Archive
The Cost of Friendship
The Cost of Friendship
Source: Harvard Business School Working Papers
This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based “birds-of-a-feather-flock-together” effects in collaboration can be costly.
The Need for (Long) Chains in Kidney Exchange
The Need for (Long) Chains in Kidney Exchange
Source: Harvard Business School Working Papers
It is illegal in the U.S. and in most of the world to buy or sell organs for transplantation. Kidney exchange arises because a healthy person has two kidneys and can donate one to a person in need of a transplant. But a donor and his or her intended recipient may be incompatible. An incompatible patient-donor pair can exchange with another pair, or with more than one other pair, in a cycle of exchanges among patient-donor pairs that allows each patient to receive a kidney from a compatible donor. In addition, sometimes exchange can be initiated by an altruistic donor who does not designate a particular intended patient, and in that case a chain of exchanges need not form a closed cycle. This paper seeks to understand why such longer chains have become increasingly important in practical kidney exchange. The answer has to do with the growing percentage of patients for whom finding a compatible donor is difficult. These “highly sensitized” patients are those for whom finding a transplantable kidney is difficult, even from a donor with the same blood type, because of tissue-type incompatibilities. This paper shows that highly sensitized patients are the ones to benefit from longer cycles and chains, and that this does not harm low-sensitized patients. Key concepts include:
- As long as there is such a high percentage of highly sensitized patients, long chains will help by increasing the number of these patients who can receive transplants, and each altruistic donor can have a big effect.
Rainmakers: Why Bad Weather Means Good Productivity
Rainmakers: Why Bad Weather Means Good Productivity (PDF)
Source: Harvard Business School Working Paper
People believe that weather conditions influence their everyday work life, but to date, little is known about how weather affects individual productivity. Most people believe that bad weather conditions reduce productivity. In this research, we predict and find just the opposite. Drawing on cognitive psychology research, we propose that bad weather increases individual productivity by eliminating potential cognitive distractions resulting from good weather. When the weather is bad, individuals may focus more on their work rather than thinking about activities they could engage in outside of work. We tested our hypotheses using both field and lab data. First, we use field data on employees’ productivity from a mid-size bank in Japan, which we then match with daily weather data to investigate the effect of bad weather conditions (in terms of precipitation, visibility, and temperature) on productivity. Second, we use a laboratory experiment to examine the psychological mechanism explaining the relationship between bad weather and increased productivity. Our findings support our proposed model and suggest that worker productivity is higher on bad rather than good weather days. We discuss the implications of our findings for workers and managers.
Looking Up and Looking Out: Career Mobility Effects of Demographic Similarity among Professionals
Looking Up and Looking Out: Career Mobility Effects of Demographic Similarity among Professionals
Source: Harvard Business School Working Paper
While women and racial minorities have increasingly crossed the threshold into professional service organizations, the path to the top remains elusive. Why do inequalities persist? McGinn and Milkman study processes of cohesion, competition, and comparison by looking at career mobility in a single up-or-out professional service organization. Findings show that higher proportions of same-sex and same-race superiors enhanced the career mobility of junior professionals. On the flip side, however, higher proportions of same-sex or same-race peers increased the likelihood of women’s and men’s exit and generally decreased their chances of promotion. This research highlights how important it is to look at both cooperative and competitive effects of demographic similarity when trying to address the problem of persistent underrepresentation of women and minorities at the highest levels in organizations. Key concepts include:
- Social comparisons lead to measurable effects on individuals’ careers, in turn shaping the demographic composition at the top of professional service organizations.
- Organizations should attend to the ways in which policies and practices invoke competition and comparison within demographic categories.
- Clustering same-race or same-sex junior employees to provide an increased sense of community may have the opposite effect of that desired, unless accompanied by senior professionals’ active sponsorship of juniors across demographic lines.
- Attempts to design employment practices that are blind to the demographics of candidates are likely to succeed only if all candidates perceive and receive equal mentoring, sponsorship, and peer support regardless of their race and gender.
- Among peers, the potentially positive role for social cohesion could be compromised by minimal interaction in day-to-day work, while limited opportunities for choice assignments and promotion lend a distinctly competitive edge to the work environment. Junior professionals perceive that they are easily replaced by peers.
When Performance Trumps Gender Bias: Joint versus Separate Evaluation
When Performance Trumps Gender Bias: Joint versus Separate Evaluation (PDF)
Source: Harvard Business School Working Papers
We examine a new intervention to overcome gender biases in hiring, promotion, and job assignments: an “evaluation nudge,” in which people are evaluated jointly rather than separately regarding their future performance. Evaluators are more likely to focus on individual performance in joint than in separate evaluation and on group stereotypes in separate than in joint evaluation, making joint evaluation the money-maximizing evaluation procedure. Our findings are compatible with a behavioral model of information processing and with the System 1/System 2 distinction in behavioral decision research where people have two distinct modes of thinking that are activated under certain conditions.
Signs of a Turnaround in the U.S. Housing Market: 2012 State of the Nation’s Housing Report Released
Signs of a Turnaround in the U.S. Housing Market: 2012 State of the Nation’s Housing Report Released
Source: Joint Center for Housing Studies, Harvard University
From press release (PDF):
Housing markets are showing signs of reviving, concludes The State of the Nation’s Housing report released today by the Joint Center for Housing Studies of Harvard University. “While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices,” says Eric S. Belsky, Managing Director of the Joint Center for Housing Studies. “With new home inventories at record lows, unless the broader economy goes into a tailspin, stronger sales should further stabilize prices and pave the way for a pickup in single-family housing construction over the course of 2012.”
Rental markets are on the mend thanks to sharp drops in construction and an increase of over 4.4 million renters since 2005. Rental vacancy rates are falling, rents are increasing, and multifamily construction is up solidly. In contrast, the nation’s homeownership rate continues to slide.
“Surveys consistently find that the overwhelming majority of young adults plan to own a home in the future, but many would-be buyers have stayed on the sidelines waiting for the job outlook to improve and house prices to stop falling,” says Belsky. “But as markets tighten, these fence-sitters may begin to take advantage of today’s lower home prices and unusually low mortgage rates. With rents up, home prices sharply down, and mortgage interest rates at record lows, monthly mortgage costs relative to monthly rents haven’t been this favorable since the early 1970s.”
While gaining ground, the homeowner market still faces a number of challenges, the Harvard report cautions. The backlog of roughly two million homes in the foreclosure process will keep distressed sales elevated and could keep price increases in check in places hardest hit by foreclosures. At the same time, growth may remain muted due to the more than 11 million homeowners who owe more on their mortgages than their homes are worth. These owners cannot sell without incurring a loss and have no home equity to borrow against to fund major remodels.
“What the housing sector needs is a sustained increase in jobs to bring household growth back to its long-term pace and spur demand,” says Chris Herbert, Director of Research at the Joint Center for Housing Studies. “The country has seen new household formations fall well below expected long-run rates due to a falloff in young adults being able to move out on their own and a slowdown in net immigration. Even in 2011, fewer than 700,000 households were added and that’s well below the 1.2 million or more annual trend expected under more normal economic conditions.”
Corporate Social Responsibility and Access to Finance
Corporate Social Responsibility and Access to Finance (PDF)
Source: Harvard Business School Working Papers
In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to a) reduced agency costs due to enhanced stakeholder engagement and b) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. Moreover, we provide evidence that both of the hypothesized mechanisms, better stakeholder engagement and transparency around CSR performance, are important in reducing capital constraints. The results are further confirmed using an instrumental variables and a simultaneous equations approach. Finally, we show that the relation is driven by both the social and the environmental dimension of CSR.
Isolated Capital Cities, Accountability and Corruption: Evidence from US States
We show that isolated capital cities are robustly associated with greater levels of corruption across US states. In particular, this is the case when we use the variation induced by the exogenous location of a state’s centroid to instrument for the concentration of population around the capital city. We then show that different mechanisms for holding state politicians accountable are also affected by the spatial distribution of population: newspapers provide greater coverage of state politics when their audiences are more concentrated around the capital, and voter turnout in state elections is greater in places that are closer to the capital. Consistent with lower accountability, there is also evidence that there is more money in state-level political campaigns in those states with isolated capitals. We find that the role of media accountability helps explain the connection between isolated capitals and corruption. In addition, we provide some evidence that this pattern is also associated with lower levels of public good spending and outcomes.
See: Researchers Find Link Between Isolated State Capitals, Corruption (NPR)
Clear and Present Danger: Planning and New Venture Survival Amid Political and Civil Violence
Clear and Present Danger: Planning and New Venture Survival Amid Political and Civil Violence
Source: Harvard Business School
Strategy theory often takes for granted the role of state institutions in providing stable, predictable environments in which new firms are founded. Yet, many states around the world (such as Iraq, Sudan, South Sudan, Syria, and the Democratic Republic of Congo) lack political institutions of sufficient strength to ensure personal safety and public order, thereby creating environments where civil and political violence can ferment. This paper explores the impact of such violence on new venture processes. Results show that comprehensive planning was negatively correlated with venture survival in such environments. While there are implications for strategy theory, the study is also relevant to entrepreneurs and organizations promoting new venture planning in less-developed countries, particularly those experiencing political and civil turmoil. Currently, prospective entrepreneurs are taught the importance of business planning by both universities and non-governmental organizations that offer entrepreneurial training. But this study suggests that such training will have mixed effects on new venture survival, depending on the extent to which these entrepreneurs pursue ventures in violent and uncertain environments. In such contexts where governments fail to maintain public safety and order, these training programs may actually increase the likelihood of new venture failure. Key concepts include:
- This paper theorizes and tests how contexts characterized by weak political institutions and ensuing high levels of violence create uncertain and unpredictable environments that alter entrepreneurial behavior and disrupt resource flows and organizational routines, thereby increasing new venture failure rates.
- In contexts of high uncertainty as a result of violence, the benefits of comprehensive planning vanish as prior predictions become obsolete and even harmful to venture survival.
- Strategy theories often assume specific types of environments. But it is important to consider carefully the macro institutional factors.
+ Full Paper (PDF)
Competition and Illicit Quality
Competition and Illicit Quality
Source: Harvard Business School Working Papers
Competition is typically thought to generate many positive outcomes including lower prices and higher productivity. But competition can also lead firms to increase quality for their customers in ways that are both illegal and socially costly. This paper examines the impact of competition on the vehicle emissions testing market, and finds that firm misconduct increases with competitive pressure and the threat of losing customers to rival firms. These results have serious implications for policy makers and managers. This paper is among the first to empirically demonstrate that increased competition can motivate firms to provide illicit quality to avoid losing business. Key concepts include:
- Firms seeking to enforce legal and ethical conduct among managers and employees must be especially vigilant when operating in highly competitive markets.
- Increased competition within markets may encourage competitors to cross legal boundaries in ways that threaten the profits of legally compliant firms.
- In the absence of effective monitoring by government institutions, firms may benefit from privately monitoring their competitors’ behavior to ensure that rivals do not maintain a competitive advantage through illicit actions.
- Policy makers must carefully consider the optimal market structure for industries in which illicit actions yield cost reductions or are demanded by customers. While competition may yield lower prices and better choice for customers, it may also bring the increased social costs of illegal behavior by firms.
- Since managers may be under considerable pressure to cross legal and ethical lines when market competition is high, avoiding government sanctions requires top managers and owners to strengthen monitoring and governance mechanisms to ensure legal compliance.
- Managers must understand that government policy, firm decisions, or exogenous factors that increase market rivalry may necessitate the monitoring of competitors’ behavior. The failure to do so may allow these rivals to gain advantage through illicit strategies, particularly under institutional regimes where regulatory monitoring or enforcement is weak.
+ Full Paper (PDF)
HBS — Most Popular Articles of 2011
You, our readers, are especially hungry for information about individual leadership, according to a tally of the most-read feature stories and faculty working papers over the past year, half of which focused either on how to be a better leader or on the factors that lead some leaders to behave badly. Other apparent areas of interest in the last 12 months included corporate social responsibility, marketing techniques, and, of course, the ubiquitous Lady Gaga.
Here are the Top 10 most-read articles and 10 most-read working papers that appeared in HBS Working Knowledge in 2011. As you reflect on the trends of yesteryear, we ask that you also turn your thoughts to 2012. What do you think will be the top areas of concern for managers in the coming months? Please share your thoughts in the comments section, and have a happy new year!
Despite Increasing Concerns about High Health Care Costs, New Survey Finds Little Support among Americans for Decisions That Limit Use of High-Cost Prescription Drugs and Treatments
A new survey by the Harvard School of Public Health and the Alliance for Aging Research finds that a majority (62%) of Americans oppose decisions by the government or health insurance plans where prescription drugs or medical or surgical treatments are not paid for because the payors determine that the benefits do not justify the cost. The exception is if there’s evidence that something else works equally well but costs less. A majority (64%) of Americans believe the government or health insurance plans should not pay for a more expensive prescription drug or medical or surgical treatment if it has not been shown to work better than less expensive ones. Majorities in Italy and Germany share both of these beliefs with the U.S. public. In the United Kingdom, at least a plurality shares these beliefs.
CEO Bonus Plans: And How to Fix Them
CEO Bonus Plans: And How to Fix Them
Source: Harvard Business School Working Paper
Discussions about incentives for CEOs in the United States begin, and often end, with equity-based compensation. After all, stock options and (more recently) grants of restricted stock have comprised the bulk of CEO pay since the mid-1990s, and the changes in CEO wealth due to changes in company stock prices dwarf wealth changes from any other source. Too often overlooked in the discussion, however, is the role of annual and multiyear bonus plans—based on accounting or other non-equity-based performance measures—in rewarding and directing the activities of CEOs and other executives. In this paper, Kevin J. Murphy and Michael C. Jensen describe many of the problems associated with traditional executive bonus plans, and offer suggestions for how these plans can be vastly improved. The paper includes recommendations and guidelines for improving both the governance and design of executive bonus plans and, more broadly, executive compensation policies, processes, and practices. The paper is a draft of a chapter in Jensen, Murphy, and Wruck (2012), CEO Pay and What to Do About it: Restoring Integrity to both Executive Compensation and Capital-Market Relations, forthcoming from Harvard Business School Press. Key concepts include:
- While compensation committees know how much they pay in bonuses and are generally aware of performance measures used in CEO bonus plans, relatively little attention is paid to the design of the bonus plan or the unintended consequences associated with common design flaws.
- These recommendations for improving executive bonus plans 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.
- In the absence of “clawback” provisions, boards are rewarding and therefore providing incentives for CEOs and other executives to lie and game the system. Any compensation committee and board that fails to provide for the recovery of ill-gained rewards to its CEO and executives is breaching another of its important fiduciary duties to the firm.
+ Full Paper (via SSRN)
Retirees and Those Near Retirement Have Different Views of Golden Years
Retirees and Those Near Retirement Have Different Views of Golden Years
Source: Harvard School of Public Health
One in four retirees think life in retirement is worse than it was before they retired, according to a poll by NPR, the Robert Wood Johnson Foundation, and the Harvard School of Public Health released today. The poll shows stark differences between what pre-retirees think retirement will be like, and what retirees say is actually the case.
“Those of us over 50 and working are optimistic about our future health and health care, but that optimism is not necessarily shared by those who have already retired,” said Risa Lavizzo-Mourey, MD, MBA, president and CEO of the Robert Wood Johnson Foundation. “Many people who have already retired say their health is worse, and they worry about costs of medical treatment and long-term care. Insights from the poll can help policy-makers and others think about how to meet the needs of aging Americans. There are changes we can make to our health care system, finances, and communities that might help ensure that our retirement years will be as fulfilling as we hope.”
The poll focuses on views and experiences related to retirement among people over age 50, including not only people who have retired, but also people who plan to retire (“pre-retirees”) and those who do not plan to do so. It was conducted by researchers at the Harvard School of Public Health.
+ Summary (PDF)
+ Complete poll findings (PDF)
The Global Economic Burden of Non-communicable Diseases
The Global Economic Burden of Non-communicable Diseases (PDF)
Source: World Economic Forum and Harvard School of Public Health
Non-communicable diseases have been established as a clear threat not only to human health, but also to development and economic growth. Claiming 63% of all deaths, these diseases are currently the world’s main killer. Eighty percent of these deaths now occur in low- and middle-income countries. Half of those who die of chronic non-communicable diseases are in the prime of their productive years, and thus, the disability imposed and the lives lost are also endangering industry competitiveness across borders.
Recognizing that building a solid economic argument is ever more crucial in times of financial crisis, this report brings to the global debate fundamental evidence which had previously been missing: an account of the overall costs of NCDs, including what specific impact NCDs might have on economic growth. The evidence gathered is compelling. Over the next 20 years, NCDs will cost more than US$ 30 trillion, representing 48% of global GDP in 2010, and pushing millions of people below the poverty line. Mental health conditions alone will account for the loss of an additional US$16.1 trillion over this time span, with dramatic impact on productivity and quality of life.
By contrast, mounting evidence highlights how millions of deaths can be averted and economic losses reduced by billions of dollars if added focus is put on prevention. A recent World Health Organization report underlines that population-based measures for reducing tobacco and harmful alcohol use, as well as unhealthy diet and physical inactivity, are estimated to cost US$ 2 billion per year for all low- and middle-income countries, which in fact translates to less than US$ 0.40 per person.
The rise in the prevalence and significance of NCDs is the result of complex interaction between health, economic growth and development, and it is strongly associated with universal trends such as ageing of the global population, rapid unplanned urbanization and the globalization of unhealthy lifestyles. In addition to the tremendous demands that these diseases place on social welfare and health systems, they also cause decreased productivity in the workplace, prolonged disability and diminished resources within families.
The results are unequivocal: a unified front is needed to turn the tide on NCDs. Governments, but also civil society and the private sector must commit to the highest level of engagement in combatting these diseases and their rising economic burden. Global business leaders are acutely aware of the problems posed by NCDs. A survey of business executives from around the world, conducted by the World Economic Forum since 2009, identified NCDs as one of the leading threats to global economic growth. Therefore, it is also important for the private sector to have a strategic vision on how to fulfill its role as a key agent for change and how to facilitate the adoption of healthier lifestyles not only by consumers, but also by employees. The need to create a global vision and a common understanding of the action required by all sectors and stakeholders in society has reached top priority on the global agenda this year, with the United Nations General Assembly convening a High-Level Meeting on the prevention and control of NCDs.
The Impact of Voluntary Youth Service on Future Outcomes: Evidence from Teach For America
The Impact of Voluntary Youth Service on Future Outcomes: Evidence from Teach For America (PDF)
Source: Harvard University and National Bureau of Economic Research
Nearly one million American youth have participated in service programs such as Peace Corps and Teach For America. This paper provides the first causal estimate of the impact of service programs on those who serve, using data from a web-based survey of former Teach For America applicants. We estimate the effect of voluntary youth service using a sharp discontinuity in the Teach For America application process. Participating in Teach For America increases racial tolerance, makes individuals more optimistic about the life chances of poor children, and makes them more likely to work in education. We argue that these facts are broadly consistent with the “Contact Hypothesis,” which states that, under appropriate conditions, interpersonal contact can reduce prejudice.
Advertising, the Matchmaker
Advertising, the Matchmaker
Source: Harvard Business School (RAND Journal of Economics)
We empirically study the informational role of advertising in matching consumers with products when consumers are uncertain about both observable and unobserved program attributes. Our focus is on the network television industry, in which the products are television shows. We estimate a model that allows us to distinguish between the direct effect of advertising on utility and its effect through the information set. A notable behavioral implication is that exposure to informational advertising can decrease the consumer’s tendency to purchase the promoted product. The structural estimates imply that an exposure to a single advertisement decreases the consumer’s probability of not choosing her best alternative by approximately 10%. Our results are relevant for industries characterized by product proliferation and horizontal differentiation.
With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship
With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship (PDF)
Source: Harvard Business School Working Papers
To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background, but in a more complex way than the literature has previously suggested: A higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.
When Smaller Menus Are Better: Variability in Menu-Setting Ability
When Smaller Menus Are Better: Variability in Menu-Setting Ability
Source: Harvard Business School Working Papers
The economics literature on choice focuses on individuals’ decisions when faced with a given menu. However, the menu itself is often the result of pre-selection by a menu setter. We develop a model to study the relation between the ability of the menu setter and the size and quality of the menu. We show that when the cost of increasing the size of the menu is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior to the menu optimally offered by a lower-ability menu setter. This results in a negative relation between menu size and menu quality, i.e., a smaller menu is better than a larger menu. We illustrate this result empirically in the context of 401(k) plans, where we show a negative relation between the number of investment choices in a 401(k) plan and the quality of the optimal portfolio achievable given those investment choices.
The Consequences of Mandatory Corporate Sustainability Reporting
The Consequences of Mandatory Corporate Sustainability Reporting (PDF)
Source: Harvard Business School Working Papers
We examine the effect of mandatory sustainability reporting on several measures of socially responsible management practices. Using data for 58 countries, we show that after the adoption of mandatory sustainability reporting laws and regulations, the social responsibility of business leaders increases. We also document that both sustainable development and employee training become a higher priority for companies and that corporate governance improves. Furthermore, we find that companies implement more ethical practices, including reducing bribery and corruption, which increases managerial credibility. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports. We conclude with thoughts about mandatory sustainability and integrated reporting.
