2016–2017

International Coaching via Skype: Connecting Business Professionals and Entrepreneurs Across Markets and Examining the Impact on Small Business Growth in Uganda

Pradeep Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing

While small and medium-sized enterprises are the backbone of developed economies, emerging markets around the world are characterised by millions of tiny businesses that do not grow into larger firms (Schoar 2010). In this study, we aim to contribute new insights into “what works” (and for whom) to stimulate small business growth in emerging markets. We use a randomized controlled trial (RCT) to evaluate the impact of an innovative business development program on small business growth in emerging markets: Grow Movement’s “international remote coaching” program. Grow Movement aims to stimulate business growth and social development by linking motivated, growth-potential entrepreneurs in Uganda with business professionals around the world who provide free, one-on-one coaching to entrepreneurs remotely via Skype, mobile phone and email. If shown to work, Grow Movement’s “international remote coaching” model could offer policy makers a cost-effective, scalable strategy for stimulating small business growth in emerging markets.

Well Confidentiality Laws and Oil and Gas Investment

Thomas R. Covert, Assistant Professor

Oil and gas regulators incentivize the development of unexplored resources through the provision of temporary information monopolies, under so-called “well confidentiality” laws. These laws allow firms to maintain secrecy about the outcomes of their exploration activities. This legally enforced secrecy solves free rider problems inherent in oil exploration but also creates information asymmetries about the value of nearby land that can be exploited during land acquisition campaigns and may also distort the timing of drilling decisions. In this project, we study the net effect of these forces by examining onshore petroleum leasing and drilling behavior in the United States. Using variation in secrecy laws across states and time, we measure the effect of secrecy on investment, exploratory effort, production and the distribution of petroleum development surplus. Based on these estimates, we explore the costs, benefits and distributional consequences of well confidentiality laws and consider the broader role of secrecy in incentivizing the development of socially valuable knowledge.

Using Online Search Data to Shed Light on Firm Hiring and Youth Unemployment

Rebecca Dizon-Ross, Assistant Professor of Economics and Charles E. Merrill Faculty Scholar

Internet job search is growing in prevalence in both developing and developed countries. Online job websites provide a nice opportunity to study hiring and labor markets because of the rich data they provide. This proposal is for a project conducted in collaboration with an online job website with 12 million registered users and presence in 40 countries. We are working with the company operating this website on two separate projects. The first project uses the website’s detailed data on employer browsing to estimate firms’ preferences across various applicant characteristics, such as gender, age, and skill, and how those preferences vary across countries and markets (e.g., whether multi-national firms have less of a preference for hiring men over women, or how preferences for skilled labor vary with market conditions). The second project conducts an online experiment to investigate the role of mismatched expectations among youth in causing unemployment.

Generalizable Results on the Effectiveness of TV Advertising

Günter Hitsch, Professor of Marketing and Bradley Shapiro, Assistant Professor of Marketing and Beatrice Foods Co. Faculty Scholar

Most of the empirical literature exploring the economics of advertising uses a case-study model of research, finding a particular effect in a single category and exploring the implications of that effect only in that category. This style of research is especially problematic if publication bias discourages researchers from pursuing projects where a null effect may exist, which leads to the disproportionate publication of false positives. Additionally, empirical identification in many of these studies is suspect due to a lack of exogenous variation. Using the recently introduced identification strategy of Shapiro (2016) taking advantage of the discontinuity in advertising at TV market borders, we study the short run and long run effects of advertising across a broad range of brands and categories. We also study other aspects of the effects of advertising, including the shape of the advertising response curve that determines how advertising should be scheduled over time, spillovers to other related products, and the impact of advertising on the price elasticity of demand. By using a multi-category study, we hope to provide insights both into whether or not effects found in the literature are generalizable and the extent to which null effects may be present generally. We also predict the optimal levels of advertising and compare predicted advertising and profit levels with the realized levels in our data.

Empirical Economic Decision Making in a Platform

Austan D. Goolsbee, Robert P. Gwinn Professor of Economic

This project uses data from the ride-sharing service UBER to explore aspects of economic decision making by people in real life settings. This includes a) testing whether the introduction of ride-sharing has reduced the demand for the purchase of automobiles and registration for driver’s licenses by young people, b) looking at drivers’ appetites for risk taking (e.g., whether they seek safe streams of small payoff trips taking a risk by looking for passengers at the airport) and whether their risk preferences change as they gain more experience as drivers, c) whether the drivers’ efficiency and driving behavior is affected by the incentive scheme they face with ride prices. In some locations, drivers are paid by the mile and by the minute. In others, they receive a pre-set lump sum for the trip. The incentives for driving directly and driving quickly are directly affected by the incentive system.

Engines of Productivity Growth: Railroads, Reallocation, and the Rise of American Manufacturing

Richard Hornbeck, Professor of Economics and Neubauer Family Faculty Fellow

This project analyzes productivity growth in American manufacturing from 1860 to 1900, decomposing productivity growth into gains in technical efficiency (counties becoming more productive) and gains in reallocative efficiency (more resources becoming allocated to counties that are more productive on the margin). We then turn to explore how railroad network expansion impacted these sources of productivity growth.

Caught with the Hands in the Cookie Jar: Labor Reallocation after Exposure of Corrupt Firms

Jacopo Ponticelli, Assistant Professor of Finance and Cohen and Keenoy Scholar and Margarita Tsoutsoura, Associate Professor of Finance and Charles E. Merrill Scholar

Corrupt practices in the assignment of government contracts are largely diffused and can generate misallocation of resources across firms. We study how disclosure of such practices affects firm growth and labor reallocation. We exploit exogenous variation in the exposure of corrupt firms using random municipality audits by a large anti-corruption government program in Brazil. Firms exposed by the auditing program experience a decline in employment relative to their peers. Released workers tend to reallocate to smaller firms in the same sector and municipality. Our evidence indicates that the exposure of corrupt practices reduces misallocation.

Ratings/Rankings and the Adoption of Diversity Management Policies and Practices

Amanda Sharkey, Associate Professor of Organizations and Strategy

Many firms have adopted diversity management policies and practices, including mentoring programs, expanded family leave and flex-time. However, these policies and practices are often adopted despite little evidence of their effectiveness; one of the few studies of the effectiveness of these types of policies and programs found that they generally did not increase the proportion of women and minority managers (Kalev, Kelly and Dobbin 2006). Why firms do adopt expensive but often ineffective diversity management programs? There are a variety of possible answers to this question. In this paper, we are interested in the role of external ratings/rankings systems in incentivizing firms to adopt various policies/practices aimed at boosting diversity. In particular, we wish to determine the extent to which ratings/rankings reward the adoption of various diversity management practices, above and beyond any effects they may actually have on the representation of women and minorities in firms.

Why Innovation Needs Public Market: Evidence from Chinese IPOs

Lin William Cong, Assistant Professor of Finance

In this joint project with Sabrina Howell (NYU Stern) and Ran Zhang (Peking University), we investigate empirically how important public markets are for high-growth entrepreneurship. Understanding how IPO affects corporate innovation, capital structure, real investments, growth, etc., would enable us to draw conclusions on how financial system links to the real economy.

Tax Planning By Financial Institutions

John Gallemore, Assistant Professor of Accounting and Charles E. Merrill Faculty Scholar

We plan to provide the first large-sample evidence on financial institutions’ tax planning outcomes. First, we plan to provide descriptive evidence on the magnitude and variation in tax planning of different types of financial institutions. Second, we will examine whether tax planning by financial institutions has varied over time. Third, we will we will compare the tax planning of financial institutions with non-financial institutions. Fourth, focusing on a subsample of commercial banks, we will examine whether certain business model factors (such asset holdings and focus on non-lending activities), regulatory factors (such as capitalization and whether the bank is state or federally chartered), and organizational factors (such as whether the bank publicly traded and whether it is owned by a holding company) are associated with tax avoidance. This study will contribute to by extending the literature on corporate tax avoidance to financial institutions, which are largely ignored by prior research.

Analysts vs. Managers: Who Determines Credit Rating Outcomes?

Elisabeth Kempf, Assistant Professor of Finance

Inflated credit ratings are widely regarded as being at the origin of the last financial crisis. While the new Dodd-Frank provisions have mainly increased scrutiny over the lower organizational levels at the rating agencies (i.e., the analysts), our understanding of which agents inside the rating agency exert the most influence on final rating outcomes is still very limited. In this study, I plan to shed light on this question by estimating the relative importance of supervisor effects relative to lead analyst effects for structured finance ratings. Rating agencies provide a unique setting to study the importance of supervisor effects, because we can observe the same analyst rating the same type of product at the same point in time, under the supervision of different managers. The results will contribute to our understanding of the effectiveness of the Dodd-Frank regulation, and of the importance of supervisor effects in finance more broadly.

The Effect of Ownership Structure on Behavior: Evidence from Indian Banks

Raghuram Rajan, Katherine Dusak Miller Distinguished Service Professor of Finance

 

Zombie Lending and Cross-Subsidization in a Lending Crisis

Margarita Tsoutsoura, Associate Professor of Finance

 

The Role of Emotions in Financial Decisions

Oleg Urminsky, Professor of Marketing

Research on emotions in decision‐making has documented a wide range of effects of emotions on decisions. In particular, research has documented effects of a variety of emotional states on financial patience – choices between sooner‐smaller and later‐larger outcomes. However, the prior research uses a variety of methods, and includes some contradictory results. In this research, we plan to systematically investigate the role of emotions on time preferences, in order to provide general conclusions.

Role of Engaging Communication and Community Support to Reduce Child Malnutrition and Mumbai’s Information Settlements

Pradeep Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing and Sanjay Dhar, James H. Lorie Professor of Marketing and Oleg Urminsky, Professor of Marketing and True North Communications, Inc. Faculty Scholar

Reducing child mortality is one of the eight millennium development goals adopted by the United Nations and one-third of child deaths every year are attributed to malnutrition. India leads the world in child malnutrition; the problem being particularly severe among the economically underprivileged sections of the society. Given the nature of the problem, educating stakeholders with relevant information to take preemptive actions is imperative, but it is clear that the current community-based messaging and advocacy approach needs to be revisited. In this project we use learnings from advertising research and research on the psychology of poverty to design personalizable audio-visual messaging to educate decision makers and affect their compliance behavior. We also examine the potential complementary role of community support groups formed to provide home-based baby-sitting support to needy mothers. We plan to test our interventions in Mumbai’s informal settlements in partnership with a local NGO.

State Ownership, Economic Stimulus, and Credit Expansion in China

Lin William Cong, Assistant Professor of Finance and Jacopo Ponticelli, Assistant Professor of Finance and Cohen and Keenoy Scholar

Frictions in the banking sector can affect banks’ lending behavior and firm ability to seize new investment opportunities. In a series of studies, we examine how changes in the availability of funds for Chinese banks as well as changes in their ownership structure affect access to credit, investment and productivity of Chinese firms. We focus on small and medium enterprises, which traditionally struggle to obtain sufficient credit from large state-owned banks. We have thus far theoretically analyzed credit allocation in a dynamic economy with financial frictions. In normal times, growth is driven by gradual reallocation of resources from low to high productivity firms. Recessions can slow down or even reverse this process of reallocation. This effect is amplified by stimulus programs implemented in response to recessions such as China's economic stimulus plan 2008-2010. Using private firm-level data we empirically document credit allocation and show evidence consistent with reallocation reversal.

Designing Incentives for Impatient Diabetics: Experimental Evidence from India

Rebecca Dizon-Ross, Assistant Professor of Economics and Charles E. Merrill Faculty Scholar

Diabetes is an exploding problem worldwide. The most promising strategy to reduce the financial burden is to encourage patients to adopt healthy behaviors like better diet and exercise. Adoption may be particularly poor among impatient people, since the costs (e.g., forgoing dessert) are borne today but the benefits realized in the future. Thus, offering financial rewards for healthy behaviors may be a potent tool for improving behavior. However, it is not well understood how to optimally design incentives for impatient agents. Two incentive contract features (additive separability across days, and the lag between behavior and payment) should theoretically interact with time preferences. Based on these interactions, we have developed new insights for structuring contracts to overcome behavioral biases preventing healthy behaviors. This project will evaluate different incentive schemes for diabetics, varying lag length and additive separability, to evaluate which works best and how performance varies by individual time preferences.

Inputs versus Outputs: A Comparison of Incentive Schemes to Promote Better Health Outcomes

Rebecca Dizon-Ross, Assistant Professor of Economics and Charles E. Merrill Faculty Scholar

In recent years, financial incentives have been increasingly used in non-traditional domains such as health. However, there has been relatively limited research on how to optimize the design of these systems. One core question is what policy makers should incentivize: the outcome itself (e.g., a health outcome), or the behavioral inputs to that outcome (e.g., exercise, medication adherence). This study will conduct a randomized controlled trial evaluating two incentive schemes designed to promote the health of diabetics in the U.S.: an outcomes-based scheme rewarding low blood sugar, and an inputsbased scheme rewarding exercise, medication adherence, and appointment attendance. The study will also shed light on the mechanisms for the differences between the two schemes by testing for heterogeneity in the relative performance by features that theory predicts would increase the relative performance of one scheme relative to the other, such as risk aversion and knowledge of the production function.

Wisdom of Crowds

Emir Kamenica, Professor of Economics

The notion of the “Wisdom of crowds” plays an important role in many aspects of economic analysis, ranging from Hayek’s arguments on the importance of markets for aggregation of dispersed knowledge to more recent development of predictions markets.Recent literature on this topic emphasizes the need of weighting more heavily the opinions of those who have more expertise and analyzes various methods of identifying such experts through multiple questions (e.g., Freund & Schapire 1995; Prelec, Seung, & McCoy 2013). The current project proposes to develop a method for identifying who the experts are even when there is only a single question or expertise is uncorrelated across questions. The logic behind the method is Bayesian but loosely related to the ideas behind the Generalized Least Squares techniques.

Elections and Economic Beliefs

Kelly Shue, Associate Professor of Finance and Fujimori/Mou Scholar

The political cycle has the potential to change household beliefs about economic growth, unemployment, financial markets, and inflation. Politicians and media outlets may have incentives to distort or frame current and past economic performance in a more negative or positive light. For example, challengers in elections may face incentives to frame the current and past economic climate in a negative light in order to argue that the electorate needs a new leader who will improve conditions. We examine how US presidential, gubernatorial, and congressional elections affect household economic forecasts, retrospective beliefs (recollections of the past), and household financial decisions and portfolio allocations.

Salient Consumption and Inflation Expectations

Michael Weber, Assistant Professor of Finance

This project investigates how households form inflation expectations. We use novel data and institutional settings to tackle these questions in a coherent framework. Expectations about macroeconomic variables play a central role in economic theory and policymaking. Households’ inflation expectations determine their saving and consumption decisions and, ultimately, the effectiveness of monetary and scal policy. During the recent Great Recession, several leading macroeconomists and policymakers have advocated a temporary increase in inflation expectations to increase current consumption and spending, and bring the economy back to its steady-state growth path. We create measures of experienced inflation at the household level using the AC Nielsen homescan panel and ran our own survey of inflation expectations on all members of the household panel. We hypothesize the price changes of goods people perceive when doing the groceries shapes their inflation perceptions. One of the key stylized facts on individual inflation expectations according to Anil Kashyap is that women have substantially higher inflation expectations than men. We create a dummy based on our own survey whether the respondent is the main grocery shopper in the household and show the gender difference in inflation expectations disappear once we control of the shopping dummy. In the next step, we plan to construct measures of experienced inflation using the micro data from the AC Nielsen homescan panel.

The Impact of Business Tax Cuts on Firms, Workers, and Owners: Evidence from Kansas

Owen Zidar, Assistant Professor of Economics and Eric Zwick, Assistant Professor of Finance

This project studies the effects of cutting business taxes on firm performance and on the outcomes of workers and firm owners. We will use our newly constructed firm-owner and firmworker datasets that are based on US Treasury tax records. This project will explore three research designs to estimate the impacts of state business tax cuts: (a) a difference-in-difference comparison of similar firms in other states, (b) a within-state comparison of C-corporations (which are not treated) and S-corporations (which had their taxes eliminated in Kansas), and (c) an owner-location exposure measure of treatment intensity that compares the performance of similar firms that face different tax shocks due to the residence of their owners. This novel data and setting will enable us to estimate directly the equity and efficiency impacts of large cuts in business taxes.

Stimulating Housing Markets

Eric Zwick, Assistant Professor of Finance

While a large literature examines the effect of fiscal stimulus programs in general, few examine policies that directly target the residential housing market. In this paper, we use the First-Time Homebuyer Credit, a temporary tax credit targeted towards marginal homebuyers, and a difference-in-differences research design to ask how do temporary subsidies affect homebuying decisions and the housing market more broadly? We combine data from administrative tax records with transaction deeds data to measure program exposure, estimate the effect of the policy, and explore the mechanism of the observed response in detail.

We present four main findings. First, the policy proved effective at spurring home sales. We estimate the FTHC raised home sales during the policy period by 163 to 224 thousand within sample and 397 to 546 thousand nationally. Second, we find little evidence that the surge in home sales induced by the credit reversed immediately following the policy period. Instead, demand appears to come from several years in the future. Third, the policy response came primarily in the form of existing home sales, implying the direct stimulative effects of the program were small ($4.5 to $5.2 billion). Fourth, we present evidence that the program likely accelerated the process of reallocation from low-value sellers to high-value buyers, and the health of the housing market, as reflected in house prices, improved accordingly. A back-of-the-envelope calculation suggests the consumption response to the increase in house prices was much larger than the policy’s direct stimulus effect.