Management Insights

Abstract

How Costly Is Diversity? Affirmative Action in Light of Gender Differences in Competitiveness (p. 1) Muriel Niederle, Carmit Segal, Lise Vesterlund Do two wrongs make a right? Since the Civil Rights Act of 1964, affirmative action has been used to compensate for the distortion that discrimination imposes on the selection of candidates. However, affirmative action has been often criticized for causing reverse discrimination and lowering the qualifications of those hired under the policy. But affirmative action could have a similar corrective impact when qualified individuals fail to apply for a job. The authors evaluate the effect of introducing a female gender quota in an environment where high-performing women fail to enter competitions they can win because they are discouraged. The authors show that guaranteeing women equal representation among winners increases their entry. The response exceeds that predicted by the change in probability of winning and is in part driven by women being more willing to compete against other women. The insight for management: Affirmative action helps more than it hurts; if employers choose the best candidate from a pool, affirmative action can boost the talent in the pool by encouraging broader participation. Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending (p. 17) Mingfeng Lin, Nagpurnanand R. Prabhala, Siva Viswanathan Do popular people get all the breaks? The authors study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. The authors examine a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, and find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The insight for management: Friendships in P2P markets are a good indicator of credit quality; more friends means lower probability of default. Buying Beauty: On Prices and Returns in the Art Market (p. 36) Luc Renneboog, Christophe Spaenjers Is beauty in the eye of the money holder? The Wall Street Journal estimated that approximately 6% of total wealth is held in “passion investments” such as art. But what determines the value of art? For example, Claude Monet's Dans la Prairie sold for 11.2 million British pounds in 2009 after being sold for 14.3 million in 1988 and 15.4 million in 1999. The authors examine the price determinants and investment performance of art by statistical examination of more than one million auction transactions of paintings and works on paper. The authors conclude that art has appreciated in value by a moderate 3.97% per year, in real U.S. dollar terms, between 1957 and 2007—a performance similar to that of corporate bonds—at much higher risk. The authors find larger average price appreciations, but higher volatilities, in higher price brackets. The authors find that measures of high-income consumer confidence and art market sentiment predict art price trends. The insight for management: Buy art to hang on your wall, not to pay for your retirement. Performance Appraisals and the Impact of Forced Distribution—An Experimental Investigation (p. 54) Johannes Berger, Christine Harbring, Dirk Sliwka Working hard, or hardly working? That is the question! As one might imagine, an employee's true efforts are at best imprecisely captured by objective figures. The authors conduct a real-effort experiment in which supervisors have to rate the performance of individual workers who in turn receive a bonus payment based on these ratings. They compare a baseline treatment in which supervisors are not restricted in their rating behavior to a forced distribution system in which they have to assign differentiated grades. They find that productivity is significantly higher under a forced distribution by approximately 6% to 12%. However, the productivity effects are less clear-cut when participants have prior experience with the system, and, worse, a forced distribution becomes detrimental when workers have access to a simple option to sabotage each other. The insight for management: Forced distribution evaluation improves effort but may also increase destructive competition between employees. The Advertising Mix for a Search Good (p. 69) Simon P. Anderson, Régis Renault Want to know more? Call now! Advertising performs many functions, such as informing consumers, signaling quality, and confirming prices. But one key role of advertising is to excite potential consumers into learning more about the product. Advertising content might contain quality information, price information, and attributes to appeal to a certain subset of customers. But which of these does an advertiser stress to generate consumer interest in seeking more information? The authors find that first quality information is disclosed, then price information is revealed, and then “horizontal product information” (attributes that appeal to some consumer segments) is added to the advertising mix. The insight for management: A dynamic advertising strategy with changing emphases must be employed to garner maximal consumer interest in learning more about your product. Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation (p. 84) Qian Liu, Dan Zhang What to buy, and when to buy it? Consumers might choose to purchase not only between products, but also between points in time. What is the appropriate pricing strategy given these dynamics? The authors show that more thoughtful consumers can reduce the profit of firms, but lower-valuation customers are particularly adversely affected. Interestingly, if either firm can hold the line on prices, both firms are generally more profitable. This is particularly true if higher-quality firms can hold prices constant. The insight for management: Pricing games over time are less successful in the face of intelligent consumers; firms can be more profitable through simpler and less costly static pricing strategies. Appropriability Mechanisms and the Platform Partnership Decision: Evidence from Enterprise Software (p. 102) Peng Huang, Marco Ceccagnoli, Chris Forman, D. J. Wu How do intellectual property rights affect entry into the market for complementary applications from independent software providers? The authors examine whether ownership of intellectual property rights (IPR) or downstream capabilities is effective in encouraging entry into markets complementary to a proprietary platform by preventing the platform owner from expropriating rents from start-ups. They study this question in the context of the software industry, an environment where evidence of the efficacy of IPR as a mechanism to appropriate the returns from innovation has been mixed. Entry is measured by an independent software vendor's (ISV's) decision to become certified by a platform owner and produce applications compatible with the platform. They find that ISVs with a greater stock of formal IPR (such as patents and copyrights), and those with stronger downstream capabilities (as measured by trademarks and consulting services) are more likely to join the platform, suggesting that these mechanisms are effective in protecting ISVs from the threat of expropriation. The insight for management: Careful use and distribution of intellectual property rights can encourage varying levels of participation in complementary product development. Intertemporal CAPM with Conditioning Variables (p. 122) Paulo Maio What factors might explain dispersion in excess returns? The author introduces a scaled cash-flow factor that results from the interaction between cash-flow news and lagged values of market dividend yield or consumer price index inflation. The author finds that the scaled ICAPM performs well in general, and prices particularly well the momentum portfolios. It compares favorably with alternative asset pricing models in pricing both sets of equity portfolios. Furthermore, the scaled factor is decisive to account for the dispersion in average excess returns between past winner and past loser stocks. The insight for management: A time-varying cash-flow beta/price of risk provides a rational explanation for momentum. GUB Covers and Power-Indexed Formulations for Wireless Network Design (p. 142) Fabio D'Andreagiovanni, Carlo Mannino, Antonio Sassano High-tech wireless networks such as the Internet, television, radio, and mobile communications depend on efficient network design. The authors provide a new approach to the problem of configuring a set of transmitters to provide service coverage to a set of receivers that is quicker to solve and better matches the situation in practice. The insight for management: New modeling techniques make configuring wireless networks faster and more accurate. Diagnostic Accuracy Under Congestion (p. 157) Saed Alizamir, Francis de Véricourt, Peng Sun Conduct a quick assessment or an accurate one? This is a tough choice faced by triage nurses, first-level technical support agents, and employees making maintenance decisions. In diagnostic services, agents typically need to weigh the benefit of running an additional test and improving the accuracy of diagnosis against the cost of delaying the provision of services to others. The authors analyze how to dynamically manage this accuracy/congestion trade-off. The diagnostic process consists of a search problem in which the service provider conducts a sequence of imperfect tests to determine the customer's type. They find that the agent should continue to perform the diagnosis as long as his current belief that the customer is of a given type falls into an interval that depends on the congestion level as well as the number of performed tests thus far. This search interval should shrink as congestion intensifies and as the number of performed tests increases if additional conditions hold. The authors find that the optimal search interval shrinks when customer types are more ambiguous a priori, i.e., as the base rate approaches the value at which the agent is indifferent between types. Surprisingly, because of congestion effects, the agent should sometimes diagnose the customer as being of a given type, even if test results indicate otherwise. The insight for management: Congestion affects optimal service times for triage-like diagnoses. Worst-Case Value at Risk of Nonlinear Portfolios (p. 172) Steve Zymler, Daniel Kuhn, Berç Rustem How should one allocate assets among investment alternatives when there is sizable downside risk? Value-at-risk (VaR) methods are used by regulators for evaluating such investments, but problems involving VaR are often computationally intractable and require complete information about the return distribution of the portfolio constituents, which is rarely available in practice. These difficulties are compounded when the portfolio contains derivatives. The authors offer two tractable conservative approximations for the VaR of a derivative portfolio. Their method offers approximations for portfolios containing long positions in European options expiring at the end of the investment horizon and one for portfolios containing long and/or short positions in European and/or exotic options expiring beyond the investment horizon. The insight for management: Advances in portfolio optimization with considerable downside risk allow for more tractable portfolio optimization. Collaborative Cost Reduction and Component Procurement Under Information Asymmetry (p. 189) Sang-Hyun Kim, Serguei Netessine How much should a manufacture rely on its suppliers? Many firms rely heavily on the expertise and resources provided by suppliers when developing new products. Japanese keiretsus are famous examples of heavily leveraging close relationships to gain success. During development of an innovative product there is often considerable uncertainty about component production cost, and it is of interest for both the manufacturer and the supplier to engage in a collaborative effort to reduce this uncertainty and lower the expected cost. Despite the obvious benefits that this brings, the supplier may be reluctant to collaborate because he fears revealing his proprietary cost information. The authors investigate how information asymmetry and procurement contracting strategies interact to influence the supply chain parties' incentives to collaborate. The authors identify a simple strategy, expected margin commitment (EMC), that effectively promotes collaboration. The manufacturer prefers EMC if collaboration leads to a large reduction in unit cost and/or demand variability is low. Otherwise, a screening contract based on price and quantity is preferred. The insight for management: Better collaboration in new product development can be attained through relatively simple strategies. The Effect of Information Technology–Enabled Flexibility on Formation and Market Value of Alliances (p. 207) Ali Tafti, Sunil Mithas, M. S. Krishnan How can information technology (IT) affect the likelihood of success of alliances and joint ventures? Three dimensions of IT architecture flexibility (open communication standards, cross-functional transparency, and modularity) can have an effect on formation of three types of alliances (arm's-length, collaborative, and joint-venture). The authors examine how capabilities in IT flexibility can enhance the value derived from alliances. Through empirical analysis of 169 joint ventures, they find that adoption of open communication standards is associated with the formation of arm's-length alliances and that modularity of IT architecture is associated with the formation of joint ventures. They also find that IT architecture flexibility enhances the value of arm's-length, collaborative, and joint-venture alliances. The contribution of IT flexibility to value is greater in the case of collaborative alliances than in arm's-length alliances. The insight for management: Appropriate investments in IT can help to facilitate reconfiguration of resources and modification of processes in collaboration-intensive alliances. Crowdsourcing New Product Ideas over Time: An Analysis of the Dell IdeaStorm Community (p. 226) Barry L. Bayus “Crowdsourcing” is the practice of taking a task once performed by an employee and outsourcing it to a large, undefined group of people outside the company, usually customers. Several organizations have developed ongoing crowdsourcing communities that repeatedly collect ideas for new products and services from a large, dispersed “crowd” of nonexperts (consumers) over time. Despite its promises, little is known about the nature of an individual's ideation efforts in such an online community. Studying Dell's IdeaStorm community, serial ideators are found to be more likely than singular ideators to generate an idea that the organization finds valuable enough to implement, but they are unlikely to repeat their early success once their ideas are implemented. As ideators with past success attempt to again come up with ideas that will excite the organization, they instead end up proposing ideas similar to their ideas that were already implemented (i.e., they generate less diverse ideas). The negative effects of past success are somewhat mitigated for ideators with diverse commenting activity on others' ideas. The insight for management: There are challenges in maintaining an ongoing supply of high-quality ideas from the crowd over time. Effects of Piracy on Quality of Information Goods (p. 245) Atanu Lahiri, Debabrata Dey Worldwide losses caused by software piracy are estimated at approximately $59 billion. It is commonly believed that piracy of information goods leads to lower profits, which translate to lower incentives to invest in innovation and eventually to lower-quality products. Inadequate piracy enforcement efforts translate to lower investments in product development. The authors provide many practical examples that contradict this claim, such as HBO, which is raising the quality of their offerings precisely to fight a 30%–50% piracy rate. They test these anecdotes with rigorous analysis, and they unexpectedly find that, in certain situations, lower piracy enforcement increases the monopolist's incentive to invest in quality. The insight for management: Don't surrender to pirates; quality improvements may be a way to thwart their efforts.