Knowledge that Transforms

Unit donations are an alternative fundraising scheme in which potential donors choose how many units of a charitable good to fund rather than just giving money. Based on evidence from an online experiment with 8,673 participants, we demonstrate that well-designed unit donation schemes can significantly boost giving above and beyond the standard money donation scheme. A decomposition of the underlying mechanisms shows patterns consistent with the conjecture that unit donations increase impact salience and leverage donors’ cognitive biases by changing the metric of the donation space. Managers need to weigh the potential fundraising benefits of a unit scheme against some important challenges, such as expert handling of the choice of unit sizes. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: Funding by Heidelberg University [Field of Focus IV under the Excellence Strategy] and the Austrian Science Fund [Grant SFB F63] is gratefully acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.00157 .

This paper studies two competing firms’ choices between the contingent-price contract (CPC) and fixed-price contract (FPC) in global commodity procurement. The FPC price is determined when signing the contract, whereas the CPC price is pegged to an underlying index and remains open until the delivery date. Under both contracts, each firm determines its order quantity based on the updated belief about the market demand. The unrealized CPC price correlates with the market demand, allowing a firm to update its belief about the CPC price using demand information, thereby generating a price-learning effect. We find that, contrary to conventional wisdom, a larger price volatility could benefit the firms, and, under differentiated contracts, a firm might benefit from the improvement of forecast accuracy at its rival. We further show that the price-learning effect plays a critical role in the firms’ contract choices. First, significant price volatility forces the firms to pursue the responsiveness of the CPC. Second, the firms may adopt differentiated contracts to enhance their responses to market changes and dampen competition, and a higher competition intensity more likely leads to contract differentiation. Third, the firms in a small market seek responsiveness and contract differentiation rather than cost efficiency. This study reveals the bright side of price volatility and takes a step toward understanding the effect of two-dimensional information updating. This paper was accepted by Jeannette Song, operations management. Funding: This work was supported in part by the National Natural Science Foundation of China [W. Xing was supported by Grant 72071210, L. Liu was supported by Grant 72371122, and F. Zhang was supported by Grants 71929201 and 72131004]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00304 .

We provide robust evidence that rank-and-file employee stock options (R&F options) lead to lower work-related injury rates. This finding is consistent with the view that R&F options improve workplace safety by facilitating employee retention and cooperation. To establish causality, we employ difference-in-differences analysis around the passage of FAS 123R option expensing regulation and instrumental variable estimation. In cross-sectional analysis, we find that the documented effect is amplified among firms with higher labor mobility rates and among firms with greater scope for employee free riding. The results of supplemental analysis suggest that work-related injuries adversely impact firm performance and rule out reduced employee whistleblowing about workplace safety issues as an alternative mechanism driving our findings. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.02072 .

We consider a model of innovation that distinguishes between ideas and innovations. Although innovation responds to incentives, ideas are a scarce resource that provides an exogenous constraint on the rate of innovation. We investigate how the optimal reward structure is shaped by the scarcity of ideas. Substitute ideas for innovation in the model arrive to random recipients at random times. By forgoing investment in a current idea, society preserves an option to invest in a better idea for the same market niche but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. The social planner does not observe the arrival of ideas and learns over time about the arrival rate of ideas. We represent the social planner’s beliefs using a general continuous density and illustrate that the evolution of beliefs can be tracked by the cumulative hazard function. The reward set by the social planner serves a dual purpose: learning about the arrival rate of ideas and trading off lower delays against lower-cost ideas. We show that the optimal reward increases as time passes because the social planner comes to view ideas as more scarce. This paper was accepted by Joshua Gans, business strategy. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.03362 .

We find that equity loan fees, which have been largely ignored by the anomalies literature, are the best predictor of cross-sectional returns. When compared with 102 other anomalies and other short-selling measures, the loan fee anomaly has the highest monthly long-short return (4.01%), the highest monthly Sharpe Ratio (0.66), and, unlike other anomalies, exhibits strong persistence throughout the sample. Although prior work has shown that existing anomalies reside in high loan fee stocks, we find that 42% of loan fee outperformance is due to unique information not contained in other anomalies. Future papers that examine cross-sectional predictors of returns should include the single most effective predictor: loan fees. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00152 .

We investigate the welfare effects of third-degree price discrimination by a two-sided platform that enables interaction between buyers and sellers. Sellers are heterogeneous with respect to their per-interaction benefit, and, under price discrimination, the platform can condition its fee on sellers’ type. In a model with linear demand on each side, we show that price discrimination (i) increases participation on both sides, (ii) enhances total welfare, and (iii) may result in a strict Pareto improvement, with both seller types being better off than under uniform pricing. These results, which are in stark contrast to the traditional analysis of price discrimination, are driven by the existence of cross-group network effects. By improving the ability to monetize seller participation, price discrimination induces the platform to attract more buyers, which then increases seller participation. The Pareto improvement result means that even those sellers who pay a higher price under discrimination can be better off, because of the increased buyer participation. This paper was accepted by Joshua Gans, business strategy. Funding: A. de Cornière acknowledges funding from ANR [Grant ANR-17-EURE-0010] (Investissements d’Avenir program). Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.02788 .

Consensus analyst target prices are widely available online at no cost to investors. In this paper, we examine how the amount of dispersion in the individual target prices comprising the consensus affects the predictive association between the consensus target price and future returns. We find that returns implied by consensus target prices and realized future returns are positively correlated when dispersion is low, but they become highly negatively correlated when dispersion is high. Further analyses suggest that the differing effect of dispersion stems from incentive-driven staleness in price targets by some analysts after bad news. As a stock performs poorly and some analysts are slow to update their target prices, dispersion increases, and the consensus target price becomes too high. This has important implications for how consensus analyst target prices should inform investment decisions. We show that a hedge strategy taking a long (short) position in stocks with the highest predicted returns among stocks with the lowest (highest) dispersion earns more than 11% annually. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists mainly for stocks with high retail interest, suggesting that unsophisticated investors are misled by inflated target prices that are available freely online. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors acknowledge financial support from Indiana University and Yale University. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.03549 .

This paper studies a key element of discrimination, namely, when stereotypes translate into discriminatory actions. Using a hiring experiment, we rule out taste-based discrimination by design and test for the presence of two types of belief-based gender discrimination. We document evidence of explicit discriminators—individuals who are willing to discriminate even when their hiring choices are highly revealing of their gender-biased beliefs. Crucially, we also identify implicit discriminators—individuals who do not discriminate against women when taking a discriminatory action is highly revealing of their biased beliefs, but do discriminate against women when their biased motive is obscured. Our analysis highlights the central role played by features of the choice environment in determining whether and how discrimination will manifest. We conclude by discussing the implications for policy design. This paper was accepted by Marie Claire Villeval, behavioral economics and decision analysis. Funding: K. Barron and S. Schweighofer-Kodritsch gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft through CRC TRR 190 [Grant 280092119]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01229 .

We develop a general equilibrium model in which investors simultaneously experience money and nominal price illusions. We show that the combined effects of these illusions widen the gap between the elasticities of the earnings yield of low- and high-priced stocks relative to the nominal interest rate. Empirically, we show that the compounded effects of money and nominal price illusions are stronger for low-priced stocks during periods of high inflation and economic downturns and for stocks with low institutional ownership. Our findings are robust when controlling for valuation uncertainties of low-priced stocks, including idiosyncratic volatility and firm age. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03549 .

Relationships with peers help entrepreneurs learn and improve firm performance. Recent scholarship confirms that events—social gatherings such as mixers, conferences, or training programs—can help entrepreneurs build valuable social connections. Yet, for entrepreneurs in developing economies, networking frictions may make connecting with peers challenging and undermine the benefits of events. We argue that when networking frictions are high, the value of events will lie more in connecting neighbors rather than bringing together distant peers. In the presence of networking frictions, neighbors are both less likely to be someone the entrepreneur has already learned from and easier to sustain a relationship with. To test this argument, we use data from a series of networking events in Togo during which entrepreneurs were randomly assigned to meet with peers from across the city of Lomé. We find that entrepreneurs who were assigned to neighboring peers were much more likely to sustain a relationship, learn from their peer’s management knowledge, and in turn benefit more: Profits increase by 10% when entrepreneurs get to know peers who are located on average 1 km closer to them. Our results highlight the central role that networking frictions play in shaping who entrepreneurs in developing economies can successfully learn from. This paper was accepted by Lamar Pierce, organizations. Funding: Ewing Marion Kauffman Foundation [Dissertation Fellowship] and the Strategic Management Society [SRF Dissertation Fellowship]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00281 .