Management Insights

Diversity and Performance (p. 529)

Feng Li, Venky Nagar

Are benefits for same-sex partners an expense, or an investment in higher returns? The authors study the performance of U.S. firms initiating same-sex domestic partnership benefit (SSDPB) policies. The results show that holding these firms upon their SSDPB initiation in a calendar portfolio earns a four-factor annualized excess return (alpha) of approximately 10% over the 1995–2008 sample period, beating 95% of all professional mutual funds in the United States. The insight for management: SSDPB adopters also show significant improvement in operating performance relative to nonadopters.

Multiple-Unit Holdings Yield Attenuated Endowment Effects (p. 545)

Katherine Burson, David Faro, Yuval Rottenstreich

In terms of the psychology of wealth, is one piece of chocolate different from a box of chocolates? The “endowment effect” is a bias toward keeping rather than parting with one's possessions. Previous research on endowment focuses on a single unit of a good (e.g., one chocolate). The authors contrast single-unit treatments with multiple-unit treatments in which participants encounter several units of a good (e.g., five chocolates). They find that people treat a box of chocolates much like a single chocolate; in either case, there is a single-unit endowment, regardless of the definition of a unit. Participants holding one piece of chocolate show an endowment effect of standard size, but so do participants holding one box of chocolates. Yet the box contains about 20 individual pieces of chocolate, and participants given that many separate pieces show a substantially attenuated endowment effect. The insight for management: When it comes to endowments, people are subject to “unit dependence”; the definition of a unit can be a chocolate or a box, but a pronounced endowment effect may emerge for singletons but not multiples.

Revenue Sharing and Information Leakage in a Supply Chain (p. 556)

Guangwen Kong, Sampath Rajagopalan, Hao Zhang

How can supply chain partners share more information to realize improved efficiency with less fear of information leakage? Advances in information technology have had a dramatic impact on the ability of firms in a supply chain to share information, and numerous firms have taken advantage of these advances. Greater collaboration between firms in a supply chain has resulted in initiatives such as Collaborative Planning, Forecasting, and Replenishment (CPFR), in which well-known manufacturers such as Procter & Gamble and Black & Decker as well as major retailers such as Home Depot and Walmart have participated. But a major challenge has been the reluctance of some firms to share information vertically with suppliers because of the fear of leakage of this information to their competitors. The authors show that traditional wholesale pricing contracts are less effective than revenue-sharing contracts to facilitate information sharing in a supply chain and mitigate the negative effects of information leakage. The insight for management: The ideal of information sharing is more easily achieved if revenue-sharing contracts provide the appropriate incentives for cooperation.

Biased Judgment in Censored Environments (p. 573)

Daniel C. Feiler, Jordan D. Tong, Richard P. Larrick

If a business sells out of inventory, can it know potential demand? If an employee completes a task, could they have done more? If a piece of equipment is replaced, how much longer could it have lasted? Each of these cases is a censored environment where a constraint, the censorship point, systematically distorts the observed sample because the environment constrains the information that managers can observe. The authors demonstrate a censorship bias—individuals tend to rely too heavily on the observed censored sample, biasing their belief about the underlying population. The authors find that the censorship bias is exacerbated for higher degrees of censorship, higher variance in the population, and higher variability in the censorship points. The insight for management: Censorship bias causes individuals to make costly decisions and behave in an overly risk-averse manner.

Dynamic Capacity Allocation to Customers Who Remember Past Service (p. 592)

Daniel Adelman, Adam J. Mersereau

How should a business ration among its customers in times of shortage? Whenever a firm doing business with a handful of customers (or customer segments) faces more demand than it can supply, it faces a tough choice. On one hand, there is a short-term opportunity for profit taking, by supplying only the most profitable customers today. On the other hand, this is potentially damaging to the firm's relationships with less profitable customers, who receive poor service today. When market conditions change in the future, these neglected customers could be essential to maintaining profitability, but their goodwill toward the firm may be so diminished that their business will not materialize when it is needed most. Customers remember when they were shorted; a customer's order quantity is positively correlated with past fill rates. The insight for management: Optimal rationing among customers depends on their unique contribution margins, their sensitivities to the past, and their demand volatilities.

Dynamic Experiments for Estimating Preferences: An Adaptive Method of Eliciting Time and Risk Parameters (p. 613)

Olivier Toubia, Eric Johnson, Theodoros Evgeniou, Philippe Delquié

When trying to understand an individual's choices it would be helpful to know the decision maker's underlying preferences. How can those preferences be determined? The authors present a method that dynamically designs elicitation questions for estimating risk and time preference parameters. They use an online experiment to compare their approach to a standard one used in the literature that requires comparable task completion time. The authors assess predictive accuracy in an out-of-sample task and completion time for both methods. For risk preferences, their results indicate that the proposed method predicts subjects' willingness to pay for a set of out-of-sample gambles significantly more accurately, while taking respondents about the same time to complete. The insight for management: New methodologies enable better estimation of underlying preferences.

Human Capital Investments and Employee Performance: An Analysis of IT Services Industry (p. 641)

Ravi Bapna, Nishtha Langer, Amit Mehra, Ram Gopal, Alok Gupta

Does training pay in quickly changing industries? The rapid pace of technological innovation necessitates that information technology (IT) services firms continually invest in replenishing the skills of their key asset base, human capital. The authors examine whether human capital investments directed toward employee training are effective in improving employee performance. The authors identify a significant positive impact of training on employee performance: A unit increase in training is linked to a 2.14% increase in an employee's performance. Interestingly, they find that, in the IT sector, skills atrophy and consequently high-experience employees reap higher returns from training, which highlights the uniquely dynamic nature of IT knowledge and skills. The authors find that this holds true for general training that an employee can utilize outside the focal firm but that specific training pertinent to the focal firm is not positively linked to performance. The insight for management: The value of training depends on the content; firm-specific training is less likely to improve performance than general training.

The Pitfalls of Subsystem Integration: When Less Is More (p. 659)

Sanjiv Erat, Stylianos Kavadias, Cheryl Gaimon

How much integration is too much? In various industries end-product manufacturers acquire core subsystems from upstream technology provider firms and focus primarily on efficient end-product integration. The authors examine the strategic interactions between a technology firm that introduces a new subsystem and the respective end-product manufacturers (“integrators”). They analyze how the fraction of end-product functionalities prepackaged into the subsystem impacts the optimal introduction strategy and the relative value appropriation power across the industries. Offering a subsystem that performs many end-product functions has a dual effect on the provider's profits. On the positive side, the provider extracts a higher ease-of-use rent from the integrators because of the easier/cheaper integration. On the negative side, such subsystems may curtail the adopters' ability for competitive differentiation and render adoption less valuable. The insight for management: Overly integrated supply chains may hinder competitive differentiation and thus product adoption and market potential.

Clustering, Agency Costs and Operating Efficiency: Evidence from Nursing Home Chains (p. 677)

Susan F. Lu, Gerard J. Wedig

What are the benefits and costs of retail chains? Chains possess scalable advantages that explain their existence, including branding, superior business models, and learning strategies. However, if managers cannot be incented contractually, private ownership is thought to be the primary organizational substitute. The authors explore geographic clustering as an alternative strategy for controlling managerial agency costs within the chain form of organization. Clustering nursing homes may facilitate scale efficiencies in both monitoring and supervision, resulting in reduced agency costs and improved application of the chain's business model. The insight for management: Clustered nursing homes achieve higher quality.

Price Discovery in the U.S. Treasury Market: Automation vs. Intermediation (p. 695)

Kasing Man, Junbo Wang, Chunchi Wu

How has automation affected market efficiency in trading markets? To understand this phenomenon, the authors examine the contribution to price discovery by electronic and voice-based trading systems in the U.S. Treasury market. Evidence shows that the electronic trading system has more price discovery and that trading automation increases the speed of incorporating information into prices. However, human trading generates significant price discovery, though its volume is low. The relative contribution of a trading system to price discovery depends on liquidity, volatility, volume, trade size, and order imbalance. The voice-based trading system contributes more to price discovery when trade size is large and liquidity is low. The insight for management: The ideal design of markets for securities depends on market characteristics and trading environments.

Market Crashes, Correlated Illiquidity, and Portfolio Choice (p. 715)

Hong Liu, Mark Loewenstein

The recent financial crisis highlights several potentially important fundamental elements for optimal portfolio choice. First, event risks such as a market crash may be significant; second, market liquidity may dry up after a crash; third, the probability of another crash may increase after a crash; and, fourth, other investment opportunity set parameters (e.g., market volatility) may also change after a crash. The authors propose a portfolio choice model where market crashes can trigger switching into another regime with a different investment opportunity set. In contrast to standard portfolio choice models, changes in the investment opportunity set in one regime can affect the optimal trading strategy in another regime even in the absence of transaction costs. The insight for management: Portfolio choice might change dramatically in the case of broad shifts in market prices.

Estimating Structural Models of Equilibrium and Cognitive Hierarchy Thinking in the Field: The Case of Withheld Movie Critic Reviews (p. 733)

Alexander L. Brown, Colin F. Camerer, Dan Lovallo

Do moviegoers realize that a lack of prerelease reviews may signal a low-quality film? Studios sometimes withhold movies from critics before their release, opting instead for a “cold opening.” Because the unreviewed movies tend to be below average in quality, this practice provides a useful setting in which to test models of limited strategic thinking. Previously, the authors found that a cold opening produces a significant 20%–30% increase in domestic box office revenue, which is consistent with moviegoers' overestimating the quality of unreviewed movies. The insight for management: Limited strategic thinking rather than equilibrium reasoning may be a better explanation for naïve moviegoer behavior.

The Effect of CRM Outsourcing on Shareholder Value: A Contingency Perspective (p. 748)

Kartik Kalaignanam, Tarun Kushwaha, Jan-Benedict E. M. Steenkamp, Kapil R. Tuli

How does information systems (IS) outsourcing affect firm performance? Previous research has shown that the increasingly common practice of outsourcing back-office IS generally has a positive effect on shareholder value of the outsourcing firm. Much less is known about the performance implications of outsourcing of another important IS function, namely, front-office customer relationship management (CRM) systems, where the vendor uses its own personnel and software to perform several CRM tasks. The authors find that CRM outsourcing is more beneficial to firms that are high on information technology capabilities and low on marketing capabilities, and that it is less beneficial when it concerns presales CRM. Similarly, although vendor economic distance has a positive influence on the outsourcing firm's shareholder value, vendor cultural distance has a negative influence. These effects are in turn significantly moderated by the type of CRM process outsourced. The insight for management: CRM outsourcing is more beneficial for firms with high information technology capabilities and lower marketing capabilities.