Showing papers in "Management Science in 2009"

A Generalized Approach to Portfolio Optimization: Improving Performance by Constraining Portfolio Norms

Abstract: We provide a general framework for finding portfolios that perform well out-of-sample in the presence of estimation error. This framework relies on solving the traditional minimum-variance problem but subject to the additional constraint that the norm of the portfolio-weight vector be smaller than a given threshold. We show that our framework nests as special cases the shrinkage approaches of Jagannathan and Ma (Jagannathan, R., T. Ma. 2003. Risk reduction in large portfolios: Why imposing the wrong constraints helps. J. Finance58 1651--1684) and Ledoit and Wolf (Ledoit, O., M. Wolf. 2003. Improved estimation of the covariance matrix of stock returns with an application to portfolio selection. J. Empirical Finance10 603--621, and Ledoit, O., M. Wolf. 2004. A well-conditioned estimator for large-dimensional covariance matrices. J. Multivariate Anal.88 365--411) and the 1/N portfolio studied in DeMiguel et al. (DeMiguel, V., L. Garlappi, R. Uppal. 2009. Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? Rev. Financial Stud.22 1915--1953). We also use our framework to propose several new portfolio strategies. For the proposed portfolios, we provide a moment-shrinkage interpretation and a Bayesian interpretation where the investor has a prior belief on portfolio weights rather than on moments of asset returns. Finally, we compare empirically the out-of-sample performance of the new portfolios we propose to 10 strategies in the literature across five data sets. We find that the norm-constrained portfolios often have a higher Sharpe ratio than the portfolio strategies in Jagannathan and Ma (2003), Ledoit and Wolf (2003, 2004), the 1/N portfolio, and other strategies in the literature, such as factor portfolios.

Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers

Abstract: We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)---committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.

Mobility, Skills, and the Michigan Non-Compete Experiment

Abstract: Whereas a number of studies have considered the implications of employee mobility, comparatively little research has considered institutional factors governing the ability of employees to move from one firm to another. This paper explores a legal constraint on mobility---employee non-compete agreements---by exploiting Michigan's apparently inadvertent 1985 reversal of its non-compete enforcement policy as a natural experiment. Using a differences-in-differences approach, and controlling for changes in the auto industry central to Michigan's economy, we find that the enforcement of non-competes indeed attenuates mobility. Moreover, non-compete enforcement decreases mobility more sharply for inventors with firm-specific skills and for those who specialize in narrow technical fields. The results speak to the literature on employee mobility while offering a credibly exogenous source of variation that can extend previous research on the implications of such mobility.

An Empirical Analysis of Search Engine Advertising: Sponsored Search in Electronic Markets

Abstract: The phenomenon of sponsored search advertising---where advertisers pay a fee to Internet search engines to be displayed alongside organic (nonsponsored) Web search results---is gaining ground as the largest source of revenues for search engines. Using a unique six-month panel data set of several hundred keywords collected from a large nationwide retailer that advertises on Google, we empirically model the relationship between different sponsored search metrics such as click-through rates, conversion rates, cost per click, and ranking of advertisements. Our paper proposes a novel framework to better understand the factors that drive differences in these metrics. We use a hierarchical Bayesian modeling framework and estimate the model using Markov Chain Monte Carlo methods. Using a simultaneous equations model, we quantify the relationship between various keyword characteristics, position of the advertisement, and the landing page quality score on consumer search and purchase behavior as well as on advertiser's cost per click and the search engine's ranking decision. Specifically, we find that the monetary value of a click is not uniform across all positions because conversion rates are highest at the top and decrease with rank as one goes down the search engine results page. Though search engines take into account the current period's bid as well as prior click-through rates before deciding the final rank of an advertisement in the current period, the current bid has a larger effect than prior click-through rates. We also find that an increase in landing page quality scores is associated with an increase in conversion rates and a decrease in advertiser's cost per click. Furthermore, our analysis shows that keywords that have more prominent positions on the search engine results page, and thus experience higher click-through or conversion rates, are not necessarily the most profitable ones---profits are often higher at the middle positions than at the top or the bottom ones. Besides providing managerial insights into search engine advertising, these results shed light on some key assumptions made in the theoretical modeling literature in sponsored search.

Blockbuster Culture's Next Rise or Fall: The Impact of Recommender Systems on Sales Diversity

Abstract: This paper examines the effect of recommender systems on the diversity of sales. Two anecdotal views exist about such effects. Some believe recommenders help consumers discover new products and thus increase sales diversity. Others believe recommenders only reinforce the popularity of already-popular products. This paper seeks to reconcile these seemingly incompatible views. We explore the question in two ways. First, modeling recommender systems analytically allows us to explore their path-dependent effects. Second, turning to simulation, we increase the realism of our results by combining choice models with actual implementations of recommender systems. We arrive at three main results. First, some well-known recommenders can lead to a reduction in sales diversity. Because common recommenders (e.g., collaborative filters) recommend products based on sales and ratings, they cannot recommend products with limited historical data, even if they would be rated favorably. In turn, these recommenders can create a rich-get-richer effect for popular products and vice versa for unpopular ones. This bias toward popularity can prevent what may otherwise be better consumer-product matches. That diversity can decrease is surprising to consumers who express that recommendations have helped them discover new products. In line with this, result two shows that it is possible for individual-level diversity to increase but aggregate diversity to decrease. Recommenders can push each person to new products, but they often push users toward the same products. Third, we show how basic design choices affect the outcome, and thus managers can choose recommender designs that are more consistent with their sales goals and consumers' preferences.

Team Familiarity, Role Experience, and Performance: Evidence from Indian Software Services

Abstract: Much of the literature on team learning views experience as a unidimensional concept captured by the cumulative production volume of, or the number of projects completed by, a team. Implicit in this approach is the assumption that teams are stable in their membership and internal organization. In practice, however, such stability is rare, because the composition and structure of teams often change over time (e.g., between projects). In this paper, we use detailed data from an Indian software services firm to examine how such changes may affect the accumulation of experience within, and the performance of, teams. We find that the level of team familiarity (i.e., the average number of times that each member has worked with every other member of the team) has a significant positive effect on performance, but we observe that conventional measures of the experience of individual team members (e.g., years at the firm) are not consistently related to performance. We do find, however, that the role experience of individuals in a team (i.e., years in a given role within a team) is associated with better team performance. Our results offer an approach for capturing the experience held by fluid teams and highlight the need to study context-specific measures of experience, including role experience. In addition, our findings provide insight into how the interactions of team members may contribute to the development of broader firm capabilities.

Investor Competence, Trading Frequency, and Home Bias

Abstract: People are more willing to bet on their own judgments when they feel skillful or knowledgeable. We investigate whether this “competence effect” influences trading frequency and home bias. We find that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the “better-than-average” aspect of overconfidence to influence trading frequency. In the context of our paper, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.

Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects

Abstract: Formal contracting addresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment. Alternatively, when firms expect to interact repeatedly, relational mechanisms may achieve similar results without the associated costs. However, as we now know from a growing body of theoretical and empirical work, the resulting intuition---that relational mechanisms will be substituted for formal ones whenever possible---does not generally hold. The extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper. We study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms. Counter to the above intuition (but consistent with recent research), we find that a firm's contracts are more detailed and more likely to include penalties when it engages in frequent deals (whether with the same or different partners). Our results suggest complementarity between formal and relational contracts, and have implications for optimal contracting, particularly in high technology sectors.

The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well

Abstract: State-of-the-art stochastic volatility models generate a “volatility smirk” that explains why out-of-the-money index puts have high prices relative to the Black-Scholes benchmark. These models also adequately explain how the volatility smirk moves up and down in response to changes in risk. However, the data indicate that the slope and the level of the smirk fluctuate largely independently. Although single-factor stochastic volatility models can capture the slope of the smirk, they cannot explain such largely independent fluctuations in its level and slope over time. We propose to model these movements using a two-factor stochastic volatility model. Because the factors have distinct correlations with market returns, and because the weights of the factors vary over time, the model generates stochastic correlation between volatility and stock returns. Besides providing more flexible modeling of the time variation in the smirk, the model also provides more flexible modeling of the volatility term structure. Our empirical results indicate that the model improves on the benchmark Heston stochastic volatility model by 24% in-sample and 23% out-of-sample. The better fit results from improvements in the modeling of the term structure dimension as well as the moneyness dimension.

Effort, Revenue, and Cost Sharing Mechanisms for Collaborative New Product Development

Abstract: The growing sophistication of component technologies and the rising costs and uncertainties of developing and launching new products require firms to collaborate in the development of new products. However, the management of new product development that occurs jointly between firms presents a new set of challenges in sharing the costs and benefits of innovation. Although collaboration enables each firm to focus on what it does best, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the joint development of products involving two firms with differing development capabilities and examine the implications of arrangements that go beyond sharing of revenues to include sharing of development cost and work. We term these approaches that involve sharing of the development cost and sharing of the development work investment sharing and innovation sharing, respectively. These cost and effort sharing mechanisms have subtle interactions with the degree to which revenues are shared between firms and the type of development project under consideration. Our analysis shows that investment and innovation sharing are particularly relevant for products with no preexisting revenues, and their benefits also depend on the degree to which revenues are shared between the firms. Whereas investment sharing is more attractive for new-to-the-world product projects with significant timing uncertainty, innovation sharing plays an important role in environments where projects experience product quality uncertainty, firms are similar in their capabilities, and the costs of integration of work across firms can be controlled. Our key contribution involves the modeling of joint work and decision making between collaborating firms and unearthing the complementary role of revenue, cost, and innovative effort sharing mechanisms for new product development. We translate our analytical findings into a managerial framework and illustrate the results with examples from the life-sciences and electronics industries.

Competition Between Local and Electronic Markets: How the Benefit of Buying Online Depends on Where You Live

Abstract: Our paper shows that the parameters in existing theoretical models of channel substitution such as offline transportation cost, online disutility cost, and the prices of online and offline retailers interact to determine consumer choice of channels. In this way, our results provide empirical support for many such models. In particular, we empirically examine the trade-off between the benefits of buying online and the benefits of buying in a local retail store. How does a consumer's physical location shape the relative benefits of buying from the online world? We explore this problem using data from Amazon.com on the top-selling books for 1,497 unique locations in the United States for 10 months ending in January 2006. We show that when a store opens locally, people substitute away from online purchasing, even controlling for product-specific preferences by location. These estimates are economically large, suggesting that the disutility costs of purchasing online are substantial and that offline transportation costs matter. We also show that offline entry decreases consumers' sensitivity to online price discounts. However, we find no consistent evidence that the breadth of the product line at a local retail store affects purchases.

Quality Improvement Incentives and Product Recall Cost Sharing Contracts

Abstract: As companies outsource more product design and manufacturing activities to other members of the supply chain, improving end-product quality has become an endeavor extending beyond the boundaries of the firms' in-house process capabilities. In this paper, we discuss two contractual agreements by which product recall costs can be shared between a manufacturer and a supplier to induce quality improvement effort. More specifically, we consider (i) cost sharing based on selective root cause analysis (Contract S), and (ii) partial cost sharing based on complete root cause analysis (Contract P). Using insights from supermodular game theory, for each contractual agreement, we characterize the levels of effort the manufacturer and the supplier would exert in equilibrium to improve their component failure rate when their effort choices are subject to moral hazard. We show that both Contract S and Contract P can achieve the first best effort levels; however, Contract S results in higher profits for the manufacturer and the supply chain. For the case in which the information about the quality of the supplier's product is not revealed to the manufacturer (i.e., the case of information asymmetry), we develop a menu of contracts that can be used to mitigate the impact of information asymmetry. We show that the menu of contracts not only significantly decreases the manufacturer's cost due to information asymmetry, but also improves product quality.

Impact of Workload on Service Time and Patient Safety: An Econometric Analysis of Hospital Operations

Abstract: Much of prior work in the area of service operations management has assumed service rates to be exogenous to the level of load on the system. Using operational data from patient transport services and cardiothoracic surgery---two vastly different health-care delivery services---we show that the processing speed of service workers is influenced by the system load. We find that workers accelerate the service rate as load increases. In particular, a 10% increase in load reduces length of stay by two days for cardiothoracic surgery patients, whereas a 20% increase in the load for patient transporters reduces the transport time by 30 seconds. Moreover, we show that such acceleration may not be sustainable. Long periods of increased load (overwork) have the effect of decreasing the service rate. In cardiothoracic surgery, an increase in overwork by 1% increases length of stay by six hours. Consistent with prior studies in the medical literature, we also find that overwork is associated with a reduction in quality of care in cardiothoracic surgery---an increase in overwork by 10% is associated with an increase in likelihood of mortality by 2%. We also find that load is associated with an early discharge of patients, which is in turn correlated with a small increase in mortality rate.

Supply Disruptions, Asymmetric Information, and a Backup Production Option

Abstract: We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change and examine whether risk-management tools are more or less valuable in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the supplier's reliability is either high or low and is the supplier's private information. On disruption, the supplier chooses to either pay a penalty to the manufacturer for the shortfall or use backup production to fill the manufacturer's order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of supplier backup production for the manufacturer is not necessarily larger under symmetric information; for the more reliable supplier type, it could be negative. The manufacturer is willing to pay the most for information when supplier backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.

Dynamic Pricing in the Presence of Strategic Consumers and Oligopolistic Competition

Abstract: We present a dynamic pricing model for oligopolistic firms selling differentiated perishable goods to multiple finite segments of strategic consumers who are aware that pricing is dynamic and may time their purchases accordingly. This model encompasses strategic behavior by both firms and consumers in a unified stochastic dynamic game in which each firm's objective is to maximize its total expected revenues, and each consumer responds according to a shopping-intensity-allocation consumer choice model. We prove the existence of a unique subgame-perfect equilibrium, provide equilibrium optimality conditions, and prove monotonicity results for special cases. The model provides insights about equilibrium price dynamics under different levels of competition, asymmetry between firms, and multiple market segments with varying properties. We demonstrate that strategic behavior by consumers can have serious impacts on revenues if firms ignore that behavior in their dynamic pricing policies. Moreover, ideal equilibrium responses to consumer strategic behavior can recover only a portion of the lost revenues. A key conclusion is that firms may benefit more from limiting the information available to consumers than from allowing full information and responding to the resulting strategic behavior in an optimal fashion.

Top Management Team Diversity and Firm Performance: Moderators of Functional-Background and Locus-of-Control Diversity

Abstract: Past research on the relationship between top management team (TMT) compositional diversity and organizational performance has paid insufficient attention to the nature of TMT team processes in interaction with TMT diversity. We fill this gap by studying how three team mechanisms (collaborative behavior, accurate information exchange, and decision-making decentralization) moderate the impact of TMT diversity on financial performance of 33 information technology firms. We focus on two fundamentally different forms of TMT diversity: functional-background (FB) and locus-of-control (LOC). We argue that the former has the potential to enhance decision quality and organizational performance, whereas the latter might trigger relational conflict, and is, therefore, potentially detrimental to firm effectiveness. The ultimate aim of our study is to analyze which team processes help to transform distributed FB knowledge into high-quality decisions and organizational effectiveness, and which help avoid the potential detrimental effects of LOC diversity. We find that a TMT's collaborative behavior and information exchange are necessary conditions to unleash the performance benefits of FB diversity, but do not interact with LOC diversity. In addition, decentralized decision making spurs the effectiveness of functionally diverse teams, while at the same time reinforces the negative consequences of LOC diversity on firm performance.

Strategic Information Management Under Leakage in a Supply Chain

Abstract: The importance of material flow management for a profit-maximizing firm has been well articulated in the supply chain literature. We demonstrate in our analytical model that a firm must also actively manage information flows within the supply chain, which translates to controlling what it knows, as well as what its competitors and suppliers know. In our model of horizontal competition between an informed and an uninformed firm with a common upstream supplier, material and information flows intersect through leakage of demand (order) information to unintended recipients. As a result, the informed firm's drive to control information flows within the supply chain can trigger operational losses through material flow distortion. These losses can be so severe that the firm may prefer not to acquire information even when it is costless to do so. Our results underscore the importance of strategic information management---actively managing the supply chain's information flows, and making trade-offs with material flows where appropriate, to maximize profits.

Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition

Abstract: A key question for Internet commerce is the nature of competition with traditional brick-and-mortar retailers. Although traditional retailers vastly outsell Internet retailers in most product categories, research on Internet retailing has largely neglected this fundamental dimension of competition. Is cross-channel competition significant, and if so, how and where can Internet retailers win this battle? This paper attempts to answer these questions using a unique combination of data sets. We collect data on local market structures for traditional retailers, and then match these data to a data set on consumer demand via two direct channels: Internet and catalog. Our analyses show that Internet retailers face significant competition from brick-and-mortar retailers when selling mainstream products, but are virtually immune from competition when selling niche products. Furthermore, because the Internet channel sells proportionately more niche products than the catalog channel, the competition between the Internet channel and local stores is less intense than the competition between the catalog channel and local stores. The methods we introduce can be used to analyze cross-channel competition in other product categories, and suggest that managers need to take into account the types of products they sell when assessing competitive strategies.

Trading as Entertainment

Abstract: Among 1,000 German brokerage clients for whom both survey responses and actual trading records are available, investors who report enjoying investing or gambling turn over their portfolio at twice the rate of their peers. Including entertainment attributes as additional explanatory variables in cross-sectional regressions of portfolio turnover on objective investor attributes more than doubles the fraction of the total variation of portfolio turnover that can be explained. The results are robust to controlling for gender and proxies for overconfidence constructed from survey responses. Nonpecuniary benefits of trading thus appear to offer a straightforward explanation of the “excessive trading puzzle.”

Contracting in Supply Chains: A Laboratory Investigation

Abstract: The coordination of supply chains by means of contracting mechanisms has been extensively explored theoretically but not tested empirically. We investigate the performance of three commonly studied supply chain contracting mechanisms: the wholesale price contract, the buyback contract, and the revenue-sharing contract. The simplified setting we consider utilizes a two-echelon supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and delivery occurs instantaneously. We compare the three mechanisms in a laboratory setting using a novel design that fully controls for strategic interactions between the retailer and the supplier. Results indicate that although the buyback and revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and revenue-sharing contracts are mathematically equivalent, they do not generally result in equivalent supply chain performance.

Effects of E-Waste Regulation on New Product Introduction

Abstract: This paper investigates the impact of e-waste regulation on new product introduction in a stylized model of the electronics industry. Manufacturers choose the development time and expenditure for each new version of a durable product, which together determine its quality. Consumers purchase the new product and dispose of the last-generation product, which becomes e-waste. The price of a new product strictly increases with its quality and consumers' rational expectation about the time until the next new product will be introduced. “Fee-upon-sale” types of e-waste regulation cause manufacturers to increase their equilibrium development time and expenditure, and thus the incremental quality for each new product. As new products are introduced (and disposed of) less frequently, the quantity of e-waste decreases and, even excluding the environmental benefits, social welfare may increase. Consumers pay a higher price for each new product because they anticipate using it for longer, which increases manufacturers' profits. Unfortunately, existing “fee-upon-sale” types of e-waste regulation fail to motivate manufacturers to design for recyclability. In contrast, “fee-upon-disposal” types of e-waste regulation such as individual extended producer responsibility motivate design for recyclability but, in competitive product categories, fail to reduce the frequency of new product introduction.

Volatility Spreads and Expected Stock Returns

Abstract: This paper investigates whether realized and implied volatilities of individual stocks can predict the cross-sectional variation in expected returns. Although the levels of volatilities from the physical and risk-neutral distributions cannot predict future returns, there is a significant relation between volatility spreads and expected stock returns. Portfolio level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between expected returns and the realized-implied volatility spread that can be viewed as a proxy for volatility risk. The results also provide evidence for a significantly positive link between expected returns and the call-put options' implied volatility spread that can be considered as a proxy for jump risk. The parameter estimates from the VAR-bivariate-GARCH model indicate significant information flow from individual equity options to individual stocks, implying informed trading in options by investors with private information.

The Duration of Patent Examination at the European Patent Office

Abstract: We analyze the duration and outcomes of patent examination at the European Patent Office utilizing an unusually rich data set covering a random sample of 215,265 applications filed between 1982 and 1998. In our empirical analysis, we distinguish between three groups of determinants: applicant characteristics, indicators of patent quality and value, and determinants that affect the complexity of the examination task. The results from an accelerated failure time model indicate that more controversial claims lead to slower grants but faster withdrawals, whereas well-documented applications are approved faster and withdrawn more slowly. We find strong evidence that applicants accelerate grant proceedings for their most valuable patents, but that they also prolong the battle for such patents if a withdrawal or refusal is imminent. This paper develops implications of these results for managerial decision making in research and development and innovation management.

Relative Performance Compensation, Contests, and Dynamic Incentives

Abstract: Contests (or tournaments) are pervasive in organizations. They help performance evaluation by eliminating common shocks affecting agents' performance. However, tournaments are less effective when participants have heterogeneous ability because participants may conclude that the ability gap is too large to be overcome by their effort. Our theoretical analysis shows that a similar loss of motivation arises when tournaments take place over multiple periods because interim performance acts in a way that is similar to heterogeneous ability. Analyzing the sales contests organized by a commodities company, we document that winning participants decrease their effort as their lead extends, whereas the effort of trailing participants fades only when the gap to a winning position is very large. We also show that, on average, when contests are introduced they induce a higher level of effort among participants, although the incentives weaken as the number of participants increases. Finally, we demonstrate that although retailers respond to the multiple performance dimensions of the incentive program in part by shifting effort toward sales of more expensive products, they channel most of the increased effort toward reaching more customers.

A Matter of Balance: Specialization, Task Variety, and Individual Learning in a Software Maintenance Environment

Abstract: Specialization at work has been recognized as a key driver of learning and productivity since the days of Adam Smith. More recently, researchers have noted that exposure to task variety can enhance learning. We examine how exposure to specialization and variety jointly drive employee productivity in a real-life setting. We analyze a data set covering 88 individuals who worked on 5,711 maintenance tasks in an offshore software support services operation. We find that, as expected, specialization enhances productivity. However, exposure to variety has a nonlinear influence on productivity; i.e., “too much variety” can impede learning. We also find that achieving a proper balance between specialization and exposure to a variety leads to the highest productivity. We capture this balance using an adaptation of the Herfindahl-Hirschman Index from the economics literature. In addition, we examine how the productivity of individuals in a workgroup is affected by member entry and exit, with the latter specified in terms of the degree of specialized experience and the degree of variety experience lost from the workgroup when a member exits. Our analysis reveals that the degree of variety experience lost has a greater impact on productivity than the degree of specialized experience that is lost.

Information Sharing and Order Variability Control Under a Generalized Demand Model

Abstract: The value of information sharing and how it could address the bullwhip effect have been the subject of studies in the literature. Most of these studies used different forms of demand models, assuming that no order smoothing was used by the retailer and that the supplier has full knowledge of the retailer's demand model and order policy. In this paper, we contribute to the literature by starting with a most general demand model, coupled with a smoothing policy for order variability control. In addition, we do not require that the supplier has full knowledge of the retailer's demand model and order policy, but instead let the retailer share its projected future orders (and freely revise them as the retailer sees fit). Under such a setting, we first obtain a unifying formula for the magnitude of the bullwhip effect. The formula indicates that it is the forecast correlation over the exposure period as a whole that determines the magnitude of the bullwhip effect. We then quantify the value of information sharing and generalize the existing results in the literature. Finally, we explore the optimal smoothing parameters that could benefit the total supply chain. The resulting optimal policy resembles the postponement strategy. We find that information sharing together with order postponement improves the supply chain performance, even though the order variability may amplify in some cases.

On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

Abstract: This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex ante, commits to a particular quantity) and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex post, if the product is out of stock). Interestingly, the seller has an incentive to overcompensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity.

Privacy Protection and Technology Diffusion: The Case of Electronic Medical Records

Abstract: This paper quantifies the effect of state privacy regulation on the diffusion of electronic medical records (EMRs). EMRs allow medical providers to store and exchange patient information using computers rather than paper records. Hospitals may be more likely to adopt EMRs if they can reassure patients that their confidentiality is legally protected. Alternatively, privacy protection may inhibit adoption if hospitals cannot benefit from easily exchanging patient information. We find that state privacy regulation restricting hospital release of health information reduces aggregate EMR adoption by hospitals by more than 24%. We present evidence that suggests that this is due to the suppression of network externalities.

What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated

Abstract: We estimate that 13.6% of all option grants to top executives during the period 1996--2005 were backdated or otherwise manipulated. Our study primarily focuses on grants that were unscheduled and at-the-money, of which we estimate that 18.9% were manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction of manipulated grants remains as high as 19.9%. We further find a higher frequency of manipulation among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.

Optimal Markdown Pricing: Implications of Inventory Display Formats in the Presence of Strategic Customers

Abstract: We propose a game-theoretical model of a retailer who sells a limited inventory of a product over a finite selling season by using one of two inventory display formats: display all (DA) and display one (DO). Under DA, the retailer displays all available units so that each arriving customer has perfect information about the actual inventory level. Under DO, the retailer displays only one unit at a time so that each customer knows about product availability but not the actual inventory level. Recent research suggests that when faced with strategic consumers, the retailer could increase expected profits by making an upfront commitment to a price path. We focus on such pricing strategies in this paper, and study the potential benefit of DO compared to DA, and its effectiveness in mitigating the adverse impact of strategic consumer behavior. We find support for our hypothesis that the DO format could potentially create an increased sense of shortage risk, and hence it is better than the DA format. However, although potentially beneficial, a move from DA to DO is typically very far from eliminating the adverse impact of strategic consumer behavior. We observe that, generally, it is not important for a retailer to modify the level of inventory when moving from a DA to a DO format; a change in the display format, along with an appropriate price modification, is typically sufficient. Interestingly, across all scenarios in which a change in inventory is significantly beneficial, we observed that only one of the following two actions takes place: either the premium price is increased along with a reduction in inventory, or inventory is increased along with premium price reduction. We find that the marginal benefit of DO can vary dramatically as a function of the per-unit cost to the retailer. In particular, when the retailer's per-unit cost is relatively high, but not too high to make sales unprofitable or to justify exclusive sales to high-valuation customers only, the benefits of DO appear to be at their highest level, and could reach up to 20% increase in profit. Finally, we demonstrate that by moving from DA to DO, while keeping the price path unchanged, the volatility of the retailer's profit decreases.