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Managerial and Decision Economics

Wiley Online Library : Managerial and Decision Economics

Published: 2018-01-01T00:00:00-05:00


An instrumental variable approach to distinguishing perceptions from preferences for beer brands


Recent developments in behavioral economics have prompted interest in identifying how product perceptions and beliefs influence decision making. Using a branded discrete choice experiment for beer, this article uses the control function approach and plausible instruments to correct for the endogeneity problem in a way that is applicable in a wide range of circumstances. Even after correction, we find that perceptions substantially affect consumer choices. In the context of brand equity for beer brands, we find that the perceived taste and brand familiarity are key determinants of choice.

Cybercrime and cloud computing. A game theoretic network model


In this paper, a network model is developed in which three players—a profit-maximizing provider of cloud computing services, its consumers, and a hacker—sequentially choose their strategies. Several scenarios with different levels of data security and public prosecution of the hacker are analyzed. Especially for the case when no security measurements are available, a firm's strategy to limit the network size in order to render hacking unattractive is discussed in detail. Finally, policy implications are given implying better international cooperation of the law enforcement authorities.

Inference of economic truth from financial statements for detecting earnings management: inventory costing methods from an information economics perspective


We introduce uncertainty in the classic inventory costing choice problem to investigate the underlying partitions imposed by two accounting inquiries (processes of generating information): variable costing and absorption costing. In a contemporaneous reporting environment, we show that absorption costing provides a finer partition of the state space compared to variable costing when a firm arbitrarily increases the production level (opportunistic overproduction), and the predetermined fixed overhead rate is adjusted. Grounded in an information economics perspective, the intent of the article is to propose an approach to detect real earnings management by extracting information from financial statements. The resulting managerial biases arising from earnings management are also discussed.

Variety in the video game industry: An empirical study of the Wundt curve


This study analyzes the effect of variety on consumer utility using historical behavioral information for 1,397 consumers participating in 729,049 unique rounds of play. We show that consumers generally exhibit a preference for variety as part of their gameplay utility. The relationship between variety and utility is nonlinear and follows, at least for some types of variety, an inverted u-shape as predicted by the Wundt curve. Our results represent the first such evidence on the importance of variety in video gaming, which has significant implications for consumption through optimization of gameplay utility to satisfy the demand for variety.

Sequential product positioning in the presence of an asymmetric network externality intensity


In this study, we analyze the sequential decisions on product positioning of two firms in the presence of network externalities. One commonly accepted phenomena in a market where a network externality arises is the first-mover advantage, in which the first entrant into a market can earn a higher profit than later entrants. However, in some recent online services markets, we see that the second mover earns a higher profit than the first mover. This occurs because the second mover strengthens its variety of available functions and services markedly, thereby facilitating consumers' work and communication with its main product, which we call network externality intensity. Based on this observation, we analyze sequential positioning in Hotelling's framework by incorporating an asymmetric network externality intensity between firms. We show that unlike the results of previous related studies, both first- and second-mover advantages can appear in the equilibrium depending on the relationship of the network externality intensity between firms; further, they do not change monotonically with the level of network externality intensity.

Friend or foe? Employee ownership and CEO dismissal


This paper examines 2 research questions. First, does the level of employee stock ownership impact the likelihood of dismissing poorly performing chief executive officers (CEOs)? Second, does the level of employee stock ownership affect the likelihood of appointing an outsider or an insider after the dismissal of an incumbent CEO? We suggest that employee stock ownership reinforces the firm performance—CEO dismissal link because employee shareholders' welfare consisting of fixed claims (wages, bonuses, etc.), residual claims (dividends, increase in stock value, etc.), and human capital (generic and idiosyncratic) are highly linked to their firm performance. Moreover, under conditions of poor performance, employee shareholders are likely to favor an outsider CEO because he or she is more likely to initiate and implement drastic changes to the strategy of the firm, and therefore, he or she is more likely to improve firm performance. Drawing on a longitudinal sample of French firms, we find that employee stock ownership strengthens the negative relationship between firm performance and CEO dismissal likelihood. We find also that the higher employee ownership, the more likely that the underperforming CEO is replaced by an outsider. In contrast, employee ownership has no moderating impact on the likelihood of insider CEO appointment.

Military spending and entrepreneurship: Spatial effects of cross-country spillovers


This paper uses a large cross-country panel data sample to examine the effects of military spending on entrepreneurship. The other major contribution of this work lies in studying the spatial cross-country influences of military spending on entrepreneurship. Placing the econometric model in the broader literature on the determinants of entrepreneurship, results show that while own military spending crowds out entrepreneurship in a country, bordering military spending promotes entrepreneurship. In other findings, we find interesting contrasts between the effects of government size and government quality, and between economic freedom and political freedom.

Resources and market definition: Rethinking the “hypothetical monopolist” from a resource-based perspective


We reassess the concept of the hypothetical monopolist as a device for relevant market definition. The hypothetical monopolist test (also known as the Small but Significant Non-transitory Increase in Price test) is a clever, intuitive way of thinking the relevant market in antitrust, and is gaining ground in strategic management. The test, however, implicitly disregards resource characteristics in relevant market delineation, focusing exclusively on demand side substitutability. In reassessing the hypothetical monopolist, we make 2 general contributions to the strategy literature. First, using cooperative game theory, we advance a precise resource-based definition of the hypothetical monopolist. Second, we demonstrate how this definition broadens our conventional understanding on 2 important topics: resource complementarities and disruptive innovations. In doing so, we complement and strengthen the hypothetical monopolist test as a device for management (strategic) and public policy (antitrust) analysis.

Effectiveness of quality standards regulation considering the behavior of government and firms


We construct an analysis framework consisting of the central government, a local government, a representative firm, and consumers. This study analyzes how the local government's enforcement, the firm's compliance, and their interaction influence the effectiveness of regulation after the central government has established policies regarding quality standards. We construct three scenarios: perfect enforcement, imperfect enforcement, and collusion. We show that when the local government imperfectly enforces the regulation, the firm's utility and the local government's utility are higher, whereas the degree of the firm's compliance, consumers' utility, and the level of social welfare are lower. When there is collusion between the local government and the firm, the firm's utility and the local government's utility are the highest, but the degree of the firm's compliance, consumers' utility, and the level of social welfare are the lowest among the different scenarios. This study proves that the behavior of governments and firms plays a vital role in the effectiveness of quality standards regulation.

Uncovering the hidden transaction costs of market power: A property rights approach to strategic positioning


A central construct in competitive strategy research is market power, the ability to raise price above marginal cost. Positioning research focuses on attempts to build, protect, and exercise market power. However, this approach contains hidden assumptions about transaction costs. Parties made worse off by the exercise of market power can negotiate, bargain, form coalitions, and otherwise contract around the focal firm's attempts to appropriate monopoly profits—depending on transaction costs. We build on property rights economics to explain how transaction costs affect positioning and offer propositions about successful positioning in an environment with transaction costs.

Optimal targeting with entry


We study an advertising agency's optimal choice of targeting technology with endogenous market structure, namely, when targeting changes firms' entry strategies into the advertising and product market. We show that the advertising agency faces a trade-off between demand-expansion and profit-dissipation: The former arises as targeting induces more entry and increases the demand for advertising; the latter refers to that targeting relaxes competition by inducing more differentiation. We show that perfect targeting is not optimal for the advertising agency. Compared to social optimum, the advertising agency underinvests in targeting when investment cost is low and overinvests when targeting is costly.

Quality investment timing by the startup and the established firm


This study investigates quality investment timing decisions of the established firm and the startup by a duopoly model, where firms can position quality early (demand uncertainty is high) or late (uncertainty has been resolved), possibly at different costs. The startup positions quality to maximize its survival probability, whereas the established firm maximizes profits. Results indicate that the startup positions quality earlier than the established firm when the demand uncertainty is high and costs do not decline sharply over time. Additionally, policy analysis shows that subsidies work better than direct funds in encouraging quality innovation of the startup.

You do not have to succeed, just do not fail: When do soccer coaches get fired?


This article deals with circumstances leading to the dismissal of a soccer coach. The article is based on results from the Premier League in England over 12 consecutive years. In this paper, we converted the scores of matches (win, draw, and loss) into an index based upon how results were perceived by club owners—those empowered with the decision as to whether or not to fire the coach. The index is based on the difference between the actual and expected results reflected by betting odds. We conclude that to ensure job preservation, the manager does not have to succeed—he just must not fail.

When do investors reward acquisitions and divestitures? The contrasting implications of normative and behavioral economic theories


We evaluate whether a contingency theory that combines a signaling hypothesis with behavioral economic theory can elucidate the discrepancy between positive expected returns to acquisitions and divestitures and the mixed-to-negative investor reactions observed in practice. We argue that, because of bounded rationality, uncertainty avoidance, and inertia, major organizational change is generally motivated by the detection of problems in an organization. Accordingly, although investors may view acquisitions and divestitures as positive corrective measures for low performers, such initiatives by high performers often signal problems that were heretofore unknown to the market. We contrast our results with predictions based on normative theories.

Contract duration and contractual learning: Evidence from franchising networks


Contract duration in franchising has generally been studied in frameworks where agents are assumed to have a high level of foresight. We complement existing studies by adopting a dynamic perspective that allows us to introduce a learning process in choice and adjustment of contract duration. On the basis of French panel data (1995–2003), collected from the yearbooks of the French Federation of Franchising, results of dynamic models are consistent with the existence of a learning process in the capacity to design appropriate contracts. Our study shows that certain factors, in particular too much franchising, may hinder the achievement of such a capability.

Entrepreneurial orientation, intermediation services, microfinance, and microenterprises


This study was conducted to examine the influence of intermediation services on microfinance-supported microenterprises. Information was collected by using a structured pretested questionnaire from a random section of 366 respondents (from 366 enterprises) from 2 Indian states. Econometric models were used to test the hypotheses, and reliability and validity testing and data analysis were also performed. It was noticed that proactiveness and risk-taking ability of microenterprises were enhanced when intermediaries emphasize more on the business development services, financial intermediation services, and social intermediation services. Intermediation services of intermediaries impacted on entrepreneurial orientation of microenterprises where networking of microentrepreneurs positively moderated the relationship.

Valuation of R&D investment under technological, market, and rival preemption uncertainty


We develop a real options model for evaluating and optimizing a research and development (R&D) project. The model captures key features of R&D, including research duration, growth opportunity, debt financing, and uncertainty of technology, demand market, and rival preemption. In the model, we unveil the interactions of key R&D features. The effect of duration on investment depends on whether there is rival preemption. Higher uncertainty of research duration speeds up investment in the presence of rival preemption. Higher uncertainty of technological success, combined with a growth opportunity, accelerates investment. Debt financing greatly decreases time lag between the first stage project and growth project.

Cost efficiency of insurance firms in Ghana


The huge infrastructural deficit in Africa requires the establishment of an efficient insurance industry in the pursuance of economic development. Unfortunately, global statistics reveal low patronage of insurance in developing countries, thus making its impact limited in the region. To position the industry for economic development, this study utilizes the stochastic frontier technique to undertake a thorough analysis on the cost efficiency of insurers from the perspective of developing economies using Ghana as a case study. The results on the 30 insurers studied from 2005 to 2014 indicate that insurers in Ghana operate with about 53.8% average cost inefficiency. This stands to confirm the long existed low performance perception of Ghanaians about the industry. Factors identified to explain the cost inefficiencies were firm size, market share, capitalization, reinsurance, regulation, and business type. Several policy recommendations that can help boost the cost efficiency of insurers were derived from the results.

Managerial time constraints and young worker productivity: Natural experiments with NFL rookies


The 2011 National Football League lockout and movement of the 2014 draft to a later date compressed the off-seasons preceding the 2011 and 2014 seasons, exogenously tightening time constraints within which managers—head coaches and their staffs—engage in short-run training of players. We exploit these natural experiments to investigate how this impacted the productivity of young workers (National Football League rookies). Results estimated for a sample of over 1,500 rookies support hypotheses emanating from an economic model of worker training time allocation and indicate reduced productivity along several dimensions. Survival analysis shows evidence of shorter player career durations along certain lines, suggesting longer term consequences.

The hidden costs of control revisited: Should a sanctioning policy be announced in advance?


Sanctions are widely used to enhance compliance in principal agent relationships. Although there is ample evidence confirming the predicted positive incentive effect of sanctions, it has also been shown that imposing sanctions may reduce compliance by crowding out intrinsic motivation. We add to the literature on the hidden costs of control by showing that these costs are restricted to situations where the principal actively chooses to sanction low performance and where this choice is known to the agent. In such a situation, the principal's commitment to sanction low performance might indicate that she or he is a distrustful “type” and hence conveys a negative signal. To the contrary, if (a) an agent is not informed about whether low performance will be sanctioned or if (b) the computer determines whether low performance will be sanctioned, the principal's “type” is not revealed, and we find no evidence of crowding out.

Peer pressure and social comparisons with heterogeneous ability


When workers' efforts are not contractible, we investigate whether the display of workers' efforts to coworkers influences wage and effort decisions. We find that employers mainly increase the wages offered to the more valuable workers when they are observed that increases the difference in wages in such setting. We find evidence of peer pressure and strategic complementarity in efforts. Additionally, low-ability workers are more sensitive to peer pressure than their more productive coworkers, and these workers exert less effort with increases in the reciprocity of their coworkers. Finally, the display of workers' efforts to coworkers is detrimental to the employer's payoff but enhances efficiency.

Diversification, capital structure, and performance: A simultaneous equation approach


This paper examines the relationships between diversification, capital structure, and performance jointly on the financial sector. Our dataset covers 412 French financial institutions over the period ranging from 2002 to 2012. Furthermore, we use a three-stage least squares to check reverse causality. Our three-stage least squares results show positive significant simultaneous interdependencies between performance and leverage. Performance reduction and debt levels increase are associated with activity diversification. Performance and leverage reduction is due to geographic diversification. Our estimation confirms reverse association between the interaction of diversification, leverage, and performance. Moreover, the findings are robust after taking into account alternative measures of diversification.

The role of task meaning on output in groups: Experimental evidence


Previous research has shown a detrimental effect of low task meaning on individual work output. This paper analyzes whether peer settings are able to counteract this negative effect of low task meaning. First, our results confirm that a low level of task meaning decreases individual output when working alone. However, this effect vanishes completely when working in the presence of a peer. Our analysis implies that organizing work in peer settings might be particularly beneficial in work environments with a low level of task meaning.

An option pricing approach to optimal bidding in construction projects


Reaching an optimal mark-up value in the context of construction projects' bidding competitions has been a research topic for more than 40 years. This paper aims to contribute to this debate by applying a real options approach. The proposed model has a pure theoretical nature and is based on a maximization problem, whose outcome is the optimal price, that is, the price that should be included in the bid proposal. The model is later extended to accommodate the existence of penalty costs if the selected bidder refuses to enter into contract. Results reached using a numerical example demonstrate that the optimal price is higher when penalty costs are considered.

Issue Information


No abstract is available for this article.

Should managerial delegation contracts be made before or after union wage setting? A game-theoretic analysis


This paper analyzes a multiple-stage game in which, at the final stage, two (managerial) firms compete over quantities in the product market. Prior to this stage, firm-specific unions set the workers' wages, while the owners of both firms hire managers and provide them with incentive contracts. Owners can freely decide to arrange the managerial contract before or after the (non-managerial) wage determination stage. Hence, the endogenous choice of the incentive contract stage is derived. The possibility of multiple equilibria arises, where both owners choose managerial contracts before or after unions' wage setting, crucially depending on unions' preferences. Such results also prove to be true for a remarkable degree of asymmetry in preferences over wages vis-à-vis employment across unions.

Why in rugby union does “Toulouse” mean “to win”? Estimation of a production function of sports results (2011–2016)


The objective of this article is to understand more fully the determinants of sports performance. To do this, we estimate a production function of sports results that explains the results of the Toulouse rugby union team's matches expressed as the gap in points between it and its opponents. To the best of our knowledge, this is the first time that a production function has been estimated in rugby union. In addition, it is one of the few production functions specified at the match level. The study confirms the relevance of some variables already identified in the literature, such as home advantage, ranking, the role of the referee, and in-match statistics. It also shows the influence of new variables, such as weather conditions and the relative strength of fielded teams measured by comparing the teams selected on match day to the ideal teams defined at the beginning of the season.

Apple's disaster: Linking two-sided markets and strategic delegation


Asymmetric pricing structure and different intergroup network externalities are characteristics of two-sided markets not captured in the analysis of one-sided markets. Focusing on Cournot duopoly where membership decision may be delegated to a manager, several equilibrium regimes are sustained depending on the fixed cost of managerial hiring and strength of the network externality exerted by the side whose demand is more price sensitive. The change from null to full delegation sharpens the asymmetric pricing structure and reduces the price level in two-sided markets. Contrary to one-sided markets with direct network effects, the prisoner's dilemma holds for sufficiently strong indirect network externalities. Imperfect interside discrimination of managerial incentives ensures profit maximization and efficient consumers' allocation. Private hiring should occur when the two-sided market exhibits symmetric pricing structure. An explanation for Apple's unprecedented event is provided. The reduction of revenue and managerial bonus in 2016 may be justified by the dissemination of full delegation in the Chinese information technology industry. Apple's upcoming strategy may consist on reducing both access prices, although the side whose demand is more price sensitive should have a greater price reduction. Alternatively, improving the content quality may constitute Apple's corporate strategy, thereby inducing a skimming pricing strategy on Chinese rivals.

Trust and trustworthiness in organizations: The role of monitoring and moral suasion


We ask whether the corporate law provisions establishing that the conduct of the manager is subject to review by the investors (monitoring) and that managers are held to an honorable behavior (moral suasion) can increase trust and trustworthiness in organizations. We answer this question through a laboratory experiment. We find that moral suasion increases the investors' trust. Monitoring also increases trust but only when the manager is not aware of the experimental identity of the monitor. The manager returns more to those investors who trust more but appropriates around 50% of the available resources. The trustworthiness of the manager is, however, unaffected by monitoring or moral suasion. We discuss possible causes of the difference between the investors' expectations regarding the behavior of the manager and the observed behavior of the manager.

Decision support for firm performance by real options analytics


This paper develops a real options decision support tool for raising the performance of the firm. It shows how entrepreneurs can use our intuitive tool quickly to assess the nature and type of action required for improved performance. This exploits our estimated econometric relationship between precipitators of entrepreneurial opportunities, time until exercise, and firm performance. Our 3D chromaticity plots show how staging investments, investment time, and firm performance support entrepreneurial decisions to embed, or to expedite, investments. Speedy entrepreneurial action is securely supported with this tool, without expertise in econometric estimation or in formulae for real options valuation.

Private information in futures markets: An experimental study


This paper presents the results of an experimental study on how people use their private information to estimate the “fair” futures price and how the quality of this information affects the traders' behavior and desire to trade. It finds that subjects are able to use their information correctly and that their desire to rely on it depends positively on the information precision. It shows that subjects are able to recognize that they are expected to lose money on futures trading when other traders have better quality information. However, subjects failed to recognize the symmetry of the futures contracts.

Subscription ticket sales for symphony orchestras: Are flexible subscription tickets sustainable?


We examine the fixed subscription ticket market for U.S. symphony orchestras, which is a crucial element of their business model and has experienced declining sales in recent years. We find that subscription ticket buyers are more sensitive to price changes than total ticket buyers. Hiring a new music director may increase subscription ticket sales, and economic downturns will decrease ticket sales. We find that increasing flexible subscriptions contributes to a decline in total subscription tickets and single ticket sales, in general. In addition, with increasing advertising costs per attendee and falling revenue from fixed subscriptions, symphony orchestra management should consider ticket prices, which have risen significantly in recent years, more strategically.

Information and profit sharing between a buyer and a supplier: Theory and practice


This paper is about aspects of an optimal relationship between 2 firms, a supplier and a retailer, in a 2-party supply chain. The focus is on sharing private information when demand uncertainty exists so as to better coordinate the supply chain. It draws inspiration from a real case in Ireland of a new fish-processing company, Oceanpath, and a supermarket chain, Superquinn, in which information was shared. The argument is that sharing the retailer's information increases supply chain profit, as well as benefiting consumers. Profit sharing will be needed to guarantee that both the retailer and the supplier gain when information is shared.

Internet diffusion and free riding in insurance markets: An empirical investigation


This paper studies the effect of internet diffusion on free riding in insurance markets, with a focus on automobile insurance. Internet usage affects both the demand and supply sides of insurance markets, while also having a bearing on institutions. Our cross-sectional analysis based on the United States supports the main hypothesis that greater internet diffusion reduced free riding by uninsured motorists. This response was fairly elastic and the reduction in the prevalence of uninsured motorists holds across different empirical specifications. Implications of these findings are discussed.

Price dispersion and optimal price categories with limited memory consumers


In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non-optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub-optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion.

Assessment of rapid growth ventures, an extension of Schwartz and Moon model


It is a challenge to incorporate randomness into financial projections that are at the core of new venture assessment. We present a model based on Schwartz and Moon () and apply it to a real firm data. We find that our 10-year projections conform to the actual realized values. The model allows addressing crucial questions regarding the venture survival, its extreme potential outcomes, and its sensitivity to its parameters. It facilitates identifying risk drivers and assessing potential remedies. To our knowledge, we are the first to propose such a comprehensive stochastic model for risky ventures' simulation and analysis.