Management Insights
The Effectiveness of Field Price Discretion: Empirical Evidence from Auto Lending (p. 1741)
Robert Phillips, A. Serdar Şimşek, Garrett van Ryzin
How much, if any, pricing discretion should headquarters grant to salespeople? In many markets, it is common for headquarters to create a price list but grant local salespeople discretion to negotiate prices for individual transactions. The authors estimate that the local sales force adjusted prices in a way that improved profits by approximately 11% on average. However, a pricing optimization system could improve profits even further, up to 20% over those actually realized. Their results suggest that centralized pricing—if appropriately optimized—can be more effective than field price discretion. The insight for management: Discretionary pricing is good, but analytically derived centralized discretionary pricing can be much better.
Are Good-Looking People More Employable? (p. 1760)
Bradley J. Ruffle, Ze’ev Shtudiner
Are good-looking people more employable? Most people would guess yes, but the results are not predictable. The authors investigate the role of physical attractiveness in the hiring process. They sent 5,312 curricula vitae (CVs) in pairs to 2,656 advertised job openings. In each pair, one CV was without a picture, whereas the second, otherwise almost identical CV contained a picture of either an attractive male or female or a plain-looking male or female. The authors show that employer callbacks to attractive men are nearly double to men with no picture and to plain-looking men. Surprisingly, attractive women do not enjoy the same beauty premium. In fact, women with no picture have a significantly higher rate of callback than attractive or plain-looking women. The insight for management: Good-looking men are in a better position than good-looking women in the workplace; the authors suggest that the reason may be female jealousy.
Fair Wages and Effort Provision: Combining Evidence from a Choice Experiment and a Field Experiment (p. 1777)
Alain Cohn, Ernst Fehr, Lorenz Goette
If workers reciprocate higher wages with greater effort, this could have important consequences for firms and labor markets. What affects this effort? The authors investigate the role of fairness perceptions and social preferences where workers are hired for a one-time job. The authors show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, whereas those who feel adequately paid or overpaid at the base wage do not change their performance. The authors find that this is true both in the field and in laboratory experiments. The insight for management: Fairness perceptions and social preferences are key in workers’ performance response to wage increases.
Corporate Philanthropy and Productivity: Evidence from an Online Real Effort Experiment (p. 1795)
Mirco Tonin, Michael Vlassopoulos
Contributing to a social cause can be an important driver for workers in the public and nonprofit sectors as well as in firms that engage in corporate philanthropy or other corporate social responsibility policies. How does the effectiveness of a social incentive that takes the form of a donation received by a charity of the subject’s choice compare to a financial incentive, as they relate to productivity? The authors find that social incentives lead to a 13% rise in productivity. The response is strong for subjects with low initial productivity, whereas high-productivity subjects do not respond. When subjects can choose the mix of incentives, half sacrifice some of their private compensation to increase social compensation, with women more likely to do so than men. Furthermore, offering subjects some discretion in choosing their own payment schemes leads to a substantial improvement in performance. The insight for management: Comparing social incentives to equally costly increases in private compensation for low-productivity subjects reveals that social incentives are less effective in increasing productivity, but the difference is small.
Signaling New Product Reliability with After-Sales Service Contracts (p. 1812)
Nitin Bakshi, Sang-Hyun Kim, Nicos Savva
How do after-sales service contracts communicate product quality to buyers? Sellers inherently know more about their product quality than buyers; after-sales contracts might both reduce buyer risk and build buyer confidence through the vendor “standing behind” his product. For example, by stocking up on spare inventory, a vendor can signal willingness to support the product after the sale. The insight for management: Contract structure is critical; resource-based contracts induce the vendor to focus on inventory savings, leading to underinvestment in spares, whereas performance-based contracts induce the vendor to focus on reliability signaling, achieved through overinvestment in inventory. As a result, neither contract is efficient.
Organizational Structure and Product Choice in Knowledge-Intensive Firms (p. 1830)
Yanhui Wu
How should knowledge-intensive firms set their organizational structure? A vertical hierarchy, in which workers refer unsolved problems to managers, facilitates the acquisition and leveraging of managers’ superior knowledge. However, the author shows that a larger span of control is complementary to the provision of high-value products. Moreover, this complementarity is sustained when employees acquire sufficient knowledge and is further strengthened when the firm enhances its capability of communicating knowledge. The insight for management: A wider span of control is conducive to the production of high-value, knowledge-based products.
Product Market Competition and the Financing of New Ventures (p. 1849)
Jean-Etienne de Bettignies, Anne Duchêne
What is the interaction among new venture risk, product market competition, and the entrepreneur’s choice between bank financing and venture capital (VC) financing? Under bank financing, a debt-type contract emerges as optimal, which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives, as long as the entrepreneur can service the debt repayment; however, this leads to liquidation in the case of default, making the venture’s success quite sensitive to exogenous, even temporary, shocks that may hinder debt repayment. Under VC financing, an equity-type contract emerges as optimal. This contract requires the entrepreneur to share a fraction of the rents with the financier, thus yielding lower effort incentives for the entrepreneur. There exists a threshold level of venture risk such that bank financing is optimal if the venture risk is below that threshold. Product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to VC financing. The insight for management: There are interactions among venture risk, product market competition, and the entrepreneur’s choice between bank financing and venture capital financing that lead to optimal structuring.
Competition in Portfolio Management: Theory and Experiment (p. 1868)
Elena Asparouhova, Peter Bossaerts, Jernej Čopič, Brad Cornell, Jakša Cvitanić , Debrah Meloso
What are the implications for portfolio management when the investor–manager relationship is nonexclusive? The authors suggest that competition forces managers to promise portfolios that mimic certain attributes, which investors then combine to fit their preferences. The authors note that price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating the desired attributes, but also because funds flow to managers who had better performance in the immediate past. The insight for management: Competition is good for portfolio management; too much concentration of assets causes price quality deterioration.
Rational Speculators, Contrarians, and Excess Volatility (p. 1889)
Matthijs Lof
How do speculators and contrarians affect stock market volatility? The author evaluates market behaviors based on historical observations of the S&P 500 index. The insight for management: The existence of contrarians can explain some of the most volatile episodes including the 1990s bubble, suggesting that this was not a rational bubble.
Do Your Online Friends Make You Pay? A Randomized Field Experiment on Peer Influence in Online Social Networks (p. 1902)
Ravi Bapna, Akhmed Umyarov
Do your online friends make you pay? Demonstrating compelling causal evidence of the existence and strength of peer-to-peer influence has become the holy grail of modern research in online social networks. In these networks, researchers have demonstrated that user characteristics and behavior tend to cluster both in space and in time. There are multiple well-known alternative theories that have the same effect but have vastly different policy implications. Through careful experimentation, the authors show that peer influence causes more than a 60% increase in odds of buying the service due to the influence coming from an adopting friend. In addition, they find that users with a smaller number of friends experience a stronger relative increase in the adoption likelihood due to influence from their peers as compared to the users with a larger number of friends. The insight for management: Peer influence is a powerful force in getting users from free to premium levels, a known challenge in freemium communities.
The Demand Effects of Joint Product Advertising in Online Videos (p. 1921)
Anuj Kumar, Yinliang (Ricky) Tan
How do joint production videos affect sales? Joint product display in videos helps customers both evaluate product attributes that can influence their individual demands (direct effect) and learn about the complementarity between them that may cause additional correlation in their demands (spillover effect). To estimate the demand effects, the authors introduced videos displaying apparel with matching accessories for a few randomly selected items on a fashion retailer’s website. They found that introducing a video resulted in a 14.5% increase in apparel sales and a 28.3% increase in accessories sales. The estimated increase in accessories sales was largely attributed to the spillover effect of videos. Moreover, introducing videos with other product promotions resulted in a significantly higher effect of videos on product demands. Video display of related products can increase their demands in an online product network. The insight for management: Joint production videos have a direct effect on products and have spillover effects on related products.
On the Failure of Hindsight-Biased Principals to Delegate Optimally (p. 1938)
David Danz, Dorothea Kübler, Lydia Mechtenberg, Julia Schmid
Does hindsight bias lead to inefficient delegation decisions? In an online experiment that was conducted during the 2010 FIFA World Cup, participants were asked to predict a number of outcomes of the ongoing World Cup and had to recall their assessments after the outcomes had been realized. Their answers were used to construct individual measures of the hindsight bias. The authors confirm that hindsight-biased subjects more frequently fail to delegate optimally than subjects whom they classify as not hindsight biased. The insight for management: The hindsight bias can lead to inefficient delegation decisions.
Probabilistic Selling in Quality-Differentiated Markets (p. 1959)
Zelin Zhang, Kissan Joseph, Ramanathan Subramaniam
Probabilistic selling is the sale of synthetic products consisting of a lottery between two distinct goods. How does probabilistic selling work in quality-differentiated markets? The authors find that probabilistic selling emerges in quality-differentiated markets as a way to profitably dispose of excess capacity. In markets where sellers employ “strong” quality differentiation, the introduction of an intermediate probabilistic good actually causes closer quality levels in a product line and enhances consumer welfare. In contrast, in markets where sellers employ “weak” quality differentiation, the introduction of an intermediate probabilistic good increases quality separation and degrades consumer welfare. The insight for management: Probabilistic selling in quality-differentiated markets depends on the level of differentiation.
Why and When Consumers Prefer Products of User-Driven Firms: A Social Identification Account (p. 1978)
Darren W. Dahl, Christoph Fuchs, Martin Schreier
Companies are increasingly drawing on their user communities to generate promising ideas for new products, which are then marketed as “user-designed” products to the broader consumer market. Why and when do consumers prefer products of user-driven firms? The authors demonstrate that nonparticipating, observing consumers prefer to buy from user-rather than designer-driven firms because of an enhanced identification with the firm that has adopted this user-driven philosophy. Because consumers are also users, their social identities connect to the user-designers, and they feel empowerment by vicariously being involved in the design process. This formed connection leads to a preference for the firm’s products. Importantly, this social identification account also effectively predicts when the effect does not materialize. The authors find that if consumers feel dissimilar to participating users, the effects are attenuated. They demonstrate that this happens when the community differs from consumers along important demographics (e.g., gender) or when consumers are nonexperts in the focal domain (e.g., they feel that they do not belong to the social group of participating users). Second, the effects are attenuated if the user-driven firm is only selectively rather than fully open to participation from all users (observing consumers do not feel socially included). The insight for management: Firms interested in pursuing a user-driven philosophy should understand why and when customers prefer these products.
Gaining Access by Doing Good: The Effect of Sociopolitical Reputation on Firm Participation in Public Policy Making (p. 1989)
Timothy Werner
How does reputation affect effectiveness? The author examines the role of firms’ sociopolitical reputations, as proxied by their perceived engagement in socially responsible practices, in public policy makers’ decisions to grant access in the policy-making process. The author contends that policy makers’ dependencies, motivations, and decision-making processes lead them to evaluate firms by using sociopolitical reputation as a differentiating heuristic. He suggests that firms that construct stronger sociopolitical reputations will be granted greater access and that firms’ existing political activity and policy makers’ partisanship will moderate this relationship. His findings are based on the evaluation of an 11-year panel on congressional testimony, reputation, and political and financial characteristics for the S&P 500. The insight for management: There is a sociopolitical dimension to firms’ reputations that affects how public policy makers evaluate firms, demonstrating that corporate social responsibility pays political benefits.
