Findings

Open for Business

Kevin Lewis

January 19, 2010

Calorie Posting in Chain Restaurants

Bryan Bollinger, Phillip Leslie & Alan Sorensen
NBER Working Paper, January 2010

Abstract:
We study the impact of mandatory calorie posting on consumers' purchase decisions, using detailed data from Starbucks. We find that average calories per transaction falls by 6%. The effect is almost entirely related to changes in consumers' food choices - there is almost no change in purchases of beverage calories. There is no impact on Starbucks profit on average, and for the subset of stores located close to their competitor Dunkin Donuts, the effect of calorie posting is actually to increase Starbucks revenue. Survey evidence and analysis of commuters suggest the mechanism for the effect is a combination of learning and salience.

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Lone Inventors as Sources of Breakthroughs: Myth or Reality?

Jasjit Singh & Lee Fleming
Management Science, January 2010, Pages 41-56

Abstract:
Are lone inventors more or less likely to invent breakthroughs? Recent research has attempted to resolve this question by considering the variance of creative outcome distributions. It has implicitly assumed a symmetric thickening or thinning of both tails, i.e., that a greater probability of breakthroughs comes at the cost of a greater probability of failures. In contrast, we propose that collaboration can have opposite effects at the two extremes: it reduces the probability of very poor outcomes - because of more rigorous selection processes - while simultaneously increasing the probability of extremely successful outcomes - because of greater recombinant opportunity in creative search. Analysis of over half a million patented inventions supports these arguments: Individuals working alone, especially those without affiliation to organizations, are less likely to achieve breakthroughs and more likely to invent particularly poor outcomes. Quantile regressions demonstrate that the effect is more than an upward mean shift. We find partial mediation of the effect of collaboration on extreme outcomes by the diversity of technical experience of team members and by the size of team members' external collaboration networks. Supporting our meta-argument for the importance of examining each tail of the distribution separately, experience diversity helps trim poor outcomes significantly more than it helps create breakthroughs, relative to the effect of external networks.

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Entrepreneurial Orientation and the Performance of Religious Congregations as Predicted by Rational Choice Theory

John Pearce, David Fritz & Peter Davis
Entrepreneurship Theory and Practice, January 2010, Pages 219-248

Abstract:
Empirical and anecdotal evidence suggests that businesses that act with an entrepreneurial orientation enjoy superior performance. Our research investigates whether nonprofit, religious congregations can benefit from similar initiatives. We based our hypotheses on the Rational Choice Theory of Religion, which was developed by social scientists to bring economic analysis to the understanding of the effects of competition among nonprofit organizations. Using a sample of 250 religious congregations in five different geographical markets, an entrepreneurial orientation is found to be positively associated with organizational performance. A hypothesized interaction effect between environmental munificence and entrepreneurial orientation is assessed.

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Latina entrepreneurship

Magnus Lofstrom & Timothy Bates
Small Business Economics, December 2009, Pages 427-439

Abstract:
We utilize individual panel data from the 1996 and 2001 Survey of Income and Program Participation (SIPP) to analyze the relative success of self-employed female Hispanics. To allow for a meaningful comparison of earnings between self-employed and wage/salary women, we generate different earnings measures addressing the role of business equity. We compare earnings of Hispanic female entrepreneurs to both Latina wage/salary workers and to self-employed female non-Hispanic whites. Latina entrepreneurs are observed to have lower mean earnings than both white female entrepreneurs and Latina employees. However, our findings indicate that Latina entrepreneurs often do well, once differences in mean observable characteristics, such as education, are taken into account. Self-employed Latinas are estimated to earn more than observationally similar non-minority white female entrepreneurs and slightly less than observationally similar wage/salary-employed Latinas.

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The Impact of Minimum-Wage Increases: Evidence from Fast-food Establishments in Illinois and Indiana

Elizabeth Powers
Journal of Labor Research, December 2009, Pages 365-394

Abstract:
Fast-food establishments in Illinois and Indiana were surveyed during a period of state-mandated minimum-wage increases in Illinois. While entry-level wages of Illinois establishments rose substantially in response to the mandated increases, there is little evidence that Illinois establishments ameliorated wage increases by delaying scheduled raises or reducing fringe benefit offerings. There is little evidence of 'labor-labor' substitution in favor of women, better educated, or teenaged workers, or increased worker tenure at the new wage, but weak evidence of increased food prices. In contrast, there are large declines in part-time positions and workers' hours in Illinois relative to Indiana. Aggregate figures from the Bureau of Labor Statistics support relative declines in total fast-food employment in 'downstate' Illinois counties, as hypothesized. However, establishments' responses do not appear proportionate to the strength of the minimum wage change.

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Managerial Beliefs and Corporate Financial Policies

Ulrike Malmendier, Geoffrey Tate & Jonathan Yan
NBER Working Paper, January 2010

Abstract:
We measure the impact of individual managerial beliefs on corporate financing. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity. We show that such overconfident managers use less external finance and, conditional on accessing risky capital, issue less equity than their peers. Second, CEOs with Depression experience have less faith in capital markets and lean excessively on internal financing. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. CEOs' press portrayals confirm these differences in beliefs. Overall, measurable managerial characteristics have significant explanatory power beyond traditional capital-structure determinants.

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Implicit Employment Contracts: The Limits of Management Reputation for Promoting Firm Productivity

Jeffrey Hales & Michael Williamson
Journal of Accounting Research, March 2010, Pages 147-176

Abstract:

Implicit employment contracts are a common way to motivate firm productivity but also require that employees trust management to be fair when allocating postproduction firm resources between employees and owners. We use an experiment to study the problem of motivating firm productivity, which depends on levels of owner investment and employee productive effort, when managers have an incentive to favor the owner's interests over those of the employee. Drawing on research in psychology and behavioral economics, we argue that reputation concerns can more effectively promote firm productivity when manager compensation is relatively insensitive to how much the owner is allocated after production occurs. Consistent with our predictions, we find that reputation concerns lead to greater firm productivity and higher payoffs for all firm members, but only when manager pay is relatively insensitive to the owner's ex post allocation. In addition to offering testable empirical implications, our theory and results are important because they can help explain why executive compensation is, in practice, surprisingly insensitive to owner returns.

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Indian Entrepreneurial Success in the United States, Canada and the United Kingdom

Robert Fairlie, Harry Krashinsky, Julie Zissimopoulos & Krishna Kumar
RAND Working Paper, December 2009

Abstract:
Indian immigrants in the United States and other wealthy countries are successful in entrepreneurship. Using census data from the three largest developed countries in the world receiving Indian immigrants - the United States, United Kingdom and Canada - the authors examine the performance of Indian entrepreneurs and the causes of their success. In the United States, Indian entrepreneurs have average business income that is substantially higher than the national average and is higher than any other immigrant group. High levels of education among Indian immigrants in the United States are responsible for nearly half of the higher level of entrepreneurial earnings while industry differences explain an additional 10 percent. In Canada, Indian entrepreneurs have average earnings slightly below the national average but they are more likely to hire employees, as are their counterparts in the United States and United Kingdom. The Indian educational advantage is smaller in Canada and the United Kingdom contributing less to their entrepreneurial success.

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Sarbanes-Oxley and corporate risk-taking

Leonce Bargeron, Kenneth Lehn & Chad Zutter
Journal of Accounting and Economics, February 2010, Pages 34-52

Abstract:
We empirically examine whether risk-taking by publicly traded US companies declined significantly after adoption of the Sarbanes-Oxley Act of 2002 (SOX). Several provisions of SOX are likely to discourage risk-taking, including an expanded role for independent directors, an increase in director and officer liability, and rules related to internal controls. We find several measures of risk-taking decline significantly for US versus non-US firms after SOX. The magnitudes of the declines are related to several firm characteristics, including pre-SOX board structure, firm size, and R&D expenditures. The evidence is consistent with the proposition that SOX discourages risk-taking by public US companies.

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Form or Substance: The Role of Business Plans in Venture Capital Decision Making

David Kirsch, Brent Goldfarb & Azi Gera
University of Maryland Working Paper, December 2009

Abstract:
We explore a well-known instance of fast decision making under high uncertainty, venture capital (VC) opportunity screening. We analyze a sample of 722 funding requests submitted to an American VC firm and evaluate the influence of the form of the submission and content of business planning documents on VC funding decisions. We improve on prior literature by a) using a large sample of known representativeness, b) relating request characteristics to actual VC decisions, and c) developing an inferential logic that takes account of the multiple sources of information to which VCs have access. We find that the presence of planning documents and some information contained therein are weakly associated with VC funding decisions. Based on our inferential strategy, we find that this information is learned independently of its inclusion in the business planning documents.

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Benefits of Relationship Banking: Evidence from Consumer Credit Markets

Sumit Agarwal, Souphala Chomsisengphet, Chunlin Liu & Nicholas Souleles
University of Pennsylvania Working Paper, July 2009

Abstract:
This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, we estimate the effects of relationship banking on the customers' default, attrition, and utilization behavior. We find that relationship accounts exhibit lower probabilities of default and attrition, and have higher utilization rates, compared to non-relationship accounts, ceteris paribus. Such effects become more pronounced with increases in various measures of the strength of the relationships, such as relationship breadth, depth, length, and proximity. Moreover, dynamic information about changes in the behavior of a customer's other accounts at the bank, such as changes in checking and savings balances, helps predict and thus monitor the behavior of the credit card account over time. These results imply significant potential benefits of relationship banking to banks in the retail credit market.

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The Effect of Immigration on Productivity: Evidence from US States

Giovanni Peri
NBER Working Paper, November 2009

Abstract:
Using the large variation in the inflow of immigrants across US states we analyze the impact of immigration on state employment, average hours worked, physical capital accumulation and, most importantly, total factor productivity and its skill bias. We use the location of a state relative to the Mexican border and to the main ports of entry, as well as the existence of communities of immigrants before 1960, as instruments. We find no evidence that immigrants crowded-out employment and hours worked by natives. At the same time we find robust evidence that they increased total factor productivity, on the one hand, while they decreased capital intensity and the skill-bias of production technologies, on the other. These results are robust to controlling for several other determinants of productivity that may vary with geography such as R&D spending, computer adoption, international competition in the form of exports and sector composition. Our results suggest that immigrants promoted efficient task specialization, thus increasing TFP and, at the same time, promoted the adoption of unskilled-biased technology as the theory of directed technologial change would predict. Combining these effects, an increase in employment in a US state of 1% due to immigrants produced an increase in income per worker of 0.5% in that state.

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The Economic Impact of Eliminating Preemption of State Consumer Protection Laws

Joseph Mason & Hal Singer
University of Pennsylvania Working Paper, September 2009

Abstract:
In July 2009, the Obama Administration proposed legislation that would create a Consumer Financial Protection Agency. Among other items, the proposed legislation would eliminate federal preemption of state consumer protection laws, which would encourage states to reintroduce a scattering of local rules and regulations. The legislation is an outgrowth of a recent - though largely non-economic - iterature linking preemption to all that ails the U.S. banking industry, including the subprime mortgage crisis. Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules. Uniform, national regulatory standards have allowed banks to issue a consistent set of terms for mortgages, credit cards, and business loans. Literature focusing on the politics of preemption, rather than on the economic effects, largely misses the efficiency gains from standardizing regulatory policy. By encouraging competition between banks, uniform standards lead to lower costs of credit and greater capital availability. In this paper, we examine from an economic perspective why uniform national standards were originally needed in the U.S. banking industry, and continue to be so. The most significant preemption decisions made by the Office of the Comptroller of the Currency over the last two decades have enhanced competition among banks and thwarted price controls, increasing overall economic efficiency. Preemption has been used to open markets, expand access to banking services such as ATMs, democratize credit, and simplify regulatory compliance. Accordingly, placing barriers to preemption would raise bank operating costs and restrict bank operations, hurt customers, and suppress economic growth.

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Holiday Price Rigidity and Cost of Price Adjustment

Daniel Levy, Haipeng (Allan) Chen, Georg Muller, Shantanu Dutta & Mark Bergen
Economica, January 2010, Pages 172-198

Abstract:
The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks, such as restocking shelves, handling customers' questions and inquiries, running cash registers, cleaning and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that, indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc. do not vary between holiday and non-holiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.


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