efficient governments. The findings suggest that country-level factors have an economically significant impact on the rate of corporate profitability mean reversion. The study has implications for forecasting profitability and equity valuation in a global context.
39 pages

Market Interest in Nonfinancial Information
No. 12-018
Robert G. Eccles, Michael P. Krzus, and George Serafeim
Organizational Behavior , Accounting and Management
September 2011
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27 pages

Matthew: Effect or Fable?
No. 12-049
Pierre Azoulay, Toby Stuart, and Yanbo Wang
Entrepreneurial Management
December 2011
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Abstract:
In a market context, a status effect occurs when actors are accorded differential recognition for their efforts depending on their location in a status ordering, holding constant the quality of these efforts. In practice, because it is very difficult to measure quality, this ceteris paribus proviso often precludes convincing empirical assessments of the magnitude of status effects. We address this problem by examining the impact of a major status-conferring prize that shifts actors' positions in a prestige ordering. Specifically, using a precisely constructed matched sample, we estimate the effect of a scientist becoming a Howard Hughes Medical Investigator (HHMI) on citations to articles the scientist published before the prize was awarded. We do find evidence of a post-appointment citation boost, but the effect is small and limited to a short window of time. Consistent with theories of status, however, the effect of the prize is significantly larger when there is uncertainty about scientist and article quality.
Keywords: sociology of science, status, stratification, Matthew effect.
51 pages

Multi-Sided Platforms
No. 12-024
Andrei Hagiu and Julian Wright
Strategy
October 2011
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Abstract:
The economics of two-sided markets or multi-sided platforms has emerged over the past decade as one of the most active areas of research in economics and strategy. The literature has constantly struggled, however, with a lack of agreement on a proper definition: for instance, some existing definitions imply that retail firms such as grocers, supermarkets and department stores are multi-sided platforms (MSPs). We propose a definition which provides a more precise notion of MSPs by requiring that they enable direct interactions between the multiple customer types which are affiliated to them. Several important implications of this new definition are derived. First, cross-group network effects are neither necessary nor sufficient for an organization to be a MSP. Second, our definition emphasizes the difference between MSPs and alternative forms of intermediation such as "re-sellers" which take control over the interactions between the various sides, or input suppliers which have only one customer group affiliated as opposed to multiple. We discuss a number of examples that illustrate the insights that can be derived by applying our definition. Third, we point to the economic considerations that determine where firms choose to position themselves on the continuum between MSPs and resellers, or MSPs and input suppliers.
38 pages

No margin, no mission? A Field Experiment on Incentives for Pro-Social Tasks
No. 12-008
Nava Ashraf, Oriana Bandiera, and Kelsey Jack
Negotiation, Organizations & Markets
August 2011
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Abstract:
A substantial body of research investigates the design of incentives in firms, yet less is known about incentives in organizations that hire individuals to perform tasks with positive social spillovers. We conduct a field experiment in which agents hired by a public health organization are randomly allocated to four groups. Agents in the control group receive a standard volunteer contract often offered for this type of task, whereas agents in the three treatment groups receive small financial rewards, large financial rewards, and non-financial rewards, respectively. The analysis yields three main findings. First, non-financial rewards are more effective at eliciting effort than either financial rewards or the volunteer contract. The effect of financial rewards, both large and small, is orders of magnitude smaller and not significantly different from zero. Second, non-financial rewards elicit effort both by leveraging intrinsic motivation for the cause and by facilitating social comparison among agents. Third, contrary to existing laboratory evidence, financial incentives do not crowd out intrinsic motivation in this setting.
Keywords: incentives, non-monetary rewards, intrinsic motivation.
JEL Codes: J33, O15, M52, D82
46 pages

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
No. 12-002
Kevin Koh, Shiva Rajgopal, and Suraj Srinivasan
Accounting and Management
July 2011
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Abstract:
We provide evidence on the long standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978-80. Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors' reputational incentives, possible synergies and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.
Keywords: auditor independence, audit fees, Nonaudit services, Auditing, conflict of interests, financial reporting, earnings management
JEL Codes: K22, G18, G28, G34, M40, M41, M49
48 pages

Observation bias: The impact of demand censoring on newsvendor level and adjustment behavior
No. 12-042
Nils Rudi and David Drake
Technology and Operations Management
December 2011
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Abstract:
In an experimental newsvendor setting we investigate three phenomena: Level behavior – the decision-maker's average ordering tendency; adjustment behavior – the tendency to adjust period-to-period order quantities; and observation bias – the tendency to let the degree of demand feedback influence order quantities. We find that the portion of mismatch cost due to adjustment behavior exceeds the portion of mismatch cost due to level behavior in three out of four conditions. Observation bias is studied through censored demand feedback, a situation which arguably represents the majority of newsvendor settings. When demands are uncensored, subjects tend to order below the normative quantity when facing high margin and above the normative quantity when facing low margin, but in neither case beyond mean demand (a.k.a. the pull-to-center effect). Censoring in general leads to lower quantities, magnifying the below-normative level behavior when facing high margin but partially counterbalancing the above-normative level behavior when facing low margin, violating the pull-to-center effect in both cases.
25 pages

Open Innovation and Organizational Boundaries: The Impact of Task Decomposition and Knowledge Distribution on the Locus of Innovation
No. 12-057
Karim R. Lakhani and Michael L. Tushman
Technology and Operations Management, Organizational Behavior
January 2012
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Abstract:
This paper contrasts traditional, internal organization-centered models of innovation with more recent work on open innovation. These fundamentally different and inconsistent innovation logics are associated with contrasting organizational boundaries and organizational designs. We suggest that when critical tasks can be modularized and when problem-solving knowledge is widely distributed and available, open innovation complements traditional innovation logics. We induce these ideas from the literature and with extended examples from Apple, NASA, and LEGO. We suggest that task decomposition and problem-solving knowledge distribution are not deterministic but are strategic choices. If dynamic capabilities are associated with innovation streams, and if innovation types are rooted in contrasting innovation logics, there are important implications for the firm, and its boundaries, design, and identity.
54 pages

The Organization of Firms Across Countries
No. 12-005
Nicholas Bloom, Raffaella Sadun and John Van Reenen
Strategy
August 2011
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Abstract:
We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.
Keywords: decentralization, trust, social capital, theory of the firm
JEL Codes: L2, M2, O32, O33.
65 pages

Platform Competition under Partial Belief Advantage
No. 12-066
Hanna Halaburda and Yaron Yehezkel
Strategy
February 2012
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Abstract:
This paper considers platform competition in a two-sided market that includes buyers and sellers. One of the platforms benefits from a partial belief advantage, in that each side believes that it is more likely that the other side will join the advantaged platform. We find that the degree of the platform's belief advantage affects its decision regarding the business model (i.e., whether to subsidize buyers or sellers), the access fees and the size of the platform. A slight increase in the platform's belief advantage may induce the advantaged platform to switch from subsidizing sellers to subsidizing buyers, or induce the disadvantaged platform to switch from subsidizing buyers to subsidizing sellers.
Keywords: platform competition, two-sided markets, belief advantage
35 pages

Price Competition under Multinomial Logit Demand Functions with Random Coefficients
No. 12-030
Gad Allon, Awi Federgruen, and Margaret Pierson
Technology and Operations Management
October 2011
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Abstract:
In this paper, we postulate a general class of price competition models with Mixed Multinomial Logit demand functions under affine cost functions. We first characterize the equilibrium behavior of this class of models in the case where each product in the market is sold by a separate, independent firm and customers share a common income level. We identify a simple and very broadly satisfied condition under which a Nash equilibrium exists while the set of Nash equilibria coincides with the solutions of the system of First Order Condition equations, a property of essential importance to empirical studies. This condition specifies that in every market segment, each firm captures less than 50% of the potential customer population when pricing at a level which, under the condition, can be shown to be an upper bound for a rational price choice for the firm irrespective of the prices chosen by its competitors. We show that under a somewhat stronger, but still broadly satisfied version of the above condition, a unique equilibrium exists. We complete the picture, establishing the existence of a Nash equilibrium, indeed a unique Nash equilibrium, for markets with an arbitrary degree of concentration; under sufficiently tight price bounds. We then discuss two extensions of our model: unequal customer income and a continuum of customer types. A discussion of the multi product case is included in the appendix. The paper concludes with a discussion of implications for structural estimation methods.
28 pages

Pricing and Efficiency in the Market for IP Addresses
No. 12-020
Benjamin Edelman and Michael Schwarz
Negotiation, Organizations & Markets
September 2011
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Abstract:
We consider market rules for the transfer of IP addresses, numeric identifiers required by all computers connected to the Internet. Excessive fragmentation of IP address blocks causes growth in the Internet's routing table, which is socially costly, so an IP address market should discourage subdividing IP address blocks more than necessary. Yet IP address transfer rules also need to facilitate purchase by the networks that need the addresses most, from the networks who value them least. We propose a market rule that avoids excessive fragmentation while almost achieving social efficiency, and we argue that implementation of this rule is feasible despite the limited powers of central authorities. We also offer a framework for the price trajectory of IPv4 addresses. In a world with- out uncertainty, the unit price of IPv4 is constant before the first time when all blocks of IPv4 addresses are in use and decreasing after that time. With uncertainty, the price before that time is a martingale, and the price trajectory afterwards is a supermartingale.
13 pages

Private and Public Decisions in Social Dilemmas: Evidence from Children's Behavior
No. 12-073
Daniel Houser, Natalia Montinari, and Marco Piovesan

February 2012
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Abstract:
Substantial research with adult populations has found that selfish impulses are less likely to be pursued when decisions are publicly observable. To the best of our knowledge, however, this behavioral regularity has not been systematically explored as potential solution to social dilemmas. This paper takes a step in that direction. We report data on the self-control decisions of children aged 6 to 11 who participated in games that require one to resist a selfish impulse for several minutes in order to benefit others. In one condition children make decisions in public view of the group of other participants, while in another they can make decisions either publicly or privately. In both conditions, we allow the group size to vary. We find that children aged 9 and higher are better able to resist selfish impulses in public environments. Younger children, however, display no such effect. Further, we find self-control substantially impacted by group size. When decisions are public, larger groups lead to better self-control, while in the private condition the opposite holds. Our findings suggest that announcing decisions publicly and to large groups may be part of a solution to some social dilemmas. In addition, the fact that public decision-making promotes pro-social behavior only in older children suggests this positive effect may stem from a desire to avoid shame.
28 pages

Private Equity and Employment
No. 12-033
Steven J. Davis, John Haltiwanger, Ron Jarmin, Josh Lerner, and Javier Miranda
Finance; Entrepreneurial Management
October 2011
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Abstract:
Private equity critics claim that leveraged buyouts bring huge job losses. To investigate this claim, we construct and analyze a new dataset that covers U.S. private equity transactions from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing outcomes to controls similar in terms of industry, size, age, and prior growth. Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.
51 pages

Relational Contracts and Organizational Capabilities
No. 12-061
R. Gibbons and R. Henderson
General Management, Strategy
January 2012
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Abstract:
A large literature identifies unique organizational capabilities as a potent source of competitive advantage, yet our knowledge of why capabilities fail to diffuse more rapidly-particularly in situations in which competitors apparently have strong incentives to adopt them and a well developed understanding of how they work-remains incomplete. In this paper we suggest that competitively significant capabilities often rest on managerial practices that in turn rely on relational contracts (i.e., informal agreements sustained by the shadow of the future). We argue that one of the reasons these practices may be difficult to copy is that effective relational contracts must solve the twin problems of credibility and clarity, and that while credibility might in principle be instantly acquired, clarity may take time to develop and may interact with credibility in complex ways, so that relational contracts may often be difficult to build.
33 pages

Reviews, Reputation, and Revenue: The Case of Yelp.com
No. 12-016
Michael Luca
Negotiation, Organizations & Markets
September 2011
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Abstract:
Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website Yelp.com and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant's rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp's rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5% to 9% increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation. I then test whether consumers use these reviews in a way that is consistent with standard learning models. I present two additional findings: (4) consumers do not use all available information and are more responsive to quality changes that are more visible and (5) consumers respond more strongly when a rating contains more information. Consumer response to a restaurant's average rating is affected by the number of reviews and whether the reviewers are certified as "elite" by Yelp, but is unaffected by the size of the reviewers' Yelp friends network.
40 pages

Salience in Quality Disclosure: Evidence from the U.S. News College Rankings
No. 12-014
Michael Luca and Jonathan Smith
Negotiation, Organizations & Markets
September 2011
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Abstract:
How do rankings affect demand? This paper investigates the impact of college rankings, and the visibility of those rankings, on students' application decisions. Using natural experiments from U.S. News and World Report College Rankings, we present two main findings. First, we identify a causal impact of rankings on application decisions. When explicit rankings of colleges are published in U.S. News, a one-rank improvement leads to a 1-percentage-point increase in the number of applications to that college. Second, we show that the response to the information represented in rankings depends on the way in which that information is presented. Rankings have no effect on application decisions when colleges are listed alphabetically, even when readers are provided data on college quality and the methodology used to calculate rankings. This finding provides evidence that the salience of information is a central determinant of a firm's demand function, even for purchases as large as college attendance.
29 pages

Short-termism, Investor Clientele, and Firm Risk
No. 12-072
Francois Brochet, Maria Loumioti, and George Serafeim
Accounting and Management
February 2012
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Abstract:
Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors. We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not mitigated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Overall, our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation.
54 pages

Social Enterprise Series No. 32: Value Creation in Business - Nonprofit Collaborations
No. 12-019
James E. Austin and M. May Seitanidi
September 2011
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95 pages

Sovereigns, Upstream Capital Flows and Global Imbalances
No. 12-009
Laura Alfaro, Sebnem Kalemli-Ozcan, and Vadym Volosovych
Business, Government and the International Economy
August 2011
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Abstract:
We decompose capital flows — both debt and equity — into public and private components and study their relationship with productivity growth. This exercise reveals that international capital flows are mainly shaped by government decisions and sovereign to sovereign transactions. Specifically, we show: (i) international capital flows net of government debt are positively correlated with growth and allocated according to the neoclassical predictions; (ii) international capital flows net of official aid flows, which are mostly accounted as debt, are also positively correlated with productivity growth consistent with the predictions of the neoclassical model; (iii) public debt flows are negatively correlated with growth only if government debt is financed by another sovereign and not by private lenders. Our results show that the failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature.
Keywords: current account, aid/government debt, reserves, puzzles of flows, productivity.
JEL Codes: F21, F41, O1
71 pages

Span of Control and Span of Activity
No. 12-053
Oriana Bandiera, Andrea Prat, Raffaella Sadun, and Julie Wulf
Strategy
December 2011, revised February 2012
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Abstract:
For both practitioners and researchers, span of control plays an important role in defining and understanding the role of the CEO. In this paper, we combine organizational chart information for a sample of 65 companies with detailed data on how their CEOs allocate their work time, which we define as their span of activity. Span of activity provides a direct measure of the CEO's management style, including the attention devoted to specific subordinates and functions, the time devoted to individual work and outside constituencies, a preference for multilateral or bilateral interaction, the degree of planning, etc. We find that CEOs with a larger number of reports spend more time with subordinates, more time on large meetings, less time on unplanned activities. The presence of a delegate, such as the COO, allows the CEO to reduce the time spent with insiders and to focus on bilateral and unplanned activities. These results suggest that time-use information is helpful in interpreting how span of control determines management style.
33 pages

Spatial Determinants of Entrepreneurship in India
No. 12-027
Ejaz Ghani, William R. Kerr, and Stephen O'Connell
Entrepreneurial Management
October 2011
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Abstract:
We analyze the spatial determinants of entrepreneurship in India in the manufacturing and services sectors. Among general district traits, quality of physical infrastructure and workforce education are the strongest predictors of entry, with labor laws and household banking quality also playing important roles. Looking at the district-industry level, we find extensive evidence of agglomeration economies among manufacturing industries. In particular, supportive incumbent industrial structures for input and output markets are strongly linked to higher establishment entry rates. We also find substantial evidence for the Chinitz effect where small local incumbent suppliers encourage entry. The importance of agglomeration economies for entry hold when considering changes in India's incumbent industry structures from 1989, determined before large-scale deregulation began, to 2005.
Keywords: Entrepreneurship, agglomeration, development, India, South Asia.
JEL Codes: L10, L26, L60, L80, M13, O10, R00, R10, R12
46 pages

Team Scaffolds: How Minimal In-Group Structures Support Fast-Paced Teaming
No. 12-062
Melissa A. Valentine and Amy C. Edmondson
Technology and Operations Management
January 2012
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Abstract:
Across many industries, particularly in health care delivery, interdependent work is performed under conditions that make bounded stable teams infeasible, creating a need to understand factors that foster teaming in the absence of team stability. Teaming refers to coordination and mutual adjustment that occurs during episodes of interdependent work. The present research investigates teaming in the high-stakes, fast-paced setting of a hospital emergency room, and focuses on the effects of a new organizational structure, which we call a team scaffold, on teaming effectiveness and performance outcomes. Using a hybrid research design that adapts and blends quantitative network methods with qualitative interview and observational data, we examine whether and how team scaffolds facilitate teaming in a dynamic, knowledge-intensive work environment. Although team scaffolds were implemented with little or no membership stability, their introduction triggered significant changes in teaming networks and behaviors in ways that improved operational performance.
56 pages

U.S. Healthcare Reform and the Pharmaceutical Industry
No. 12-015
Arthur Daemmrich
Business, Government and the International Economy
September 2011
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Abstract:
Fiercely contested before, during, and since its passage, the 2010 Patient Protection and Affordable Care Act (ACA) will restructure the U.S. healthcare market if fully implemented in coming years. This article describes the institutional and political context in which the ACA was passed, and develops estimates of its likely impact on the biopharmaceutical industry. Universal insurance, either through a government-run system or by mandated purchase of private insurance, has been controversial in the United States since it was first proposed in the mid-1930s. Even in the absence of national health coverage, the United States became the world's largest prescription drug market and emerged as the global leader in new drug research and testing. With health benefits globally from the availability of new drugs, albeit for poorer populations only after patent terms expire, changes to the U.S. healthcare system are also of significance to patients and the pharmaceutical industry internationally. This article evaluates how the ACA will affect the size of the biopharmaceutical market and competitive dynamics within the industry. Estimates are developed for healthcare spending in 2015 and 2020, especially for expenditures on prescription drugs in nominal terms and as a percentage of overall health spending. The article concludes with a discussion of the political economy of insurance and the sustainability of largely free-pricing of pharmaceuticals in the United States.
Keywords: Health policy, pharmaceutical industry, drug prices, health insurance, United States healthcare reform
37 pages

Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device
No. 12-060
Felipe Kast, Stephan Meier, and Dina Pomeranz
Entrepreneurial Management
January 2012
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Abstract:
While commitment devices such as defaults and direct deposits from wages have been found to be highly effective to increase savings, they are unavailable to the millions of people worldwide who do not have a formal wage bill. Self-help peer groups are an alternative commitment device that is widespread and highly accessible, but there is little empirical evidence evaluating their effectiveness. We conduct two randomized field experiments among low-income micro-entrepreneurs in Chile. The first experiment finds that self-help peer groups are very potent at increasing savings. In contrast, a more classical measure, a substantially increased interest rate, has no effect on the vast majority of participants. A second experiment is designed to unbundle the key elements of peer groups as a commitment device, through the use of regular text messages. It finds that surprisingly, actual meetings and peer pressure do not seem to be crucial in making self-help peer groups an effective tool to encourage savings.
55 pages

Understanding the Incentives of Commissions Motivated Agents: Theory and Evidence from the Indian Life Insurance Market
No. 12-055
Santosh Anagol, Shawn Cole, and Shayak Sarkar
Finance
January 2012
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Abstract:
We conduct a series of field experiments to evaluate two competing views of the role of financial service intermediaries in providing product recommendations to potentially uninformed consumers. One view argues intermediaries provide valuable product education, and guide consumers towards suitable products. Consumers understand how commissions affect agents' incentives, and make optimal product choices. The second view argues that intermediaries recommend and sell products that maximize the agents' well-being, with little or no regard for the customer. Audit studies in the Indian life insurance market find evidence supporting the second view: in 60-80% of visits, agents recommend unsuitable (strictly dominated) products that provide high commissions to the agents. Customers who specifically express interest in a suitable product are more likely to receive an appropriate recommendation, though most still receive bad advice. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong.
We then test how regulation and market structure affect advice. A natural experiment that required agents to describe commissions for a specific product caused agents to shift recommendations to an alternative product, which had even higher commissions but no disclosure requirement. We do find some scope for market discipline to generate debiasing: when auditors express inconsistent beliefs about the product suitable from them, and mention they have received advice from another seller of insurance, they are more likely to receive suitable advice. Agents provide better advice to more sophisticated consumers.
Finally, we describe a model in which dominated products survive in equilibrium, even with competition.
48 pages

What Do Development Banks Do? Evidence from Brazil, 2002-2009
No. 12-047
Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon
Business, Government and the International Economy
December 2011
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Abstract:
While some authors view development banks as an important tool to alleviate capital constraints in scarce credit markets and unlock productive investments, others see those banks as conduits of cheap loans to politically-connected firms that could obtain capital elsewhere. We test these contrasting views using data on loans and equity allocations in the period 2002-2009 by the Brazilian National Development Bank (BNDES), one of the largest development banks in the world. In our fixed effect regressions, we find that BNDES' allocations do not seem to affect firm-level operational performance and investment decisions, although they do reduce firm-level cost of capital due to the governmental subsidies accompanying loans. Next, examining the selection process through which BNDES' capital is allocated to firms, we find that BNDES apparently selects firms with good operational performance but also provides more capital to firms with political connections (measured as campaign donations to politicians who won an election). Yet, we do not find evidence that BNDES is systematically bailing out firms. In general, BNDES appears to be generally selecting firms with capacity to repay their loans, as regular commercial banks would do.
Keywords: Development banks, industrial policy, national champions, political economy
JEL Codes: O16, O25, H1, L3
48 pages

What Environmental Ratings Miss
No. 12-017
Auden Schendler and Michael Toffel
Technology and Operations Management
September 2011
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3 pages

What Impedes Oil and Gas Companies' Transparency?
No. 12-038
Paul Healy, Venkat Kuppuswamy, and George Serafeim
Accounting and Management
November 2011
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Abstract:
We examine determinants of oil and gas companies' transparency in reporting on business activities in host countries where they operate. We find that our index of transparency across host countries is lower the more corrupt the host country, the higher the number of nationalizations in that host country in the past, and the fewer the number of oil and gas companies operating in the host country. The results of additional tests are consistent with the risk of expropriation being a barrier to information disclosure about firm performance. In contrast, we find no evidence that disclosure of government payments is related to proprietary costs. Moreover, holding the host country constant we find that firms coming from more corrupt home countries are less transparent about their government payment.
49 pages

When to Sell Your Idea: Theory and Evidence from the Movie Industry
No. 12-039
Hong Luo
Strategy
November 2011
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Abstract:
How completely should an innovator develop his idea before selling it? In the context of selling original movie ideas, I present a model that features the writer's private information on the idea's value, different protection levels associated with different development stages, as well as costly buyer participation. The empirical results are consistent with the model's predictions: Inexperienced writers are excluded from the market for earlier-stage ideas, restricting their choices to developing the idea fully or abandoning it; writers who have a choice select better ideas to sell at a later stage and sell worse ideas at an earlier stage.
41 pages

Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management
No. 12-059
Maria Guadalupe, Hongyi Li, and Julie Wulf
Strategy
January 2012
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Abstract:
This paper shows that top management structures in large US firms radically changed since the mid-1980s. While the number of managers reporting directly to the CEO doubled, the growth was driven primarily by functional managers rather than general managers. Using panel data on senior management positions, we explore the relationship between changes in executive team composition, firm diversification, and IT investments-which arguably alter returns to exploiting synergies through corporate-wide coordination by functional managers in headquarters. We find that the number of functional managers closer to the product ("product" functions i.e., marketing, R&D) increase as firms focus their businesses, while the number of functional managers farther from the product ("administrative" functions i.e., finance, law, HR) increase with IT investments. Finally, we show that general manager pay decreases as functional managers join the executive team suggesting a shift in activities from general to functional managers-a phenomenon we term "functional centralization."
Keywords: communication, organizational design, functions, centralization, M-form, hierarchy, top management team, information technology, activities, diversification.
34 pages

Why do we redistribute so much but tag so little? The principle of equal sacrifice and optimal taxation
No. 12-064
Matthew Weinzierl
Business, Government and the International Economy
January 2012
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Abstract:
Tagging is a free lunch in conventional optimal tax theory because it eases the classic tradeoff between efficiency and equality. But tagging is used in only limited ways in tax policy. I propose one explanation: conventional optimal tax theory has yet to capture the diversity of normative principles with which society evaluates taxes. I generalize the conventional model to incorporate multiple normative frameworks. I then show that if the principle of equal sacrifice-a classic, comprehensive criterion of fair taxation proposed by John Stuart Mill and associated with the Libertarian normative framework-is given some weight in the social objective function, tagging generates costs that must be weighed against the benefits it generates through conventional channels. Only tags that are sufficiently predictive of ability, such as disability status, will be used. Calibrated simulations using micro data from the United States show that optimal policy may simultaneously include substantial redistribution across income-earning abilities, as in the standard model, and reject three prominently-proposed tags-gender, race, and height-as in actual policy. This explanation for limited tagging also implies that optimal marginal tax rates at high incomes are lower than in standard analysis and closer to those observed in policy.
28 pages

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