Harvard Business School

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Is Pay Transparency Good?
(American Economic Association, 2024-02-01) Cullen, Zoe
Countries around the world are enacting pay transparency policies to combat pay discrimination. Since 2000, 71 percent of OECD countries have done so. Most are enacting transparency horizontally, revealing pay between coworkers doing similar work within a firm. While these policies have narrowed coworker wage gaps, they have also led to counterproductive peer comparisons and caused employers to bargain more aggressively, lowering average wages. Other pay transparency policies, without directly targeting discrimination, have benefited workers by addressing broader information frictions in the labor market. Vertical pay transparency policies reveal to workers pay differences across different levels of seniority. Empirical evidence suggests these policies can lead to more accurate and more optimistic beliefs about earnings potential, increasing employee motivation and productivity. Cross-firm pay transparency policies reveal wage differences across employers. These policies have encouraged workers to seek jobs at higher paying firms, negotiate higher pay, and sharpened wage competition between employers. We discuss the evidence on effects of pay transparency, and open questions.
Grand Bargain: Negotiating Toward a Better Middle East
(MIT Press, 2024) Sebenius, James
How can sophisticated negotiation bring about a more peaceful and prosperous Middle East? While a “grand bargain” to accomplish this lofty goal may seem implausible, the potential value of such an agreement would be vast for most Israelis, Palestinians, and key regional players—as well as for many global states. Yet the failure to successfully negotiate it would entail correspondingly huge potential costs for these parties. When the benefits of a deal are high and the costs of no deal are extreme, the underlying basis for a successful negotiation exists—that is, we can envision a collectively beneficial “zone of possible agreement” (ZOPA). The first task of this article is relatively easy: to describe the elements of such a grand bargain—an “Arab-Israeli-Palestinian Peace Initiative (AIPPI),” which should be announced by Saudi Arabia and/or the United Arab Emirates (UAE). The AIPPI would contain a vision of a permanent solution to the Israeli-Palestinian conflict in the form of a non-militarized Palestinian state with Israel enjoying normalized relations with moderate Sunni Arab regimes. As a point of departure for negotiating, it would detail the benefits to and obligations of Israelis, Palestinians, and Arab states required to realize this vision, encourage the creation of performance-based milestones toward this end, to be followed by an international conference. The analysis of this article then shows that a ZOPA likely exists among critical stakeholders despite formidable would-be blockers. Yet bringing about the AIPPI requires answering two much harder questions: What are the barriers to realizing it and what is a plausible path to overcome these barriers? Sketching credible answers to these two knotty questions is the main intended contribution of this article.
The Real Consequences of Market Segmentation
(Oxford University Press (OUP), 2011-12-30) Chernenko, Sergey; Sunderam, Aditya
We study the real effects of market segmentation due to credit ratings using a matched sample of firms just above and just below the investment-grade cutoff. These firms have similar observables, including average investment rates. However, flows into high-yield mutual funds have an economically significant effect on the issuance and investment of the speculative-grade firms relative to their matches, especially for firms likely to be financially constrained. The effect is associated with the discrete change in label from investment-grade to speculative-grade, not with changes in continuous measures of credit quality. We do not find similar effects at other rating boundaries.
Frictions or Mental Gaps: What's Behind the Information We (Don't) Use and When Do We Care?
(American Economic Association, 2018-02-01) Handel, Benjamin; Schwartzstein, Joshua
Consumers suffer significant losses from not acting on available information. These losses stem from frictions such as search costs, switching costs, and rational inattention, as well as what we call mental gaps resulting from wrong priors/worldviews, or relevant features of a problem not being top of mind. Most research studying such losses does not empirically distinguish between these mechanisms. Instead, we show that most highly cited papers in this area presume one mechanism underlies consumer choices and assume away other potential explanations, or collapse many mechanisms together. We discuss the empirical difficulties that arise in distinguishing between different mechanisms, and some promising approaches for making progress in doing so. We also assess when it is more or less important for researchers to distinguish between these mechanisms. Approaches that seek to identify true value from demand, without specifying mechanisms behind this wedge, are most useful when researchers are interested in evaluating allocation policies that strongly steer consumers towards better options with regulation, traditional policy instruments, and defaults. On the other hand, understanding the precise mechanisms underlying consumer losses is essential to predicting the impact of mechanism policies aimed primarily at reducing specific frictions or mental gaps without otherwise steering consumers. We make the case that papers engaging with these questions empirically should be clear about whether their analyses distinguish between mechanisms behind poorly informed choices, and what that implies for the questions they can answer. We present examples from several empirical contexts to highlight these distinctions.
Optimal Tilts: Combining Persistent Characteristic Portfolios
(Informa UK Limited, 2017-10) Baker, Malcolm; Taliaferro, Ryan; Burnham, Terence
We examine the optimal weighting of four tilts in U.S. equity markets from 1968 through 2014. We define a “tilt” as a characteristic-based portfolio strategy that requires relatively low annual turnover. This is a continuum, with small size (a very persistent characteristic) at one end of the spectrum and high frequency reversal at the other. Unlike low-turnover tilts, a full history of transaction costs is essential for determining the expected return of, and hence the optimal allocation to, less persistent, more turnover-intensive characteristics. The mean-variance optimal tilts toward value, size, and profitability are roughly equal to each other and equal to the optimal low-beta tilt. Notably, the low-beta tilt is not subsumed by the other three.
The Impact of the ‘Open’ Workspace on Human Collaboration
(The Royal Society, 2018-07-02) Bernstein, Ethan; Turban, Stephen
Organizations’ pursuit of increased workplace collaboration has led managers to transform traditional office spaces into ‘open’, transparency-enhancing architectures with fewer walls, doors and other spatial boundaries, yet there is scant direct empirical research on how human interaction patterns change as a result of these architectural changes. In two intervention-based field studies of corporate headquarters transitioning to more open office spaces, we empirically examined—using digital data from advanced wearable devices and from electronic communication servers—the effect of open office architectures on employees' face-to-face, email and instant messaging (IM) interaction patterns. Contrary to common belief, the volume of face-to-face interaction decreased significantly (approx. 70%) in both cases, with an associated increase in electronic interaction. In short, rather than prompting increasingly vibrant face-to-face collaboration, open architecture appeared to trigger a natural human response to socially withdraw from officemates and interact instead over email and IM. This is the first study to empirically measure both face-to-face and electronic interaction before and after the adoption of open office architecture. The results inform our understanding of the impact on human behaviour of workspaces that trend towards fewer spatial boundaries.
Who Neglects Risk? Investor Experience and the Credit Boom
(Elsevier BV, 2016-11) Chernenko, Sergey; Hanson, Samuel; Sunderam, Aditya
Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new microdata on mutual funds' holdings of securitizations to examine which investors are susceptible to such boom-time thinking. We show that firsthand experience plays a key role in shaping investors' beliefs. During the 2003–2007 mortgage boom, inexperienced fund managers loaded up on securitizations linked to nonprime mortgages, accumulating twice the holdings of more seasoned managers. Moreover, inexperienced managers who personally experienced severe or recent adverse investment outcomes behaved more like seasoned managers. Training and institutional memory can serve as partial substitutes for personal experience.
Institutions and Venture Capital
(Oxford University Press (OUP), 2013-01-24) Lerner, Joshua; Tag, Joacim
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.
The Psychosocial Value of Employment: Evidence from a Refugee Camp
(American Economic Association, 2022-11-01) Hussam, Reshmaan; Kelley, Erin M.; Lane, Gregory; Zahra, Fatima
Employment may be important to well-being for reasons beyond its role as an income source. This paper presents a causal estimate of the psychosocial value of employment in refugee camps in Bangladesh. We involve 745 individuals in a field experiment with three arms: a control arm, a weekly cash arm, and an employment arm of equal value. Employment raises psychosocial well-being substantially more than cash alone, and 66 percent of the employed are willing to forgo cash payments to continue working temporarily for free. Despite material poverty, those in our context both experience and recognize a nonmonetary, psychosocial value to employment.
Advancing Computational Biology and Bioinformatics Research through Open Innovation Competitions
(Public Library of Science (PLoS), 2019-09-27) Blasco, Andrea; Endres, Michael; Sergeev, Rinat; Jonchhe, Anup; Macaluso, N. J. Maximilian; Narayan, Rajiv; Natoli, Ted; Paik, Jin; Briney, Bryan; Wu, Chunlei; Su, Andrew I.; Subramanian, Aravind; Lakhani, Karim
Open data science and algorithm development competitions offer a unique avenue for rapid discovery of better computational strategies. We highlight three examples in computational biology and bioinformatics research where the use of competitions has yielded significant performance gains over established algorithms. These include studying algorithms for antibody clustering, imputing gene expression data, and querying the Connectivity Map (CMap). Performance gains are evaluated quantitatively using realistic, albeit sanitized, data sets. The solutions produced through these competitions are then examined with respect to their utility and the prospects for implementation in the field. We present the decision process and competition design considerations that lead to these successful outcomes as a model for researchers who want to use competitions and non-domain crowds as collaborators to further their research.

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