Knowledge that Transforms

Senior leadership has two primary levers to influence a direct report: incentives and communication. Financial incentives are credible and precisely specified but offer limited flexibility. In contrast, communication is flexible but lacks precision, and must be deemed credible to affect a direct report’s actions. We study a setting where senior leadership seeks to add a new initiative to their organization’s portfolio. The initiative’s potential to create value is not initially well understood. Senior leadership eventually obtains more precise information on the initiative’s value and subsequently may communicate this information to their direct report. We analyze senior leadership’s incentive and communication decisions, and ultimately their portfolio decision. We find that senior leadership’s communication only affects a direct report’s actions when a new initiative’s potential to create value is sufficiently uncertain. Additionally, we find instances where an organization may benefit from communication that offers lessspecificity.

While digitization has greatly increased the reuse of knowledge, this study shows how these benefits might be mitigated by copyright restrictions. I use the digitization of in-copyright and out-of-copyright issues of Baseball Digest magazine by Google Books to measure the impact of copyright on knowledge reuse in Wikipedia. I exploit a feature of the 1909 Copyright Act whereby material published before 1964 has lapsed into the public domain, allowing for the causal estimation of the impact of copyright across this sharp cutoff. I find that, while digitization encourages knowledge reuse, copyright restrictions reduce citations to copyrighted issues of Baseball Digest by up to 135% and affect readership by reducing traffic to affected pages by 20%. These impacts are highly uneven: copyright hurts the reuse of images rather than text and affects Wikipedia pages for less-popular players greater than more-popular ones. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2767 .

We study the price-setting behavior in a competitive market for used cars and provide empirical evidence for coarse information processing. Based on detailed field data from one of Europe’s largest online marketplaces for automotive vehicles, we document systematic and sizable price discontinuities at salient car-age and mileage thresholds. The price difference between two otherwise identical cars across registration years (where one was first registered in January and the other in December of the previous year) is up to five times larger than that between two cars first registered in any two subsequent months within a registration year. A similar pattern can be observed in the mileage dimension at 10,000-km odometer marks, which is in line with earlier findings in the literature. Being able to study discontinuities along two dimensions of the same good allows us to further our understanding toward a more general notion of inattentive behavior. While our results are compatible with a behavioral model of limited attention, we also provide evidence for a more traditional explanation based on search frictions. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2016.2714 .

Incumbents can enjoy a cost advantage vis-à-vis new entrants and so deter new firm entry by establishing and leveraging connections with the judicial system. Connected firms may in fact avoid fully complying with the costly norms implied by a law, a regulation, or a contract. At the same time, they can also credibly threaten to sue new entrants. Therefore, a change in the institutional environment that diminishes the ability of incumbent firms to establish judicial connections—i.e., an increase in judicial independence—can promote entrepreneurship. Exploiting reforms that change the way in which U.S. state judges are selected, we confirm that this is the case, and we show that this effect is more salient in states and industries where the likelihood of entering into a business dispute is higher. The paper also sheds some light on the mechanisms behind this effect. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2794 .

Growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets. Testosterone, a chemical messenger especially influential in male physiology, has been shown to affect economic decision making and is taken as a performance enhancer among some financial professionals. This is the first experimental study to test how testosterone causally affects trading and prices. We exogenously elevated testosterone in male traders and tested testosterone’s effect both on their trading behavior in experimental asset markets and on the size and duration of asset price bubbles. Using both aggregated and individual trading data, we find that testosterone administration generated larger and longer-lasting bubbles by causing high bids and the slow incorporation of the asset’s fundamental value. The e-companion is available at https://doi.org/10.1287/mnsc.2017.2836 .

Using hand-collected data on division manager (DM) pay contracts, we document that DM pay is related to the performance of both the DM’s division and the other divisions in the firm. There is substantial heterogeneity in DM pay for performance. DM pay for division performance is lower in industries with less informative accounting earnings. DM pay is more sensitive to other-division performance if the DM’s division is related to the rest of the firm, if the DM’s division has fewer growth opportunities, and if the DM’s division receives less capital from the rest of the firm. Consistent with optimal contracting view, DMs receive greater pay for other-division performance in better-governed firms. Overall, our evidence suggests that DM compensation is structured to account for the information and agency problems in multidivision firms. The Internet appendix is available at https://doi.org/10.1287/mnsc.2016.2672 .

Decision makers can often improve the accuracy of their judgments on factual matters by consulting “crowds” of others for their respective opinions. In this article, we investigate whether decision makers could similarly draw on crowds to improve the accuracy of their judgments about their own tastes and hedonic experiences. We present a theoretical model that states that accuracy gains from consulting a crowd’s judgments of taste depend on the interplay among taste discrimination, crowd diversity, and the similarity between the crowd’s preferences and those of the decision maker. The model also delineates the boundary conditions for such “crowd wisdom.” Evidence supporting our hypotheses was found in two laboratory studies in which decision makers made judgments about their own enjoyment of musical pieces and short films. Our findings suggest that although different people may have different preferences and inclinations, their judgments of taste can benefit from the wisdom of crowds. Data are available at https://doi.org/10.1287/mnsc.2016.2660 .

We investigate the factors that affect the growth of Groupon, the leading online daily deals platform. We concentrate on the online-to-offline (O2O) aspect of the business that differentiates it from other e-commerce platforms—its strong connection to local markets. We focus on travel cost and store density, the key local characteristics that affect consumer deal demand and merchant deal offering. Using a comprehensive longitudinal data set on deal offerings and sales across local markets, and combining it with local market characteristics, we estimate a simultaneous equation model of the weekly number of deal offerings and deal sales characterizing the two-sided nature of the platform. We find that the word-of-mouth effect on the consumer side and the observational learning effect on the merchant side contribute to and reinforce the expansion of a two-sided platform. However, a larger number of deals intensifies the competition, which then lowers per deal sales and limits the number of deal offerings. We find that local characteristics have significant impact on both the deal demand and the supply side. We further use model simulation to show how differences in growth patterns across markets may be driven by local characteristics, and we decompose their relative impact on the demand and supply sides. The paper provides managerial implications for firms specializing in O2O commerce.

The relationship between pharmaceutical detailing and prescriptions for non-FDA-approved (off-label) use has been the subject of regulatory scrutiny, with more than $12 billion in regulatory settlements for off-label promotion since 2004. Using the case of AstraZeneca’s antipsychotic drug, Seroquel, I study the extent to which off-label prescriptions are caused by detailing. Using a physician panel that connects detailing exposure to medical charts, I exploit within-physician variation to identify detailing effects. I find the effect of detailing on off-label prescriptions is small in both absolute and relative terms. Detailing on net tilts the prescribing distribution toward on-label.

This paper presents a theory of disclosure in a market where investors have heterogeneous beliefs and face short-sale constraints. Assets trade above fundamentals reflecting the value of the option to sell to more optimistic investors in the future. The initial seller has an incentive to commit to an imprecise disclosure policy, despite the negative effect this has on the fundamental value of the asset, in order to increase the potential for disagreement and hence the magnitude of the speculative premium. I show that there is a strategic complementarity between sellers in their disclosure decisions. This explains why financial misreporting and episodes of speculation occur together in waves and demonstrates that the endogenous choice of imprecise disclosure amplifies the extent to which assets are overpriced.