Policy makers and managers often turn to experts when in need of information, but we should expect experts to be systematically biased. This is because the decision to research a question implies a belief that research will be fruitful. If priors about the impact of one’s work are correct on average, then those who choose to research a question are optimistic about the quality of their work. The bias varies predictably with attributes of the question being studied. This fact has implications for a variety of mechanism design applications and yields predictions in accordance with a large literature in psychology. This paper was accepted by Teck-Hua Ho, behavioral economics.
Financial institutions use risk measures to calculate the marginal capital cost when expanding the exposure to a certain risk within their portfolio. We reverse this approach by calculating the marginal cost based on economic fundamentals for a profit-maximizing firm and then by identifying the risk measure delivering the correct marginal cost. The resulting measure depends on context. Whereas familiar measures can be recovered in some circumstances, other circumstances yield unfamiliar forms. In all cases, the risk preferences of the institution’s claimants determine how the correct risk measure must weight various default states. Our results demonstrate that risk measures used for pricing and performance measurement should be chosen based on economic fundamentals and may not necessarily adhere to the mathematical properties typically imposed in the literature. This paper was accepted by Jerome B. Detemple, finance.
We develop a model to show how agency conflicts, free-rider effects, and monitoring costs interact to affect optimal team size and workers’ incentive contracts. Team size increases with project risk, decreases with profitability, and decreases with monitoring costs as a proportion of output. Our predictions are consistent with empirical evidence that firm-specific risk has increased over time, average corporate earnings have declined, and firms’ organizational structures have also flattened. The predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams. Further, firms with relatively more intangible assets, where monitoring costs are likely to be higher, are smaller. Optimal incentive intensities decrease with risk and increase with profitability. The endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives. This paper was accepted by Gustavo Manso, finance.
We document that the strength of negatively reciprocal inclinations affects workers’ reaction to unfair treatment. We exploit unique matched survey and administrative data on male public sector employees in the Netherlands and compare the job motivation of employees born in 1950, who faced a substantial retrenchment of their pension rights resulting from a pension reform in 2006, to that of slightly older employees who remained entitled to more generous pension benefits. Job motivation is significantly lower among negatively reciprocal employees who were affected by the reform. The adverse effect on job motivation is stronger for negative reciprocal employees born very shortly after the cutoff date of January 1, 1950, as well as for those with many unaffected colleagues, who perceive the policy change as being more unfair. The treatment effect is stronger among workers who are more likely to hold their employer accountable for the drop in their pension rights. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2157 . This paper was accepted by Uri Gneezy, behavioral economics.
One key factor contributing to emergency department (ED) overcrowding is prolonged waiting time for admission to inpatient wards, also known as ED boarding time. To gain insights into reducing this waiting time, we study operations in the inpatient wards and their interface with the ED. We focus on understanding the effect of inpatient discharge policies and other operational policies on the time-of-day waiting time performance, such as the fraction of patients waiting longer than six hours in the ED before being admitted. Based on an empirical study at a Singaporean hospital, we propose a novel stochastic processing network with the following characteristics to model inpatient operations: (1) A patient’s service time in the inpatient wards depends on that patient’s admission and discharge times and length of stay. The service times capture a two-time-scale phenomenon and are not independent and identically distributed. (2) Pre- and post-allocation delays model the extra amount of waiting caused by secondary bottlenecks other than bed unavailability, such as nurse shortage. (3) Patients waiting for a bed can overflow to a nonprimary ward when the waiting time reaches a threshold, where the threshold is time dependent. We show, via simulation studies, that our model is able to capture the inpatient flow dynamics at hourly resolution and can evaluate the impact of operational policies on both the daily and time-of-day waiting time performance. In particular, our model predicts that implementing a hypothetical policy can eliminate excessive waiting for those patients who request beds in mornings. This policy incorporates the following components: a discharge distribution with the first discharge peak between 8 a.m. and 9 a.m. and 26% of patients discharging before noon, and constant-mean allocation delays throughout the day. The insights gained from our model can help hospital managers to choose among different policies to implement depending on the choice of objective, such as to reduce the peak waiting in the morning or to reduce daily waiting time statistics. This paper was accepted by Assaf Zeevi, stochastic models and simulation.
Risk pooling has been studied extensively in the operations management literature as the basic driver behind strategies such as transshipment, manufacturing flexibility, component commonality, and drop shipping. This paper explores the benefit of risk pooling in the context of inventory management using the canonical model first studied in Eppen [Eppen GD (1979) Effects of centralization on expected costs in a multi-location newsboy problem. Management Sci. 25(5):498–501]. Specifically, we consider a single-period, multilocation newsvendor model, where n different locations face independent and identically distributed demands and linear holding and backorder costs. We show that Eppen’s celebrated result, i.e., that the expected cost savings from centralized inventory management scale with the square root of the number of locations, depends critically on the “light-tailed” nature of the demand uncertainty. In particular, we establish that the benefit from pooling relative to the decentralized case, in terms of both expected cost and safety stock, is equal to n (α–1)/α for a class of heavy-tailed demand distributions (stable distributions), whose power-law asymptotic decay rate is determined by the parameter α ∈ (1, 2). Thus, the benefit from pooling under heavy-tailed demand uncertainty can be significantly lower than [Formula: see text], which is predicted for normally distributed demands. We discuss the implications of this result on the performance of periodic-review policies in multiperiod inventory management, as well as for the profits associated with drop-shipping fulfillment strategies. Corroborated by an extensive simulation analysis with heavy-tailed distributions that arise frequently in practice, such as power law and log normal, our findings highlight the importance of taking into account the shape of the tail of demand uncertainty when considering a risk pooling initiative. This paper was accepted by Serguei Netessine, operations management.
Enterprise software systems are required to be highly reliable because they are central to the business operations of most firms. However, configuring and maintaining these systems can be highly complex, making it challenging to achieve high reliability. Resource-constrained software teams facing business pressures can be tempted to take design shortcuts in order to deliver business functionality more quickly. These design shortcuts and other maintenance activities contribute to the accumulation of technical debt, that is, a buildup of software maintenance obligations that need to be addressed in the future. We model and empirically analyze the impact of technical debt on system reliability by utilizing a longitudinal data set spanning the 10-year life cycle of a commercial enterprise system deployed at 48 different client firms. We use a competing risks analysis approach to discern the interdependency between client and vendor maintenance activities. This allows us to assess the effect of both problematic client modifications (client errors) and software errors present in the vendor-supplied platform (vendor errors) on system failures. We also examine the relative effects of modular and architectural maintenance activities undertaken by clients in order to analyze the dynamics of technical debt reduction. The results of our analysis first establish that technical debt decreases the reliability of enterprise systems. Second, modular maintenance targeted to reduce technical debt was approximately 53% more effective than architectural maintenance in reducing the probability of a system failure due to client errors, but it had the side effect of increasing the chance of a system failure due to vendor errors by approximately 83% more than did architectural maintenance activities. Using our empirical results we illustrate how firms could evaluate their business risk exposure due to technical debt accumulation in their enterprise systems, and we assess the estimated net effects, both positive and negative, of a range of software maintenance practices. Finally, we discuss implications for research in measuring and managing technical debt in enterprise systems. This paper was accepted by Chris Forman, information systems.
Extended producer responsibility (EPR) is a policy tool that holds producers financially responsible for the post-use collection, recycling, and disposal of their products. Many EPR implementations are collective—a large collection and recycling network (CRN) handles multiple producers’ products in order to benefit from scale and scope economies. The total cost is then allocated to producers based on metrics such as their return shares by weight. Such weight-based proportional allocation mechanisms are criticized in practice for not taking into account the heterogeneity in the costs imposed by different producers’ products. The consequence is cost allocations that impose higher costs on certain producer groups than they can achieve independently. This may lead some producers to break away from collective systems, resulting in fragmented systems with higher total cost. Yet cost efficiency is a key legislative and producer concern. To address this concern, this paper develops cost allocation mechanisms that induce participation in collective systems and maximize cost efficiency. The cost allocation mechanisms we propose consist of adjustments to the widely used return share method and include the weighing of return shares based on processing costs and the rewarding of capacity contributions to collective systems. We validate our theoretical results using Washington state EPR implementation data and provide insights into how these mechanisms can be implemented in practice. This paper was accepted by Serguei Netessine, operations management.
Operational failures persist, in part because employees work around them without engaging in actions to prevent recurrence. To break this cycle, we investigate the impact of work design factors on responses to operational failures. We use hospital nurses as subjects in a laboratory experiment, where, unknown to them, two medication administration supplies are missing. We observe their real-time responses to the two failures and whether they contribute an improvement idea. We randomly assign half of the participants to an experiment location far away from a satellite pharmacy where the missing supplies can be obtained (“difficult condition”), and the other half are located near the satellite pharmacy (“easy condition”). Both conditions contain risky, against-policy supplies that can be used to complete the work tasks, giving participants a choice between policy-compliant workarounds and risky, against-policy workarounds. In the first study, we find that participants in the difficult condition are more likely to contribute improvement ideas but are less likely to use policy-compliant workarounds. A second experiment with a 2 × 2 design shows that participants in the difficult condition who have high access to the process owner are more likely to use policy-compliant workarounds than when they have low access. Our results suggest that hospitals can increase communication about operational failures by deliberately making it difficult to work around them while simultaneously providing a high level of access to process owners. Otherwise, nurses encountering operational failures are likely to resort to against-policy workarounds, a behavior observed in practice. This paper was accepted by Serguei Netessine, operations management.
Although a sizable literature suggests that firms benefit from vulnerability to takeovers because it reduces agency problems, the threat of takeovers can also impose ex ante costs on firms by adversely affecting relationships with important stakeholders, such as major customers. We find that when firms have corporate customers as important stakeholders, an exogenous reduction in the threat of takeovers increases their ability to attract new customers and strengthens their relationships with existing customers, resulting in improvement in operating performance. The positive effect on operating performance is greater for suppliers that are likely to offer unique and durable products to their customers. Our results suggest a beneficial aspect of protection from takeovers when stakeholder relationships are important. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2252 . This paper was accepted by Wei Jiang, finance.