November 2009

The Effects of Health On Wealth
Americans without health insurance are one major illness away from financial catastrophe. David Dranove and his co-authors found uninsured middle aged people suffer lose nearly half their assets if they experience a major illness.

Keziah Cook

David Dranove

Andrew Sfekas

October 2009

Tort Reform No Miracle Cure
The lawyers can relax. There’s no need to follow Shakespeare’s advice to kill them after all.

Ronen Avraham

Leemore S. Dafny

Max M. Schanzenbach

October 2009

Reading the Org Chart
A firm’s organizational chart can reveal important insights into the inner workings of a firm. David Besanko suggests that the firm’s structure can also reveal much about its competencies and competitive advantages.

David A. Besanko

Pierre Régibeau

Katharine E Rockett

September 2009

There’s No Place Like Home
Investors strongly tilt their portfolios toward domestic assets and away from foreign instruments in a phenomenon called “home bias.” Wioletta Dziuda discusses how better information could level the imbalance between foreign and domestic mutual fund investments.

Wioletta Dziuda

Jordi Mondria

August 2009

Rational Retail Pricing
If there is one thing you would assume from basic marketing principles, it is that retailers should adapt prices to changing demand. Vincent Nijs notes, however, that if the cost of adapting prices exceeds the benefits, they won’t.

Shuba Srinivasan

Koen Pauwels

Vincent Nijs

August 2009

Super-Premium Ice Cream
When regulators evaluate proposed mergers and acquisitions, they use sophisticated econometric models. Current models consider price but not product variety. Michael Mazzeo and colleagues provide insights into conditions that result in merged companies providing greater product variety.

Michael J. Mazzeo

Michaela Draganska

Katja Seim

July 2009

Rationalization in Decision Making
Our inability to rationalize can constrain our ability to pick a favored option. Timothy Feddersen shows how rationalization impacts choices and can help economists understand why people make decisions that violate standard economic theories.

Vadim Cherepanov

Timothy Feddersen

Alvaro Sandroni

July 2009

Walking Away
With more than 20 percent of U.S. homeowners realizing negative equity, strategic defaults are on the rise. Paola Sapienza notes that moral and social considerations play a crucial role in dissuading householders from taking that route—that is, until potential losses reach a certain threshold.

Luigi Guiso

Paola Sapienza

Luigi Zingales

July 2009

$1,000 Cash Back
Auto manufacturers often turn to rebates to stimulate sales. The two most commonly used subsidies are payments made directly to customers and payments made directly to car dealers. Which one works better? Meghan Busse and Florian Zettelmeyer help sort out the answer.

Meghan Busse

Jorge Silva-Risso

Florian Zettelmeyer

June 2009

Picking Up Pennies for Profit
There’s more to “buy low, sell high” than just buying low and selling high. Twitchy markets spew endless, jittery streams of temporary highs and retreating lows. Which low is the “buy” low? When is the “sell” high? A sellers’ high today may be humdrum in a week. Noontime buyers’ rock-bottom low might not impress an hour later. Given these fluctuations in stock prices and the recalibration of highs and lows, traders probe the peaks and valleys in search of patterns and values. New research by Robert Korajczyk (Professor of Finance at the Kellogg School of Management), Kellogg alumnus Ronnie Sadka (Professor of Finance at Boston College), and Steven L. Heston (Professor of Finance at the University of Maryland) reveals surprising patterns that can help predict daily peaks in stock price. This work was deemed so influential in the field of quantitative investment that it was awarded the 2009 Crowell Prize by PanAgora Asset Management.

Steven L. Heston

Robert Korajczyk

Ronnie Sadka

June 2009

Global Dual Sourcing Strategies
Many researchers say that their greatest flashes of inspiration come not from extraordinary events but from everyday activities. Intuitive leaps are triggered by observing life unfolding around them, they say. We are all familiar with the anecdote - historically accurate or not - of an apple falling on Isaac Newton’s head while he rested beneath the tree, jolting him to contemplate universal gravitation.

Gad Allon

Jan A. Van Mieghem

March 2009

Uncertainty Principles
History has not been kind to price controls. During the French Revolution, caps on food prices that were lower than the cost of production encouraged merchants to keep their wares for themselves or sell them on the black market.

Robert Earle

Karl Schmedders

Tymon Tatur

February 2009

To Sell but not to Missell
Imagine you are at a major electronics chain store, finally ready to purchase that plasma television that would be just perfect for your recreation room. But when you tell the salesperson which model you want to take home, she asks you a few questions about your television room and viewing habits.

Roman Inderst

Marco Ottaviani

February 2009

Predicting Politics
Political prediction markets—in which participants buy and sell “contracts” based on who they think will win an election—accurately predicted Barack Obama’s 2008 victory. New research by Daniel Diermeier (Managerial Economics and Decision Sciences) and colleagues shows that these markets behave similar to financial markets, except when traders’ partisan feelings get in the way.

Saikat Ray Majumdera

Daniel Diermeier

Thomas A Rietz

Luís A. Nunes Amaral

February 2009

Measuring Trust
Consumer spending, home prices, 401(k) values, and employment levels are but a few of the economic vital signs that have plummeted during the upheaval of the past months. While these indicators help to describe today’s crisis, new research by Paola Sapienza (Kellogg) and Luigi Zingales (Booth) suggests that true insight into the root causes of a nation’s financial strength or weakness lies in a different measure: trust.

Paola Sapienza

Luigi Zingales

January 2009

Golf Lessons
When confronted by a Tiger Woods or a Michael Phelps, do challengers step up their game or throw in the towel? Managers often use internal competition to motivate employees, but new research suggests that adding a superstar to the mix might actually hurt productivity rather than help it.

Jennifer Brown

October 2008

Science as Team Sport
The Large Hadron Collider, accelerating subatomic particles to light speed before crashing them together in spectacular fashion 100 meters beneath the Franco-Swiss border, unites thousands of physicists and engineers from dozens of nations and hundreds of universities in one of the world’s largest scientific collaborations. But calculus, a cornerstone of mathematics that is wielded en masse in the collider’s humming tunnels and glowing control rooms, was developed by just two men, Gottfried Wilhelm Leibniz and Sir Isaac Newton, each of whom worked independently in the latter half of the 17th century.

Benjamin F. Jones

Stefan Wuchty

Brian Uzzi

October 2008

When Does Coordination Require Centralization?
The question of how large, multidivisional entities should organize has a long pedigree. Often relevant to governments, armies, corporations, and nongovernmental organizations, the topic has been debated for centuries; Plato's Republic, Sun Tzu's Art of War, and Aesop’s fables all addressed various forms of this problem.

Ricardo Alonso

Wouter Dessein

Niko Matouschek

September 2008

Strategic Activism and Nonmarket Strategy
In 1987 Rainforest Action Network (RAN) initiated a nationwide boycott against Burger King. At the core of their demands was the accusation that the contracts with Central American countries for exports of cheap hamburger beef resulted in “rainforests being denuded to provide pasture for cattle” (RAN 2007). The result: a 12 percent drop in Burger King’s sales and the cancellation of $35 million worth of contracts with the tropical countries. This example reflects a trend: activist organizations ceasing to direct their demands to governments and, according to David Baron and Daniel Diermeier, “increasingly turning to private politics to advance their agenda.”

David P. Baron

Daniel Diermeier

September 2008

Firm Size and Service Level
Both Ameritrade and E-Trade, small online brokerage firms, tout their guaranteed transaction times as part of their service to customers. However, capable large-scale competitors such as Merrill Lynch Direct make no such guarantee. Why do some firms choose to promote a customer service guarantee as one of their benefits while others are content to conform to the customer service standard set by their industry?

Gad Allon

Itay Gurvich

August 2008

Own-Brand and Cross-Brand Retail Pass-Through
Trade promotions drive the marketing strategies of packaged goods manufacturers. Roughly 60 percent of the marketing budget of major packaged goods manufacturers goes to offering wholesale discounts to retail partners. Not surprisingly then, manufacturers are concerned with how much of their promotional pricing gets passed through to the end-users of their products. Discrepancies between manufacturer and retailer estimates of pass-through often occur. Retailers claim to pass-through $7.5 billion more in trade promotions than manufacturers believe they do. Recent research published in Marketing Science explores this gap and offers insights into retailer behavior with regard to these promotions.

David A. Besanko

Jean-Pierre Dubé

Sachin Gupta

July 2008

Professional Forecasters
Imagine you are the chief operating officer for a Fortune 500 technology company and you have to sign off on a major pricing increase for your firm's best-selling product line in two days. All the internal data you have—labor costs, product sales/growth trends, competitors' and vendors' anticipated pricing—support the price increase. But you are still hesitant.

Marco Ottaviani

Peter Norman Sørensen

July 2008

The Price of Advice
Consulting is big business these days. Estimates put the turnover of management consulting firms in the United States alone at more than $120 billion. And, closer to home, roughly a third of every graduating MBA class at Kellogg joins a consulting firm for a median salary well into six figures. Since "consulting" can mean anything from providing information or advice professionally to firms and individual clients; working in fields such as information technology (IT), marketing, or human resources; or being a real estate agent, financial adviser, or lawyer, it is clear that consultants form a sizeable portion of the economy.

Péter Eső

Balázs Szentes

June 2008

Meeting Strangers and Friends of Friends
To many people, the years spent tangled in the twisted realm of high school romance may have seemed like hard time served in prison. New work by Brian Rogers (Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management) and Matthew Jackson (Professor of Economics at Stanford University) shows that patterns of social relationships found in these and other seemingly distinctive worlds are in fact surprisingly similar.

Matthew O. Jackson

Brian W. Rogers

April 2008

Concrete Threats
During the summer of 2007, a couple of months after finishing a draft of a paper on the Brazilian cement industry, Alberto Salvo, Assistant Professor of Management and Strategy, received a phone call from Elizabeth Farina, President of Brazil's Administrative Council for Economic Defense, an antitrust authority that is part of the Ministry of Justice.

Alberto Salvo

April 2008

A Borderline Question
Snaking 1,900 miles from Tijuana to Matamoros, San Diego to Brownsville, the border between Mexico and the United States might seem large. But its physical size is dwarfed by the passions that it evokes among hundreds of millions of people spread to its north and south. As anxiously scrutinized as they are heavily traversed, those miles of desert, rivers, and fences symbolize to some a gateway to everything that is great about America, while to others they are a gaping leak on a sinking ship. Even the most casual observer of America's front-page headlines or late-night TV monologues knows of big city rallies, millions of immigrants strong, and of the volunteer army of Minutemen, rifle-toting citizens intent on locking down the border. That border and its issues recently brought Congress to a standstill, and may help decide the next American President.

David A. Besanko

Brad Wible

March 2008

Running Neck and Neck
Phenom. Quad-core. FASN8. These may sound like a new car model, the type of engine under its hood, and a vanity license plate for it respectively, but in reality they are all microprocessors recently introduced by major chipmakers. More generally, they are moves in one of the most competitive current product races in the technology industry: the ongoing battle to develop the fastest processor.

Johannes Hörner

February 2008

Playing Well Together
Why do some people in human capital intensive industries such as law and medicine decide to work together in firms? When do firms "extend their boundaries" by including a wider range of work and people with a broader variety of expertise? Why do some human capital intensive industries tend to generate these associations while others do not? According to research published by Thomas Hubbard (Kellogg School of Management), the answers to these questions are shaped in part by the value of sharing information about economic opportunities.

Luis Garicano

Thomas N. Hubbard

February 2008

When Should a Firm Decentralize?
Ask a nanoscientist how an amazing new molecule was built and you're liable to hear, "It assembled itself." Observations of such self-organizing systems are increasingly common in the natural sciences, as complex structures and astounding properties emerge without any influence from external sources. In the corporate arena, however, a boardroom decision to let a company "assemble itself" would probably lead to panic on the trading floor. When it comes to corporate structuring, it is far more normal for the players to engage in some intelligent design, to co-opt the phrase. In this vein, Kellogg School of Management Professor Artur Raviv (Finance) and longtime collaborator Milton Harris (formerly of Kellogg, now at the University of Chicago) write in Management Science about how various features of corporations can determine the structures by which the company should be organized.

Milton Harris

Artur Raviv

January 2008

Big Fish, Little Fish—Choose Your Pond
"Stockholder and public disapproval of executive pay levels is growing and could lead to government intervention unless directors and managers confront the executive pay issue squarely and come to grips with it," wrote David Kraus in a 1980 Harvard Business Review article. At that time, an average chief executive officer (CEO) earned 42 times more than an average worker, and the ratio had been fairly stable for decades.

Bård Harstad

January 2008

Games Hospitals Play
Hospitals facing the entry of competitors that threaten to eat into their revenues act strategically to dissuade the potential competitors from entering the market. Hospitals, insurance companies, and doctors are economic agents reacting to economic conditions.

Leemore S. Dafny

December 2007

Are Reservations Recommended?
To understand restaurant reservations, we need an explanation that does not depend upon varying prices to customers. Alexandrov and Lariviere identify a variety of situations that effect whether it is in the best interests of a restaurant to offer or not offer reservations. Their research provides evidence that providing reservations can increase demand. Considering the additional operational advantages of allowing reservations, it is not surprising that restaurants and other service-based businesses offer reservations without getting paid for them.

Alexei Alexandrov

Martin Lariviere

November 2007

Nobel Designs
Roger Myerson, today on faculty at the University of Chicago Department of Economics, was an integral part of the Kellogg School’s famed Managerial Economics and Decision Sciences Department from 1976-2001 as the Harold L. Stuart Professor of Decision Sciences. It was during that time that much of his Nobel-winning research was conducted as part of a renowned team of Kellogg scholars who pushed the boundaries of how applied mathematics and game theory could generate breakthroughs in management education and strategy. Mechanism design is one of those breakthroughs. This article explains mechanism design and its importance.

Rakesh Vohra

November 2007

Place Your Bids
The traditional belief is that a high first offer results in a high selling price. This belief is rooted in a psychological principle known as anchoring, such that the size of an opening bid is a testament to the item’s value. The numerical value of an anchor sets the tone of more or less prestige of the product up for auction. Furthermore, a high opening bid can spark the rose-colored glasses effect, leading bidders to focus on the more positive features of an item. The researchers show that low rather than high opening bids—for a variety of products from shirts to fancy rugs in online auctions—generate high selling prices, demonstrating a reversal of the anchoring effect.

Gillian Ku

Adam D. Galinsky

J. Keith Murnighan

October 2007

The Value of a Cabinet Position
On May 28, 2007, Japan’s Minister of Agriculture, Toshikatsu Matsuoka, hanged himself in his residence. Accused of corruption and about to face an inquiry in Parliament, Mr. Matsuoka committed suicide. Were the accusations related to the power that his position conveyed? Mr. Matsuoka was facing corruption charges brought about by undeclared political donations.

Takanori Adachi

Yasutora Watanabe

August 2007

Does Location Matter for the Adoption of Internet Technologies in Business?
From traveling businessmen and women using PDAs as movable offices to large consortiums sharing supercomputing capabilities around the globe, advanced Internet technology has revolutionized the business world. It has obviously had an economic impact, changing the very way that companies do business. But what exactly is the impact? And how can businesses and regional planning boards benefit from a better understanding of the interplay between a business’s location and its adoption of Internet technology?

Christopher Forman

Avi Goldfarb

Shane Greenstein

July 2007

Compete or Cooperate?
For generations, would-be entrepreneurs and economists believed that start-up companies were created to bring new innovations to market rapidly and to compete with or displace established firms. The noted economist Joseph Schumpeter famously referred to this process of continuous innovation and displacement as “creative destruction.” Due to this conventional wisdom, the first instinct of most executives at start-ups today is to try to use new technology to outcompete larger, more established and less innovative firms.

Joshua S. Gans

David H. Hsu

Scott Stern

June 2007

“Acting White,” or Just Acting Rationally?
It is painfully well known that in America, black students lag behind white students in essentially all measures of academic achievement. Especially distressing is that many black students who might otherwise succeed are discouraged from doing so by peers who accuse them of “acting white” in their pursuit of education. David Austen-Smith (Kellogg School’s Department of Managerial Economics & Decision Sciences) and his colleague Roland Fryer Jr. (Harvard University) show that rather than reflecting some inherent dysfunction in individuals or communities, this phenomenon could result from perfectly rational individuals responding in the best way possible to their social and economic realities.

David Austen-Smith

Roland G. Fryer Jr.

June 2007

Do Leaders Matter?
The degree to which leaders matter is an old and unsettled question. Despite centuries of thought and study, this issue remains divisive. What none can doubt, however, is this: leaders die. And when they do, national economies can change in major, unexpected ways, according to research by Benjamin Jones, assistant professor of management and strategy at Kellogg, and his colleague Benjamin Olken (Harvard Society of Fellows). Their report in The Quarterly Journal of Economics provides clear evidence that unpredictable changes in a country’s leadership, due to the executive’s death by accident or illness, can trigger changes in gross domestic product (GDP) growth. In this new light, the grip of massive political institutions on economies appears much less commanding than was previously thought.

Benjamin F. Jones

Benjamin A. Olken

May 2007

Are Healthcare "Report Cards" Good for Patients?
Report cards may improve access to information in the market for healthcare, but also give doctors and hospitals incentives to decline to treat more difficult, severely ill patients. Whether the net impact for society is positive or detrimental depends on whether their financial and health benefits outweigh their costs in terms of quantity, quality, and the appropriateness of the medical treatment they induce.

David Dranove

Daniel Kessler

Mark McClellan

Mark Satterthwaite

April 2007

Uncertainty and Independence
Motel chain affiliation is more common than independent ownership when there is greater uncertainty about the prospects for an individual outlet’s success. Factors that contribute to uncertainty for a given motel location include proximity to an interstate highway, room capacity, competition, resident income, traffic volume, and the industry’s economic fluctuation. Under conditions of uncertainty, chain affiliation is beneficial because it helps to stabilize demand for an individual outlet. This research is extendable to the retail sector and service industries, as well as managers analyzing business partnerships and negotiating with suppliers.

Michael J. Mazzeo

April 2007

Healthcare Gets a Check-up
At issue is the reality that today's Americans are part of a healthcare system ridden with maladies, says Dranove, whose upcoming book takes readers on a journey through the barriers that prevent many from accessing quality care at reasonable cost. Employing an economic framework, Dranove chronicles the rise and fall of managed care, discusses ongoing changes (for better or worse, as he puts it) and concludes with his recommendations.

David Dranove

April 2007

Learning Curve
There are those who argue that intelligence, as reflected in test scores, is fixed and immutable. No need for additional schooling, they say; if a student performs poorly on standardized tests, not much can help. Kellogg School Professor Karsten Hansen begs to differ. In an award-winning paper published recently in the Journal of Econometrics, Hansen found evidence that an additional year of schooling can indeed boost test scores by up to 2 to 4 percent.

Karsten Hansen

James J. Heckman

Kathleen Mullen

April 2007

Clause and Effect
Record companies were incensed two years ago by a judge's decision to award $50 million to Universal Music Group. The judge had ruled that MP3.com, an online music service, had violated Universal's copyright by allowing users to listen to music online. Universal, along with four other record companies, had sued the Internet upstart. But Universal's rivals had settled when MP3 presented them with an apparently unbeatable deal.

Kathryn Spier