Feature Articles
(click read more to view a Q&A with the authors)

Volume 27, Issue 1, Spring 2018

The magic of the new: How job changes affect job satisfaction

Adrian Chadi and Clemens Hetschko

We investigate a crucial event for job satisfaction: changing one’s workplace. For representative German panel data, we show that the reason why the previous employment ended is strongly linked to satisfaction with the new job. Workers initiating a change of employer experience extraordinarily high job satisfaction, though in the short term only. To investigate causality, we exploit the event of plant closure as an exogenous trigger of job switching. In this case, we find no significantly positive effect of job changes on job satisfaction. Our findings complement research on workers’ well-being and concern labor market policies and human resource management.

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The O-ring theory of the firm

Michael T. Rauh

We develop an O-ring production function characterized by specialization and division of labor and where shirking or negative shocks can have major adverse consequences. We show that when the principal can monitor individual output, the firm tends be large (potentially larger than first best), with a high degree of specialization and division of labor, weak incentives, and low pay as in traditional nonunion manufacturing. Moral hazard can only limit the size of the firm relative to the first best when the principal can only monitor team output, in which case the firm has the opposite characteristics.

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Previously Featured Articles

26.3

Targeted advertising, platform competition, and privacy
Henk Kox, Bas Straathof, and Gijsbert Zwart

Read more →

The effects of major U.S. domestic airline code sharing and profit sharing rule
Caixia Shen

Read more →

Recently Published Articles

Volume 26, Issue 4, Winter 2017

Customer-oriented employees: Blessing or curse for firms?

Ester Manna
I investigate whether the presence of customer-oriented employees benefits firms in a competitive environment. Employees are defined as customer-oriented if they are interested not only in their wage but also in the well-being of their customers. I find that firms may obtain higher profits by hiring self-interested rather than customer-oriented employees.

Customer-employee substitution: Evidence from gasoline stations

Emek Basker, Lucia Foster, and Shawn Klimek
We document the adoption of self-service pumps in U.S. gasoline stations from 1977 to 1992. Using establishment-level data from the Census of Retail Trade over this period, we show that self-service stations employ approximately one quarter fewer attendants per pump, all else equal. The work done by these attendants has shifted to customers, biasing upward conventional measures of productivity growth.

Choosing not to compete: Can firms maintain high prices by confusing consumers?

Paulo Crosetto and Alexia Gaudeul
Firms with very similar products often present their products in different ways. This makes it difficult for consumers to find out which product fits their needs best, or which one is the cheapest. Why is there no convergence toward common ways to present products? Is it possible for firms to maintain high prices by confusing consumers? We run a market experiment to investigate those questions.

Learning remotely: R&D satellites, intrafirm linkages, and knowledge sourcing

Joel Blit
Using U.S. patent data, I show that firm headquarters disproportionately source knowledge from third parties in remote locations where they have an R&D satellite. This “satellite effect” on knowledge flow is economically significant, representing up to 60% of the knowledge-flow premium associated with collocation.

The economic value of patent portfolios

Alfonso Gambardella, Dietmar Harhoff, and Bart Verspagen
Patent holders may choose to protect innovations with single patents or to develop portfolios of multiple, related patents. We propose a decision-making model in which patent holders allocate resources to either expanding the number of related patents or investing in higher value of patents in the portfolio.

Signaling by an informed service provider

Frances Xu Lee and Yuk-fai Fong
We study a service provider, who, at the time of offering a contract, is better informed than the potential client. A service provider that is hired to increase the client's chance of a gain, an “enhancer,” may be better informed of whether the client has a big or small opportunity. A service provider that is hired to reduce the client's chance of a loss, a “problem solver,” may be better informed of whether the client has a big or small problem.

Should everybody be in services? The effect of servitization on manufacturing firm performance

Matthieu Crozet and Emmanuel Milet
The servitization of the manufacturing sector refers to the evolution of manufacturers' capabilities to offer services as complements to or substitutes for the goods that they produce. A vast literature has described these strategies and has shown that this phenomenon is widespread and growing in most developed economies. However, very little systematic evidence of the extent or consequences of servitization based on a comprehensive data set of firms exists. In this paper, we provide such evidence using exhaustive data for French manufacturing firms between 1997 and 2007.

Manufacturer collusion: Strategic implications of the channel structure

Markus Reisinger and Tim Paul Thomes
We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level.

Will a matchmaker invite her potential rival in?

Rupayan Pal and Vinay Ramani
This paper analyzes optimal strategies of an incumbent intermediary, who matches agents on the two sides of a market, in the presence of entry threat under alternative scenarios. It shows that, when entry is free, strategic entry accommodation is the optimal choice of the incumbent—not entry deterrence, unless the variation in agents' types is small. Entry accommodation remains optimal for the incumbent for a wide range of parametric configurations even when there is a fixed cost of entry.

Volume 26
Issue 3

Volume 26, Issue 3, Fall 2017

Do tournaments solve the adverse selection problem?

Theofanis Tsoulouhas
This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.

The taxation of bonuses and its effect on executive compensation and risk taking—Evidence from the UK experience

Maximilian von Ehrlich and Doina Radulescu
This paper explores the effects of a bonus tax adopted in the UK in December 2009 on the compensation structure of executives and on risk-taking behavior in the financial sector. Using a comprehensive dataset on executive compensation, we show that the introduction of the bonus tax decreased the net cash bonuses awarded to directors by about 40%, accompanied, however, by a simultaneous increases in other forms of pay leaving total compensation as well as risk levels unaffected.

The effects of major U.S. domestic airline code sharing and profit-sharing rule

Caixia Shen
This paper presents a structural model of code sharing among major U.S. domestic airlines and estimates a profit-sharing rule. The profit-sharing rule between partner firms in code sharing is estimated at 0.92, which suggests that the operating carrier acquires around 92% of profits from a round-trip, and the marketing carrier retains 8% as a commission fee. Meanwhile, the economies of code sharing reduces marginal cost, and firms are able to price at higher markups. This implies that demand increases and consumers have larger surplus if code sharing creates new products.

Targeted advertising, platform competition, and privacy

Henk Kox, Bas Straathof, and Gijsbert Zwart
We study competition for consumers between web sites that can show targeted advertisements. We find that more targeting increases competition and reduces the web sites' profits, but yet in equilibrium web sites choose maximum targeting as they cannot credibly commit to low targeting. A privacy protection policy can be beneficial for both consumers and web sites.

Scientific research, firm heterogeneity, and foreign R&D locations of multinational firms

René Belderbos, Bart Leten, and Shinya Suzuki
We examine the influence of host countries’ scientific research strengths on global R&D location choices by multinational firms. In an analysis of 277 new R&D activities identified for 175 firms in 40 host countries and 30 technology fields, we find that the strength of relevant university research positively affects the likelihood that host countries attract foreign R&D.

Rivalry information acquisition and disclosure

Xinyu Li and Ronald Peeters
In the recent past, there have been numerous scandals around poor product qualities in various industries. Although it can be easily rationalized why bad practices have not been reported by the inflictors themselves, it is more difficult to understand why the non-inflicting competitors did not report their rivals' acts. In this paper, we study these competitors' incentives to acquire and to disclose information on the quality of their rivals' products and question when we can leave the information disclosure process to the competitive pressure of markets and when there is a need for governmental intervention.

Prevention incentives in long-term insurance contracts

Renaud Bourlès
Long-term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured's risk profile. A given profile may change, based on observed outcomes which depend on the insured's prevention efforts. The aim of this paper is to analyze the latter relationship.

Motivate and select: Relational contracts with persistent types

Radoslawa Nikolowa
We develop a model of relational contracts with moral hazard and asymmetric persistent information about an employee's type. We find that the form of the optimal contract depends on the job characteristics and the distribution of employees' talent.

From fixed to state-dependent duration in public-private partnerships

Daniel Danau and Annalisa Vinella
A government delegates a build-operate-transfer project to a private firm. In the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly effort when building the infrastructure. Once the infrastructure is in place, the firm learns the true cost and begins to operate. Under limited commitment, either partner may renege on the contract at any moment thereafter. The novelty with respect to incentive theory is that the contractual length is stipulated in the contract in such a way that it depends on the cost realization.

Volume 26
Issue 2

Volume 26, Issue 2, Summer 2017

Privacy Is Precious: On the Attempt of Lifting Anonymity on the Internet to Increase Revenue

Tobias Regner and Gerhard Riener
We investigate the effect of a reduction of anonymity on consumers' purchase decisions (whether to buy, and if so how much to pay) at an online music store with Pay-What-You-Want (PWYW)-like pricing and in an Internet experiment mimicking the real world situation. Our results suggest that the positive effect of reduced anonymity, previously established for donation or public goods contexts, does not extend to a consumption environment.

A Map of Markups: Why We Observe Mixed Behaviors of Markups

Seong-Hoon Kim and Seongman Moon
This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels through which firms handle uninsurable business losses.

Punishment Motives for Small and Big Lies

Gerald Eisenkopf, Ruslan Gurtoviy, and Verena Utikal
Corporate fraud typically involves deceptive financial statements that are harmful for some stakeholders. We analyze how preferences for honesty and economic fairness shape the punishment of such untruthful statements. Our results suggest that popular demand for punitive measures in case of financial scandals reflects a genuine interest in the enforcement of social norms.

Honest versus Misleading Certification

Philippe Mahenc
This paper questions the honesty of third-party certification in the market for a good whose environmental quality is not observable by consumers. I show that certification can only be honest when the certifier is driven more by social welfare than by profit. In the reverse case, the certifier cannot help jamming the price signal, thereby granting unreliable labels.

Optimal Loyalty-Based Management

Dongsoo Shin
This paper studies an agency model in which an entrepreneur selects a manager from a candidate set. The selected manager's effort improves the project's potential environment, and is a hidden action. The realized project environment is the entrepreneur's private information.

Bailing on the Car That Was Not Bailed Out: Bounding Consumer Reactions to Financial Distress

Cristian Huse, Nikita Koptyug
This paper examines how consumers react to the financial distress of durable goods manufacturers by studying the Swedish new car market.

Vertical Integration and Firm Productivity

Hongyi Li, Yi Lu, Zhigang Tao
This paper uses three cross-industry datasets from China and other developing countries to study the effect of vertical integration on firm productivity. Our findings suggest that vertical integration has a negative impact on productivity, in contrast to recent studies based on U.S. firms. We argue that in settings with poor corporate governance, vertical integration reduces firm productivity because it enables inefficient rent-seeking by insiders.

The Quality of Institutions and Organizational Form Decisions: Evidence from Within the Firm

Francine Lafontaine, Rozenn Perrigot, Nathan E. Wilson
We use data on the operations of a multinational, multibrand hotel company to show that in environments where local institutions are weaker—as proxied mainly by the World Bank's Checks index—the company eschews direct ownership. Rather than increasing its reliance on franchising, as predicted by some models, the company relies more on another form of organization commonly used in this industry, namely management contracts.

Measuring Consumer Preferences for Video Content Provision Via Cord-Cutting Behavior

Jeffrey Prince, Shane Greenstein
The television industry is undergoing a generational shift in structure; however, many demand-side determinants are still not well understood. We model how consumers choose video content provision among over-the-air (OTA), paid subscription to cable or satellite, and online streaming (also known as over-the-top, or OTT).