Management Insights

Exploring Trade-offs in the Organization of Scientific Work: Collaboration and Scientific Reward (p. 1473)

Michaël Bikard, Fiona Murray, Joshua S. Gans

When do scientists and other innovators organize into collaborative teams, and why do they do so for some projects and not for others? In short, the authors argue that scientists make a trade-off between the productive efficiency of collaboration and the credit allocation that arises after the completion of collaborative work. The authors use the annual research activity of 661 faculty scientists at the Massachusetts Institute of Technology over a 31-year period to explore the trade-off between collaboration and reward at the individual faculty level. The insight for management: A smaller piece of a bigger cake, or a cupcake? Researchers must decide between smaller accomplishments on their own and a larger, but shared, accomplishment when deciding on research team participation.

Bonus Payments and Reference Point Violations (p. 1496)

Axel Ockenfels, Dirk Sliwka, Peter Werner

When is a bonus not a bonus? One would think a bonus is just that—but maybe not. The authors investigate how bonus payments affect the satisfaction and performance of managers in a large multinational company. They find that falling behind the notion of a “fair” bonus payment (a “reference point violation”) actually reduces satisfaction and subsequent performance. How to overcome the backlash is to withhold information about one’s relative standing toward the reference point. The insight for management: Not everyone can get above-average bonuses; if their bonus relative to the crowd is withheld, they might appreciate it more.

A New Solution for the Moral Hazard Problem in Team Production (p. 1514)

Pablo Guillen, Danielle Merrett, Robert Slonim

How can the slacker in team projects be abolished? The age-old problem of the free rider who takes the credit without the effort is the bane of teamwork. The authors propose an intergroup competition scheme (ICS) to theoretically solve free riding in team production and test it with experimental teams. How does it work? The ICS includes an internal transfer payment from the lowest to highest contributing team proportional to the difference in group contributions. The nice feature of ICS is that it requires minimal information, makes the efficient contribution the best strategy, and is budget balanced. These features make the ICS ideally suited to solve the moral hazard problem in team production. Our experiment demonstrates that the ICS raises contributions to almost reach optimality with the appropriate parameters. The authors also show experimentally that the success of the ICS can be primarily attributed to the effect of higher returns and to the introduction of competition and that it is not due to the introduction of potential losses or information regarding other groups. The insight for management: Competition is yet again the solution for inefficiency; properly structured payments between competing teams tend to eliminate the free-riding member.

Inducing Social Norms in Laboratory Allocation Choices (p. 1531)

Arthur Schram, Gary Charness

Who’s watching me? Or is it just me? Social norms involve expectation and observation by others and external sanctions for violations, whereas moral norms involve introspection and internal sanctions. The authors look at two cases—one where the decision maker receives advice from peers, and the other where no advice is given. They also vary whether the actual choices are made public. In this way, they explicitly separate the effects of moral and social norms. The insight for management: Choices are in fact affected by a combination of observability and shared understanding.

Analysis of Tailored Base-Surge Policies in Dual Sourcing Inventory Systems (p. 1547)

Ganesh Janakiraman, Sridhar Seshadri, Anshul Sheopuri

In today’s far-flung and fragile supply chains, manufacturers are looking for a solution between low cost and fast response. How should manufacturers blend the low-cost, long-lead-time suppliers in a global environment with the higher-cost, local “emergency” supplier? Imagine a firm that procures a constant quantity from the regular supplier in every period and then dynamically makes procurement decisions for the emergency supplier. The regular supplier meets a “base” level of demand, and the emergency supplier is used to manage demand surges. One would think that this is most effective when the lead time difference between the two suppliers is large. The authors support this hypothesis both analytically and empirically. They find that the cost difference decreases dramatically as the lead time of the regular supplier increases. The insight for management: The value of an emergency supplier grows as the lead time from the baseline supplier grows.

An Empirical Investigation on the Appointments of Supply Chain and Operations Management Executives (p. 1562)

Kevin B. Hendricks, Manpreet Hora, Vinod R. Singhal

How does the stock market react to supply chain executives joining a company? Supply chain and operations management executives (SCOMEs) can be critical to company performance. The authors evaluate stock market reaction to 681 SCOME appointments that were publicly announced during the 2000–2011 period. They find that the stock market reaction is positive on the day of the announcement. The market reacts more positively when it is a newly created SCOME position and when the appointment is an outsider to the company. The authors find that when there is poor performance prior to the appointment, new SCOME appointments are not followed by an immediate improvement in stock price and operating performance, but further declines seem obviated. They note that outsiders are more likely for firms that are smaller, operate in more concentrated industries, and have experienced poor prior performance. The insight for management: Get that hired supply chain gun; the market notices when companies go out to find the best supply chain talent.

Optimal Advance Scheduling (p. 1584)

Van-Anh Truong

How should patients be scheduled effectively, when urgent care patients take priority without scheduling? On one hand, the medical professional wants to fill his day; on the other hand, leaving insufficient room for urgent care will cause patient appointments to be lost, causing dissatisfaction and lost patients. The author derives an optimal policy and an algorithm to compute the policy exactly and efficiently. The insight for management: Balancing long-term and emergency-term appointment and capacity needs is an important and difficult challenge for which new effective methods have been developed.

A Theory of Market Pioneers, Dynamic Capabilities, and Industry Evolution (p. 1598)

Matthew Mitchell, Andrzej Skrzypacz

How does the evolution from innovative to mature markets affect capabilities in an industry? The authors analyze industry evolution where the pioneering innovation arises from incumbents and entrants. Incumbent pioneers enjoy an advantage of additional pioneering innovation via a dynamic capability that takes the form of an improved technology for innovation in younger markets. Entrants are motivated in part by a desire to acquire the dynamic capability. The authors show that dynamic capabilities increase total innovation. Interestingly, whether the capability confers a cost advantage is important in determining how the impact of dynamic capabilities is distributed across incumbent and entrant innovation rates. The authors further describe how competition, free entry, and the dynamic capability of incumbents drive the evolution of an industry. The insight for management: The shift from immature to mature submarkets can lead to a shakeout in firm numbers and eventually leads to a reduction in total dynamic capabilities in an industry.

Linear Tests for Decreasing Absolute Risk Aversion Stochastic Dominance (p. 1615)

Thierry Post, Yi Fang, Miloš Kopa

People are averse to risk, but how much are they willing to pay to avoid it? The authors develop and implement linear formulations of convex stochastic dominance relations based on decreasing absolute risk aversion (DARA) for discrete and polyhedral choice sets. The approach is based on a piecewise-exponential representation of utility and a local linear approximation to the exponentiation of log marginal utility. An empirical application to historical stock market data suggests that a passive stock market portfolio is DARA stochastic dominance inefficient relative to concentrated portfolios of small-cap stocks. The insight for management: The mean-variance rule and Nth-order stochastic dominance rules substantially underestimate the degree of market portfolio inefficiency because they do not penalize the unfavorable skewness of diversified portfolios, in violation of DARA.

Corporate Transparency and the Impact of Investor Sentiment on Stock Prices (p. 1630)

Michael Firth, Kailong (Philip) Wang, Sonia ML Wong

How does corporate transparency help explain the sensitivity of stock prices to general investor sentiment? Using China’s stock market as the testing venue, the authors find that firms with low corporate transparency, as measured by variables such as state ownership, the prevalence of related party transactions, accrual-based earnings management, audit opinions, and the quality of audit firms, are more affected by investor sentiment than are firms with high corporate transparency. The insight for management: Corporate transparency is important in mitigating the effects of investor sentiment on stock prices.

Repurchasing Debt (p. 1648)

Lei Mao, Yuri Tserlukevich

How does a repurchasing debt affect a corporation’s performance? The authors find that firm creditors sell debt to the firm only at face value. However, buying back debt is cheaper and easier when there are many creditors on the open market. They further show that repurchases contribute to flexibility in firms’ capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm’s ability to save cash and delay the repurchase. The insight for management: When repurchasing debt, a corporation should consider numerous factors to maximize the value of the firm.

Management Earnings Forecasts and Value of Analyst Forecast Revisions (p. 1663)

Yongtae Kim, Minsup Song

What are stock-price reactions of analyst earnings forecast revisions when they are based on management preannouncement forecasts? The authors find that management earnings forecasts influence the timing and precision of analyst forecasts. Furthermore, where it was believed that there are stronger stock-price responses to forecast revisions in the period immediately before the prior-quarter earnings announcement, this effect disappears once management earnings forecasts are controlled for. The insight for management: To the extent that management earnings forecasts are public disclosures, the importance of analysts’ information discovery role is diminished greatly.

Compact Bid Languages and Core Pricing in Large Multi-item Auctions (p. 1684)

Andor Goetzendorff, Martin Bichler, Pasha Shabalin, Robert W. Day

How can we best structure an auction design framework for large markets with hundreds of items and complex bidder preferences, such as TV advertising? The authors develop a framework that consists of compact bid languages for sealed-bid auctions. They introduce a compact bidding language for TV advertising markets and arrive at very good solutions quickly. Such auction designs allow bidders to express their preferences with a low number of parameters while at the same time providing incentives for truthful bidding. They extend their TV advertising auction markets with a discussion of volume discount auctions in procurement to illustrate the applicability of the approach in different types of large markets. The insight for management: New auction structures to increase efficiency for large markets with hundreds of items and complex bidder preferences have been developed.

Counterfactual Decomposition of Movie Star Effects with Star Selection (p. 1704)

Angela (Xia) Liu, Tridib Mazumdar, Bo Li

Would The Godfather been a success without Marlon Brando? What drives box office—the movie star or the movie? The authors investigate the effects of a movie star on the movie’s opening week theater allocations and box office revenue. But because the big stars are offered big movies, it is difficult to discern which effect is bigger—the movie or the star. There are many factors that influence a star’s assignment to a movie such as movie budget, distribution, and genre; the biggest stars get the best scripts. Because the star and nonstar movie characteristics are often systematically different, the authors estimate the theater allocations and revenues that stars would have generated had they acted in movies endowed with the same characteristics as the nonstar movies. The insight for management: The presence of a star has a much stronger effect on theater allocations than the movie characteristics have, but the revenue difference is entirely attributed to the differences in the characteristics of the star and nonstar movies.

The Value of Field Experiments (p. 1722)

Jimmy Q. Li, Paat Rusmevichientong, Duncan Simester, John N. Tsitsiklis, Spyros I. Zoumpoulis

What is the value of field experiments to optimize marketing? The authors investigate pricing decisions that require estimating a large matrix of cross-product demand elasticities and ask the following question: How many experiments are required as the number of products in the category grows? In some cases, they find, field experiments help to learn faster and reduce the number of experiments that are required. As a result, firms may be able to obtain meaningful estimates using a practically feasible number of experiments, even in categories with a large number of products. The authors provide a relatively simple mechanism that firms can use to evaluate whether a category has a structure that makes it feasible to use field experiments to set prices. The insight for management: Field experiments may be practically feasible for optimizing marketing even with a large number of product categories.