by Andrei Hagiu and Julian Wright
Executive Summary — Retailers including Best Buy and Safeway act as intermediaries between suppliers and buyers, reselling the products they purchase from suppliers to buyers. Other intermediaries, such as eBay or Mall of America, act as marketplaces in which suppliers sell directly to buyers via a platform. In the existing literature, the structure of an intermediary—reseller or marketplace—is taken as given. It is important to recognize, however, that intermediaries can often choose which mode they operate under; this paper analyzes that choice. What are the economic tradeoffs that drive an intermediary to adopt one mode or the other? The authors present a framework in which the allocation of residual control rights creates meaningful distinctions between the two modes, and emphasize a fundamental tradeoff between local information and coordination that was not raised in earlier literature. Overall, the analysis provides a new style of modeling intermediaries' strategic positioning decisions. Key concepts include:
- A fundamental distinction between marketplaces and resellers is the allocation of control rights between independent suppliers and the intermediary over non-contractible decisions (such as prices, advertising, customer service, responsibility for order fulfillment, etc.) pertaining to the products being sold.
- There is a fundamental tradeoff faced by an intermediary choosing whether to function as a marketplace or a reseller. The marketplace mode allows for better exploitation of suppliers' location information, whereas the reseller mode leads to better coordination of activities that have cross-product spillovers.
- Among other findings, the authors' model shows that cost differences tilt the tradeoff in favor of the marketplace when there are many long-tail products, and in favor of the reseller when there are a few short-tail products.
An intermediary can choose between functioning as a marketplace, on which suppliers sell their products directly to buyers, or as a reseller, purchasing products from suppliers and selling them to buyers. In our model, this choice comes down to whether residual control rights over non-contractible decision variables are better held by suppliers (the marketplace mode) or by the intermediary (the reseller mode). We focus on a single non-contractible decision variable―the level of demand-enhancing marketing activities. The reseller is better able to coordinate these activities across products, whereas the marketplace mode benefits from allowing independent suppliers to tailor their marketing activities to local information about buyer demand. In the benchmark setting, the marketplace mode is preferred if and only if the variance of local information exceeds the squared value of spillovers from marketing activities across products. We explore several generalizations, showing how the benchmark tradeoff is modified in different settings.Paper Information
Editor's note: Think money can't buy happiness? Behavioral economists Elizabeth Dunn and Michael Norton beg to differ. It actually can, they say—but only if we spend it the right way.
In their book released this week, Happy Money: The Science of Smarter Spending, Dunn and Norton draw on years of quantitative and qualitative research to explain how we can turn cash into contentment. The key lies in changing our spending habits and adhering to five key principles: Buy Experiences (research shows that material purchases are less satisfying than vacations or concerts); Make it a Treat (limiting access to our favorite things will make us keep appreciating them); Buy Time (focusing on time over money yields wiser purchases); Pay Now, Consume Later (delayed consumption leads to increased enjoyment); and Invest in Others (spending money on other people makes us happier than spending it on ourselves).
Happy Money provides valuable information not only for pleasure-seeking consumers, but also for companies looking to increase the happiness of both employees and customers. The following excerpt describes how the power of limited access led to fanatical demand of such products as McDonald's "McRib" sandwich and KFC's "Double Down."MAKE IT A TREAT
From Happy Money: the Science of Smarter Spending
By Elizabeth Dunn and Michael Norton
In June 2011, a chorus of tweets heralded the arrival of a culinary wonder:
@BJIT: #doubledown is coming back!!! God bless the colonel!
@kevinelop: OMG!! . . . The Double Down is back at KFC!!!
@iamToddyTickles: KFC's #doubledowns for Breakfast. Mmmmm. Mmmmmm. Yummmmmmy. I'm full.
Despite his precious Twitter handle, iamToddyTickles appears to be a fully grown man in his profile picture, yet his tweet echoes the slobbery exuberance of Scooby Doo. What could have prompted such an onslaught of emotion, ranging from unadulterated excitement to utter incoherence? KFC's Double Down features two slices of bacon, two kinds of cheese, and the Colonel's secret sauce, all sandwiched between two slabs of fried chicken. According to KFC, it's "so meaty, there's no room for a bun!"
This bunless "sandwich" was a hit in the United States, but in Canada, it was a sensation. The Double Down (translated for our French-Canadian friends as Coup Double, or "Double Punch") made KFC history, becoming the chain's best-selling new item in Canada ever. When the sandwich made its Canadian debut in the fall of 2010, KFC sold a million Double Downs in less than a month, enough "to stretch across 2,083 hockey rinks," according to the company's press release. (For readers unfamiliar with Canadian culture, all Canadian measurements are in hockey rink units, or HRUs.) Social media activity was intense, and consumers even organized Double Down "Bro Downs" where men competed to see who could guzzle the most Double Downs.
In response to the initial runaway success of its product, KFC pulled the sandwich off the menu across most of Canada. This move may seem strange in an industry where a pivotal goal—in the words of Coca-Cola's long-standing mantra—is to be "within an arm's reach of desire." According to KFC Canada's chief marketing officer, David Vivenes, KFC is about "making moments that are so good." But by removing the Double Down from the menu, KFC made the moment when it came back in 2011 not just "so good," but even better. Nor is KFC alone in adopting this approach. McDonald's has pursued a similar strategy with its McRib sandwich, a ground pork patty with barbecue sauce, onions, and pickles. Although pork supplies are steady, the McRib has been continually taken off the market and reintroduced—always for a limited time—over the past three decades. Ashlee Yingling, of McDonald's media relations department, explained that the company makes the McRib available in the fall, thereby creating nostalgia for summer barbecues.
The consumer response has been obsession. If you want to know when and where you might get your hands on a McRib, you can visit McRib fan Alan Klein's McRib Locator website, a United States map with a comprehensive list of confirmed, possible, and questionable McRib sightings. McDonald's kicked off its latest McRib launch with a "Legends of the McRib" event in New York City. The McRib was a key contributor to a 4.8 percent increase in company sales in November 2010.
Long before innovations like bunless sandwiches and boneless ribs, Disney began harnessing the power of limited availability by making its movies available for limited periods. The company locks away Dumbo, Cinderella, Peter Pan, and other hits in the "Disney vault," where they remain unavailable for years at a time. Like Cinderella herself, these movies rush out of the ball while the party's still going strong, before the magic wears off. Many other companies adopted similar strategies, and the psychologist Robert Cialdini devotes an entire chapter of his classic book Influence to the creative and downright crafty ways in which scarcity has been used to move product. Although Cialdini admits to a "grudging admiration for the practitioners who made this simple device work in a multitude of ways," he urges readers to resist the lure of scarcity marketing, coaching them on "how to say no." If we take Silverman's mantra and the science behind it seriously, however, scarcity marketing starts to look like a win-win. That is, people may savor everything from the Double Down to Dumbo more when they know these delights won't be available forever, increasing their own satisfaction even as companies ring up increased sales.
Applying this principle is straightforward when it comes to ephemeral delights such as movies and bunless sandwiches. But what about major purchases? Derek Lee is an aspiring actor and filmmaker who owns a beautiful, bright red Mini Cooper. If you owned a sporty little car, you might be tempted to drive it all the time, settling in to the comfy leather seats whenever you needed to get groceries or meet friends for dinner. But Derek lives in Vancouver, Canada, where public transit is excellent and car insurance is expensive. So, when Derek first got the Mini Cooper, he kept it in the garage and insured it only on the days when he really wanted to use it, rather than paying regular monthly car insurance and using the car every time he needed to run an errand. As his mildly traumatized former passengers can attest, Derek got the most out of those days, hugging turns and accelerating through straightaways like he was auditioning for a car commercial. Recently, he decided to insure his car full-time, but now, he says, driving is "just about contained road rage and not killing people." He looks back wistfully on the earlier years, when he "drove exuberantly."
Car-sharing companies like Zipcar provide customers with a similar opportunity for exuberance by turning driving back into a treat. Whereas traditional car rental companies choose standard cars in the dullest colors of the rainbow, the first Zipcar was a tricked-out lime-green Volkswagen Beetle. The founder and former CEO of Zipcar, Robin Chase, pointed to the key difference between driving your own car and driving a Zipcar: You use your own car for everything. Zipcars are for "outings." Higher-end companies, like the Classic Car Club, founded in London in 1995, take this approach to its logical extreme. For a hefty membership fee, the Classic Car Club gives members access to a "staggeringly stylish fleet of cars," including Ferraris and Maseratis. In Manhattan, club members pay almost $11,000 for thirteen days of driving the club's "high-end supercars." This doesn't sound like a bargain. But the cost of actually owning one of these cars is mind-boggling. And we're willing to bet that members' attention stays focused on the "supercars" during those magical thirteen days, making each of those eleven thousand dollars count.
Car-sharing is now a familiar concept, but creative companies are making it possible for their clients to share ownership and access to just about everything, from villas and handbags to dogs and French truffle trees. According to our favorite Portuguese saying, "You should never have a yacht; you should have a friend with a yacht." (To be honest, it's also the only Portuguese saying we know.) By joining SailTime, members can live the Portuguese dream by sharing a yacht with up to seven other people. In describing SailTime, a recent media story warned consumers that sharing the yacht means "there is no guarantee you will always be able to use it when you want." This apparent limitation is precisely what helps consumers make it a treat. Limiting your access to everything from the McRib to Maseratis helps to reset your cheerometer. That is, knowing you can't have access to something all the time may help you appreciate it more when you do.About the authors
Elizabeth Dunn is an associate professor of psychology at the University of British Columbia. Michael Norton is an associate professor of business administration and the Marvin Bower Fellow at Harvard Business School.
From Happy Money: The Science of Smarter Spending, by Elizabeth Dunn and Michael Norton. Copyright © 2013 by Elizabeth Dunn and Michael Norton. Reprinted by permission of Simon & Schuster, Inc.
Professor Rosabeth Moss Kanter's new case explores the change process within Hillary Clinton's US State Department as it pursues women's empowerment through partnerships around the globe. One issue raised: Are the alliances sustainable when Clinton leaves office? Purchase the case, "Hillary Clinton & Partners: Leading Global Social Change from the US State Department."Where is the economic research on digitization?
"In an industry that is all about information, shouldn't the information economy be more measurable?" That question is central to an essay by Josh Lerner, Shane Greenstein, and Scott Stern that points out the critical need for more research on the consequences of digitization on topics ranging from the composition of organizations to the design of copyright. Read "Digitization, Innovation, and Copyright: What Is the Agenda?" in the February 2013 issue of Strategic Organization II.Innovation at Greylock Partners
The case "Greylock Partners" explores the pioneering initiatives of venture capitalist William Elfers, who started Greylock Partners in 1965. Using a limited partnership structure, Elfers helped create "a new organizational approach to venture capital through mechanisms that deeply reflected New England's financial investment culture," according to authors G. Felda Hardymon, Tom Nicholas, and David Lane. Over three decades, Elfers never lost a general partner or saw a colleague leave to start his own venture capital firm, they note.
— Sean SilverthornePublications
- Henry Holt (Macmillan)
Abstract—What's behind the phenomenal success of entertainment businesses such as Warner Bros., Marvel Enterprises, and the NFL-along with such stars as Jay-Z, Lady Gaga, and LeBron James? Which strategies give leaders in film, television, music, publishing, and sports an edge over their rivals? In this book, drawing on my case studies and other research on the worlds of media and sports, I explain a powerful truth about the fiercely competitive world of entertainment: building a business around blockbuster products-the movies, television shows, songs, and books that are hugely expensive to produce and market-is the surest path to long-term success. Along the way, I reveal why entertainment executives often spend outrageous amounts of money in search of the next blockbuster, why superstars are paid unimaginable sums, and how digital technologies are transforming the entertainment landscape. Full of inside stories about some of the world's most successful entertainment brands, Blockbusters is aimed at anyone seeking to understand how the entertainment industry really works-and how to navigate today's high-stakes business world at large.
Publisher's link: http://www.blockbusters-thebook.com/
- Journal of Economic Perspectives
Abstract—This paper examines the direct private equity investment strategies across sovereign wealth funds (SWFs) and their relationship to the funds' organizational structures. SWFs seem to engage in a form of trend chasing, since they are more likely to invest at home when domestic equity prices are higher and invest abroad when foreign prices are higher. Funds see the industry P/E ratios of their home investments drop in the year after the investment, while they have a positive change in the year after their investments abroad. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. At the same time, SWFs with external managers tend to invest in lower P/E industries, which see an increase in the P/E ratios in the year after the investment. By way of contrast, funds with politicians involved invest in higher P/E industries, which have a negative valuation change in the year after the investment.
- New England Journal of Medicine
Abstract—More effective models of care delivery are needed, but their successful implementation depends on effective care teams and good management of local operations (clinical microsystems). Clinicians influence both, and local clinician leaders will have several key tasks.
Publisher's link: http://www.nejm.org/doi/full/10.1056/NEJMp1301814
- Marketing Science
Abstract—I measure the spillover effect of intercollegiate athletics on the quantity and quality of applicants to institutions of higher education in the United States, popularly known as the "Flutie Effect." I treat athletic success as a stock of goodwill that decays over time, similar to that of advertising. A major challenge is that privacy laws prevent us from observing information about the applicant pool. I overcome this challenge by using order statistic distribution to infer applicant quality from information on enrolled students. Using a flexible random coefficients aggregate discrete choice model that accommodates heterogeneity in preferences for school quality and athletic success, and an extensive set of school fixed effects to control for unobserved quality in athletics and academics, I estimate the impact of athletic success on applicant quality and quantity. Overall, athletic success has a significant long-term goodwill effect on future applications and quality. However, students with lower than average SAT scores tend to have a stronger preference for athletic success, while students with higher SAT scores have a greater preference for academic quality. Furthermore, the decay rate of athletics goodwill is significant only for students with lower SAT scores, suggesting that the goodwill created by intercollegiate athletics resides more extensively with low-ability students than with their high-ability counterparts. But, surprisingly, athletic success impacts applications even among academically stronger students.
- Harvard Business Review
Abstract—By now most companies have sustainability programs. They're cutting carbon emissions, reducing waste, and otherwise enhancing operational efficiency. But a mishmash of sustainability tactics does not add up to a sustainable strategy. To endure, a strategy must address the interests of all stakeholders: investors, employees, customers, governments, NGOs, and society at large. To do that, it has to increase shareholder value while at the same time improving the firm's performance on environmental, social, and governance (ESG) dimensions. This article outlines a process that can be used to execute a sustainable strategy and extend the boundaries of The Performance Frontier.
- Management Science
Abstract—We study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance-which prevents shareholders from controlling the board-protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994-2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making.
Publisher's link: http://www.people.hbs.edu/mrhodeskropf/GovernanceCEOTurnoverMS.pdf
- Journal of Law, Economics & Organization
Abstract—We test theoretical propositions from the literature on information and control in interfirm agreements using a sample of over 100 Internet portal alliance contracts. The literature on information and control in alliances suggests that the use of verifiable performance measures to allocate state-contingent control rights depends (a) on the precision of the information about the realized state and (b) on the level of information asymmetry between the two parties regarding the preferences of each. We test these propositions by looking at how the timing of agreements (a proxy for environmental uncertainty) and exclusivity restrictions (a proxy for incentive conflict) impact the use of a subset of available performance measures. Consistent with a signaling model of the allocation of contingent control rights, we find that contracts involve fewer contingent control rights as industries have matured. Where incentive conflicts are potentially greater, more contingent control rights are used.
- Strategic Organization
Abstract—This essay discusses the need for research on the consequences of digitization, as well as the impact of alternative policies governing the creation and use of digital information. This agenda focuses on the development of research to investigate the economics of digitization, to analyze the governance of intellectual property in this sector, particularly through copyright, and to pioneer approaches to analyzing measurement of digitization. This agenda overlaps with many related open questions in organizational and strategy research.
- Review of Corporate Finance Studies
Abstract—The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund's impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding.
Publisher's link: http://rcfs.oxfordjournals.org/content/2/1/98.full.pdf+html
- Industrial and Corporate Change
Abstract—We survey the literature on venture capital and institutions and present a case study comparing the development of the venture capital market in the United States and Sweden. Our literature survey underscores that the legal environment, financial market development, the tax system, labor market regulations, and public spending on research and development correlate with venture capital activities across countries. Our case study suggests these institutional differences led to the later development of an active venture capital market in Sweden compared with the United States. In particular, a later development of financial markets and a heavier tax burden for entrepreneurs have played a key role.
Publisher's link: http://icc.oxfordjournals.org/content/22/1/153.full.pdf+html
- Boston Review
Abstract—Codes of conduct indicate that working conditions are improving overall at the factories being monitored by multinational corporations, and that these the codes of conduct also create possibilities for political mobilization that can improve labor conditions more broadly.
Publisher's link: http://www.bostonreview.net/BR38.3/ndf_jodi_short_michael_toffel_global_brands_labor_justice.php
Working Papers The Impact of Supplier Reliability on Retailer Demand By: Craig, Nathan, Nicole DeHoratius, and Ananth Raman
Abstract—To set inventory service levels, firms must understand how changes in service level affect customer demand. While the effects of service level changes have been studied empirically at the level of the end consumer, relatively little is known about the interaction between a retailer and a supplier. Using data from a manufacturer of branded apparel, we show increases in service level to be associated with statistically significant increases in retailer orders (i.e., demand, not just sales). Controlling for other factors that might affect demand, we find a 1% increase in historical service level to be associated with a 12% increase in demand from retailers, where historical service level is the type 1 service level performance of the apparel manufacturer over the prior year. Further, we find that retailers that order frequently exhibit a more substantial reaction to changes in service level, an outcome that is consistent with retailers learning about and reacting to changes in supplier service level. Our study not only provides the first empirical evidence of the impact of changes in service level on demand from retailers but also illustrates a method for estimating this relationship in practice.
Download working paper: http://www.hbs.edu/faculty/product/38678Exclusive Preferential Placement as Search Diversion: Evidence from Flight Search By: Edelman, Benjamin, and Zhenyu Lai
Abstract—We analyze the incentives for a two-sided intermediary to divert consumers to its favored destinations. Using a quasi-experiment to control for search intent, we identify and measure the impact of a search engine's exclusive award of preferential placement to its own service. We find that Google's differential placement of its Flight Search service led to a 65% decrease in click-through rates for non-paid algorithmic links and an 85% increase in click-through rates for paid advertising listings of competing online travel agencies. Moreover, the exclusive integration of search engine services into search results disproportionately impacted traffic to popular sites.
Download working paper: http://www.hbs.edu/faculty/product/44724Strategic Search Diversion, Product Affiliation and Platform Competition By: Hagiu, Andrei, and Bruno Jullien
Abstract—Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to products other than the ones that best fit their preferences. Our analysis yields three key and novel insights regarding search diversion incentives, which have direct implications for platforms' strategies and empirical predictions. First, platforms that charge positive access fees to consumers have weaker incentives to divert search relative to platforms that cannot (or choose not to) charge such fees. Second, endogenizing the affiliation of products that consumers are not interested in (advertising) leads to stronger incentives to divert search relative to the exogenous affiliation (vertical integration) benchmark, whenever the marginal product yields higher profits per consumer exposure relative to the average product. Third, the effect of platform competition on search diversion incentives depends on the nature of competition. Competition for advertising leads to more search diversion relative to competition for consumers. Both types of competition lead to at least as much search diversion as a monopoly platform. Nevertheless, in the case of competing platforms, the equilibrium level of search diversion increases with the degree of horizontal differentiation between platforms.
Download working paper: http://www.hbs.edu/faculty/product/40488Marketplace or Reseller? By: Hagiu, Andrei, and Julian Wright
Abstract—An intermediary can choose between functioning as a marketplace, on which suppliers sell their products directly to buyers, or as a reseller, purchasing products from suppliers and selling them to buyers. In our model, this choice comes down to whether residual control rights over non-contractible decision variables are better held by suppliers (the marketplace mode) or by the intermediary (the reseller mode). We focus on a single non-contractible decision variable―the level of demand-enhancing marketing activities. The reseller is better able to coordinate these activities across products, whereas the marketplace mode benefits from allowing independent suppliers to tailor their marketing activities to local information about buyer demand. In the benchmark setting, the marketplace mode is preferred if and only if the variance of local information exceeds the squared value of spillovers from marketing activities across products. We explore several generalizations, showing how the benchmark tradeoff is modified in different settings.
Download working paper: http://www.hbs.edu/faculty/product/44784Cases & Course Materials
- Harvard Business School Case 413-068
No abstract available.
Purchase this case:
- Harvard Business School Case 513-060
Four businesses had, by 2012, grown to dominate the infrastructure that all firms rely on to reach online customers. Will the balance of power among the four persist, will one take command at the expense of the other three, or are all four more vulnerable than they seem to outside forces? What are the implications for the pace at which consumers go online? Amara's Law claims that we tend to overestimate change in the short run and underestimate it in the long run.
Purchase this case:
- Harvard Business School Case 813-002
In 1965 William Elfers left Georges Doriot's American Research and Development Corporation to found Greylock, his own venture capital firm. Over the ensuing three decades followed a series of eight Greylock partnerships, during which time Elfers never lost a general partner or saw a colleague leave to start his own venture capital firm. Furthermore, each of the investors in Greylock's first fund participated in all succeeding partnerships. Elfers was among the first to pioneer the limited partnership structure of the modern venture capital firm with Greylock being organized as a series of limited partnerships, each of which pooled the investment capital that its general partners and limited partners committed for finite lifetimes. Greylock was established against a long historical tradition of New England financial innovation going back to at least the nineteenth century. In essence Elfers helped to create a new organizational approach to venture capital through mechanisms that deeply reflected New England's financial investment culture.
Purchase this case:
- Harvard Business School Case 313-086
As U.S. Secretary of State, Hillary Rodham Clinton acted on a long-standing interest in public-private partnerships to elevate and activate an Office of Global Partnerships reporting directly to her. One major initiative that also addressed her interest in women's empowerment was to create an alliance for clean cookstoves, a significant environmental and public health issue in developing countries. This case examines the change process within the State Department and across the federal government as well as the process of developing partnerships and looks at what happens on the ground to deploy resources. It raises the question of whether the alliances are sustainable when Sec. Clinton leaves office.
Purchase this case:
- Harvard Business School Case 413-090
Supplements the (A) case, 412-002.
Purchase this case:
- Harvard Business School Case 813-108
John Gilleland, CEO of TerraPower, returned to his office after a lengthy meeting with potential investors. It was October 2012, and TerraPower was in the process of raising a $200M Series C round to finance the ongoing development of its next-generation nuclear reactor. Though early in the fundraising process, Gilleland noted that this most recent conversation was similar to conversations with other interested cleantech growth equity investors. The conversations circled around a common theme: "This is the biggest idea that's ever been presented at our partners' meeting. We love what you're doing, but it's not right for us as an investment." Outside of raising money from typical growth equity and infrastructure funds, Gilleland could partner with a government and/or form a joint venture with an existing nuclear power player. Reliance Industries as an investor in TerraPower could provide an entry point into the fast growing Indian market. At the same time, Gilleland and Gates had talked with China National Nuclear Corp. about a possible cooperation with TerraPower. Whom should Gilleland call next?
Purchase this case:
Want to know if someone's lying to you? Telltale signs may include running of the mouth, an excessive use of third-person pronouns, and an increase in profanity.
These are among the findings of a recent experimental study that delves into the language of deception, detailed in the paper Evidence for the Pinocchio Effect: Linguistic Differences Between Lies, Deception by Omissions, and Truths, which was published in the journal Discourse Processes. Asked why the topic of deception is important to business research, negotiation expert Deepak Malhotra responds wryly: "As it turns out, some people will lie and cheat in business!"
Malhotra, the Eli Goldston Professor of Business Administration at Harvard Business School, coauthored the paper with Associate Professor Lyn M. Van Swol and doctoral candidate Michael T. Braun, both from the University of Wisconsin—Madison. "Most people admit to having lied in negotiations, and everyone believes they've been lied to in these contexts," Malhotra says. "We may be able to improve the situation if we can equip people to detect and deter the unethical behavior of others."
"Evidence for the Pinocchio Effect" fills a key gap in the field of deception research, says Van Swol, the study's lead author. Previous studies have examined the linguistic differences between lies and truthful statements. But this one goes a step further to consider the differences between flat-out lying and so-called deception by omission—that is, the willful avoidance of divulging important information, either by changing the subject or by saying as little as possible.The ultimatum game
To garner a sample of truth tellers, liars, and deceivers by omission, the researchers recruited 104 participants to play the ultimatum game, a popular tool among experimental economists. In the traditional version of the game, one player (the allocator) receives a sum of money and proposes how to divvy it up with a partner (the receiver). The receiver has the option of either accepting the proposed split or refusing the allocator's proposal—in which case neither player gets any of the money. Because receivers will often reject offers they perceive as unfair, leaving both parties with nothing, it behooves the allocator to offer an amount that will be deemed fair by the receiver. In many instances, allocators choose to share half, Malhotra says.
For the purposes of the deception experiment, the rules of the ultimatum game differed from the traditional version in three ways. First, in this version, the allocator received an endowment of either $30 or $5 to share with the receiver. The receiver had no way of verifying how much money the allocator had been given, information which the allocator was not required to divulge. Hence, an allocator could conceivably give the receiver $2 and keep $28, and the receiver would be none the wiser, perhaps assuming only $5 was in play. The second change was that if the receiver rejected the allocator's offer he or she would receive a default amount of $7.50 (or $1.25)—whereas the allocator would get no money at all.
Finally, each game included two minutes of videotaped conversation in which the receiver could grill the allocator with questions, prior to deciding whether to accept or reject the offer. This provided ample opportunity for the allocator to tell the truth about the money, lie, or try to avoid the subject altogether. "We wanted to create a situation where people could choose to lie or not lie, and it would happen naturally," Van Swol says.
Ultimately, the receiver had to decide whether the proposed allocation was fair and honest, based only on a conversation with the allocator. Thus, it behooved the allocator to be either a fair person or a good liar.
As it turned out, 70 percent of the allocators were honest, telling the receivers the true amount of the endowment and/or offering them at least half of the pot. The remaining 30 percent of allocators were classified either as liars (meaning they flat-out lied about the amount of the endowment) or as deceivers by omission (meaning they evaded questions about the amount of the endowment, but ultimately offered the receiver less than half).
After a graduate student transcribed all the allocator/receiver conversations, the researchers carefully analyzed the linguistic content, comparing the truth tellers against the liars and deceivers in order to suss out cues for deception. They looked for both strategic and nonstrategic language cues.
"A strategic cue is a conscious strategy to reduce the likelihood of the deception being detected," Van Swol explains, "whereas a nonstrategic cue is an emotional response, and people aren't usually aware that they're doing it."Key findings: word count, profanity, and pronouns
In terms of strategic cues, the researchers discovered the following:
- Bald-faced liars tended to use many more words during the ultimatum game than did truth tellers, presumably in an attempt to win over suspicious receivers. Van Swol dubbed this "the Pinocchio effect." "Just like Pinocchio's nose, the number of words grew along with the lie," she says.
- Allocators who engaged in deception by omission, on the other hand, used fewer words and shorter sentences than truth tellers.
Among the findings related to nonstrategic cues:
- On average, liars used more swear words than did truth tellers—especially in cases where the recipients voiced suspicion about the true amount of the endowment. "We think this may be due to the fact that it takes a lot of cognitive energy to lie," Van Swol says. "Using so much of your brain to lie may make it hard to monitor yourself in other areas."
- Liars used far more third-person pronouns than truth tellers or omitters. "This is a way of distancing themselves from and avoiding ownership of the lie," Van Swol explains.
- Liars spoke in more complex sentences than either omitters or truth tellers.
The researchers also examined when and whether the receivers trusted the allocators—noting instances when receivers voiced doubts about the allocators' statements, and correlating the various linguistic cues with the accuracy of the receivers' suspicions. They also noted instances in which receivers showed no suspicion toward deceivers.
On average, receivers tended to trust the bald-faced liars far more than they trusted the allocators who tried to deceive by omission. In short, relative silence garnered more suspicion than flat-out falsehoods. "It turns out that omission may be a terrible deception strategy," Van Swol says. "In terms of succeeding at the deception, it was more effective to outright lie. It's a more Machiavellian strategy, but it's more successful."Possible applications
In the latest phase of their research, the team is investigating the linguistic differences between lying in person and lying via email. Results regarding the latter may be increasingly useful as a larger portion of business is now being conducted via email, and such communications leave a transcript that can be analyzed carefully—and at leisure—by suspicious counterparts. "People detect lies better over the computer than they do face-to-face," Van Swol says.
That said, the researchers are quick to emphasize that linguistic cues are most definitely not a foolproof method of detecting lies, even among those who are trained to look out for them.
"This is early stage research," Malhotra says. "As with any such work, it would be a mistake to take the findings as gospel and apply them too strictly. Rather, the factors we find to be associated with lies and deception are perhaps most useful as warning signs that should simply prompt greater vigilance and further investigation regarding the veracity of the people with whom we are dealing."
—To learn more about how to deal with liars during business negotiations, read Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond by Deepak Malhotra and Max H. Bazerman. Follow Malhotra on Twitter at @Prof_Malhotra.About the author
Carmen Nobel is senior editor of Harvard Business School Working Knowledge.
by Aaron Chatterji, Edward Glaeser, and William Kerr
Executive Summary — For many decades, the common wisdom among local officials pursuing employment growth for their areas was to attract a large firm to relocate. This "smokestack chasing" led to many regional governments bidding against each other and providing substantial incentives to large plants making their location choice decisions. The success of entrepreneurial clusters in recent decades, however, has challenged this wisdom, and now many policy makers state that they want their regions "to be the next Silicon Valley." This has led to extensive efforts to seed local entrepreneurship, with today's politicians routinely announcing the launch of an entrepreneurial cluster in a hot industry, such as biotechnology, nanotechnology, or advanced manufacturing. In this paper, the authors explore the rationale for and efficacy of policies to promote local entrepreneurship and innovation and reflect on recent initiatives in this domain. Key concepts include:
- Entrepreneurship is often linked to local economic growth, and economic theory provides rationales for why governments may want to support entrepreneurship and innovative activities in their local areas (e.g., spillover benefits to neighboring firms). Economic theory and practice also identifies potential pitfalls in these efforts.
- Policies supporting the emergence of clusters of small-scale entrepreneurs allow policy interventions to touch many entrepreneurship simultaneously, providing important scale to interventions, and appear to respect the empirical tendency of economic activity to cluster. Such approaches can also avoid the dangers of targeting specific firms for support.
- Despite this foundation and the tremendous current policy interest for entrepreneurship, the optimal formulation of entrepreneurship policy is not yet known. Indeed, relative to our understanding of how to craft policies for mature fields like international trade and monopoly, we have very little experience evaluating policies towards start-up clusters.
- The best path forward involves extensive experimentation and evaluation. Without advances in these dimensions, we cannot be confident that policies to promote entrepreneurship will have their intended impact.
This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.Paper Information
A company's internal deliberations and changing beliefs about women in the workplace over the course of two decades, particularly about their role as leaders, is the subject of a recent paper that traces how fundamental societal views can change an organization.
The study looks at the years between 1991 and 2009, a period when the growing number of highly educated women in the workforce tested widely held understandings about gender and professional work, write the authors, Harvard Business School professors Lakshmi Ramarajan and Kathleen L. McGinn, and Simmons School of Management Professor Emerita Deborah Kolb.
"Despite bodies of knowledge about social institutions and social issues at the institutional and organizational levels, we know very little about how individual organizations experience and internalize gradual shifts in deeply held social understandings," they write.
This article is part of a continuing series on faculty research and teaching commemorating the 50th anniversary of the first women to enter Harvard Business School's two-year MBA program.-->
This article is part of a continuing series on faculty research and teaching commemorating the 50th anniversary of the first women to enter Harvard Business School's two-year MBA program.
As the first longitudinal examination of the relationship between societal and organizational change regarding gender and work, the paper, An Outside- Inside Internalization of Shifting Gender Logics in Professional Work, identifies cycles of organizational analysis and resulting actions sparked by transformations in societal beliefs and practices from outside the organization. (The unidentified firm is called "BigAC" in the paper.)
Ramarajan, McGinn, and Kolb attempted to answer several questions about the relationship between societal and organizational change. What is the process through which an organization responds to changes in society's understandings of gender and work? Specifically, how is internal adaptation in employment practices linked to external shifts in gendered beliefs and practices?
The authors began by comparing thousands of pages of the firm's internal documents, such as surveys and interviews, as well as public annual reports, against nearly 300 articles about gender-related themes from media outlets including the Wall Street Journal and New York Times. This allowed them to trace how, when, and why the firm evolved in its focus on gender. They also created a time line to explore links between gender as a social institution of beliefs, practices, and representations, and the organization's own set of beliefs and practices.
By linking these changes to the company documents, the study sheds light on how shifts in US society's understanding of gender influences beliefs and practices inside organizations.
To maximize the potential for deeper insight, one of the three—Deborah Kolb—added perspective as an "insider" at BigAC. Although not a BigAC employee, Kolb had collaborated closely with the firm's leadership between 1998 and 2010 by conducting interviews and surveys, as well as designing and delivering a leadership program for women in the firm. She was thus familiar with its culture and practices.
To ensure broad perspective, two "outsider" researchers—Ramarajan and McGinn—conducted the detailed coding of the inside data. "Our insider-outsider authorship provided a balance between involvement and distance," they write.
Using the keyword "work" plus either "women" or "gender," the researchers collected and analyzed several hundred media articles between 1991 and 2009. (Articles mentioning BigAC were eliminated to minimize overlap between inside and outside data.) The year 1991 was selected as the start point for two reasons: First, it was when the CEO of BigAC observed that less than 10 percent of the candidates for partnership were female—this after a decade of actively recruiting highly qualified women. And second, clients were openly expressing concerns about gender equity in their own companies.Bias, underrepresentation, and work-family conflict
Analysis of the articles published over nearly two decades in the US business press gave the authors an opportunity to trace shifts in the media's framing of issues around gender and work. The presentations shifted over time: from a logic of bias (women presented as victims of unequal treatment), to a logic of underrepresentation (women presented as stuck at lower levels of organizations), to a logic of work-family conflict (women's career advancement stymied by child-bearing and home responsibilities). Although all three were important across the period studied, their relative prevalence varied. For example, gender bias peaked as a concern in 1991, underrepresentation dominated the picture in the late 1990s, and work-family conflict as a concern peaked in 2002. By 2008, the data show, all three issues held equal sway in the media.
As the authors suggest, the first two presentations, bias and underrepresentation, have tended to invite straightforward responses from organizations. When the media discuss gender and work as a problem of bias, for example, the media also project solutions: that companies should educate employees about biases and be held legally and reputationally responsible for treating men and women equally.
Likewise underrepresentation: When the issue is a lack of female leadership, the solution is to get more women at the top by watching numbers and holding managers and leaders accountable. But as the researchers note, there is only so much that firms can do to improve underrepresentation before they hit up against work-family conflict.
"This is where organizations and society working separately get stuck—because the solution can't be mandated solely by an organization," says McGinn, the Cahners-Rabb Professor of Business Administration at HBS.
"There is an interaction," she continues. "The organization can be helpful, the family can be helpful, the individual women can be helpful; but all of these interact with one another and with legal and normative constraints and enablers in society. And so for the first two—bias and underrepresentation—the problem and solution, although not simple and not fully resolved, were discrete. With work-family conflict, the problem is amorphous and the solution even more so."
Adds Ramarajan, "Even though the work-family logic has taken off and grabbed everyone's imagination and experience, it doesn't mean that bias is no longer an issue, or that underrepresentation is no longer an issue. Even if obvious gender bias seems to have disappeared, there may be more subtle forms of bias or ways in which bias gets expressed that perhaps come out in policy or in concerns about work-family conflict. These themes all work together."A powerful dance
When they studied the interplay between societal discourse and institutional change, the researchers found a repeating cycle. Shifts in societal discourse on gender and work would be accompanied by the company noting discrepancies between its own expectations and outcomes, sparking an analysis phase and subsequent actions.
One example: As social discourse peaked about bias in the workplace in the early 1990s, BigAC found discrepancies between its own hiring rates and promotion rates for women. At the CEO's prompting, an initial analysis phase focused on the question, "Why are women leaving?" A task force was established, outside gender experts consulted, and internal surveys conducted to find the answers. The learning that took place resulted in new beliefs that the firm's culture was inhospitable to women, and that "the problem was a 'firm problem' not a 'women problem'"—a conclusion echoed in the business press at the time, that gender bias was baked into workplace processes and practices.
The firm moved into action to change the culture, through organizational and policy changes. The sobering results led to a significant achievement: BigAC's formation of a Women's Initiative—which has endured as an integral part of the organization.
According to McGinn and Ramarajan, it is the process of change and the structure of this initiative that has been crucial to the firm's overall improvement in its efforts to recruit, retain, and promote women.
"The Women's Initiative is embedded into every level of the organization," McGinn explains. "There is a representative in every office so it truly permeates the organization. Its members are part of the decision-making body at the table making hiring and promotion decisions. More than good intentions, such structure increases accountability and ensures that practices are implemented in ways that are useful, relevant, and effective within the organization."
As a result, several women were appointed to the company's board of directors, and the firm moved ahead of its competitors in terms of number of women partners. According to the paper, BigAC was soon recognized as a leading women-friendly place to work and succeed.
The research shows that organizations internalize shifts in public discourse into their own beliefs and activities. These come about in repeated analysis and action cycles. To sustain these changes, leaders may want to initiate "periodic monitoring of the fit between outcomes and assumptions, and intermittent periods of analysis relatively free of new activities."
The study also underlines the importance of outside experts in helping organizations identify, validate, and implement change. During analysis phases, outside experts provide credibility; during action phases, they offer accountability.The future of work
As the authors suggest, technology and growing economic pressures may be increasing the difficulty in striking a work-family balance that could allow women to fully pursue corporate goals. As long as solutions to work-family conflict circle around individual choice—who in the family is responsible for what—they remain outside the purview of political action.
"Right now there is a sensibility that 24/7 is a normal labor practice," says Ramarajan. "There's nothing questionable about it. But I think that if it becomes so dominant and permeates every part of every person's life, all the societal repercussions that come with that—such as people's health—are going to make it a much more legitimate political topic."
The researchers' current projects focus on gender through lenses of generations and identity, and family. Ramarajan, for example, is working with Boston University's Erin Reid to study how organizational practices relate to employee identities outside of work. She also studies masculine gender identity in dual-career couples with Jennifer Berdahl of the University of Toronto.
McGinn is involved in three related projects: The first, with HBS colleague Mukti Khaire, studies self-employed women in India and their different understandings of gender, family, and women in the economy and community.
A second project, with HBS doctoral student Rachel Arnett and Beth Humberd and Judy Clair, both of Boston College, focuses on interviews with 60 successful female executives, inquiring into how they navigated transitions in their career and life trajectories.
A third project, with Arnett and HBS Professor Robin Ely, is a long-term study of high-wage-earning-potential women, their partners, and their hopes and expectations about career and family.About the author
Martha Lagace is a freelance writer for Harvard Business School Working Knowledge. She is also a PhD student in social anthropology at Boston University.