Research Paper Series

  • Title
  • Author(s)


Departments: Economics & Decision Sciences

This paper shows that bailouts of private agents can optimally take the form of asset purchases, even if this also means paying off external asset holders, in the presence of borrowing constraints and asymmetric information on liquidity needs. The combination of these two ingredients make direct compensation through loans and/or net transfers imperfect. Thus, when more constrained agents are also more exposed to the asset, the compensation through asset purchases becomes desirable. Anticipating these purchases, private agents engage in a collective bet on the defaulting asset, leading to an equilibrium implicit guarantee, where even an intrinsically worthless asset can be traded at a positive price

Keywords: Implicit guarantees, bailouts, capital ows, capital controls


Departments: Finance

We provide empirical evidence of the importance of hold-up problems for investment decisions in a large number of U.S. manufacturing industries. We exploit variation in the severity of hold-up problems between upstream suppliers and downstream customers resulting from import tariff reductions in upstream industries. We find that downstream customers respond by increasing investment. As theory predicts, the effect is stronger if the customers have little bargaining power and are not vertically integrated with their suppliers, if the suppliers produce differentiated inputs, if high uncertainty inhibits the use of long-term contracts, and if shipping costs are low


Departments: Strategy & Business Policy

Firms that are slow in the execution of investment projects often incur substantial revenue losses. However, accelerating investments generally results in higher investment costs. In this paper, we integrate this investment speed tradeoff in a reduced-form model of project development to create an empirical proxy for firm speed. We examine how deviations from industry-average speed in the execution of large investments in oil and gas facilities worldwide from 1996 to 2005 impact firm value, as measured by Tobin's q. We find that there is substantial variation in investment speed among firms in the oil and gas industry. Using a linear correlated random parameter model to account for unobserved firm heterogeneity, we show that faster firms have higher firm value when speed results from firms' dynamic capabilities. On average, accelerating a firm's investments by 5% (or 1 month) below the industry norm due to dynamic capabilities increases market value by $214.3 million. Additionally, we show that the effect of speed on firm value varies widely among firms and is amplified by good corporate governance but often mitigated by the level of firms' debt.

Keywords: time-based competition, dynamic capabilities, strategy dynamics, firm value, project management, correlated random parameters


Departments: Strategy & Business Policy

Studies on market entry focus on the tradeoff between commitment and flexibility: early entrants face less competition but risk costly mistakes due to limited information, whereas late entrants can benefit from information revelation and learning opportunities but risk high costs from preemption. These entry timing benefits and costs typically vary with firms’ capabilities. In this study, we empirically examine the relationship between firms’ intrinsic speed capabilities and entry timing. Speed capabilities refer to firms’ ability to execute the process of entering a new market faster than competitors when market entry is time-consuming. Since firms with intrinsic speed capabilities can complete entry faster, they face low preemption risks. The implication is that faster firms can afford to wait longer for uncertainty resolution before deciding to enter new markets than slower firms. This hypothesis is more applicable when investment is associated with higher levels of commitment and thus greater option value of waiting. A related implication is that late entrants with intrinsic speed capabilities should have greater expected post-entry performance. We find support for these hypotheses by examining the entry timing and entry performance of firms in the Atlantic Basin liquefied natural gas (LNG) industry from 1996 to 2007.

Keywords: Firm Capabilities, First Mover Advantages, New Market Entry, Strategy Dynamics, Speed, Project Management


Departments: Strategy & Business Policy

Why do some innovators freely reveal their intellectual property? This empirical puzzle has been a focal point of debate in the R&D literature. We show that innovators may share proprietary technology with rivals for free - even if it does not directly benefit them - to slow down competition. By disclosing IP, innovators indirectly induce rivals to wait and imitate instead of concurrently investing in innovation, which alleviates competitive pressure. In contrast with the classical strategy view, our paper also shows that imitators may not always benefit from interfirm knowledge spillovers. Specifically, imitators may want to limit the knowhow that they can freely appropriate from innovators. Otherwise, innovators have fewer incentives to quickly develop new technologies, which, ultimately, reduces the pace and profits of imitation. Our theoretical model contributes to the literature on competitive dynamics of R&D. The main propositions establish testable relationships between strategic variables that are empirically observable.

Keywords: R&D and technology, innovation dynamics, timing games, time compression diseconomies, firm spillovers, capabilities


Departments: Strategy & Business Policy

This article examines how leader firms should respond to the erosion of competitive advantages caused by rapid imitation and innovation in hypercompetitive environments. On the one hand, shorter-lived advantages induce leaders to develop new advantages faster. On the other hand, hypercompetition also erodes the expected returns from new advantages — reducing leaders’ incentives to accelerate investments. Since investing faster also raises costs, this article shows that leaders often prefer to renew competitive advantages more slowly in more hypercompetitive industries — thereby increasing the probability of being displaced by competitors. This phenomenon is dubbed self-displacement. Firms’ decision to self-displace themselves from industry leadership with greater probability is deliberate and rationa l — not a result of leaders’ inability to respond to competitive threats, as previously assumed in the literature. This article also shows that leaders’ rule of thumb in more hypercompetitive environments should be to accelerate the development of advantages with high competitive value but low market value. This study is based on a theoretical model and numerical analysis grounded on stylized empirical facts that govern industry competitive macrodynamics and firm investment microdynamics in most industries. Because the model builds on empirically observable constructs, its theoretical propositions are amenable to large sample testing.

Keywords: Hypercompetition, time compression, sustainable competitive advantage, industry leadership, imitation, innovation


Departments: Strategy & Business Policy

We develop a formal model of the timing of resource development by competing firms. Our aim is to deepen and extend resource-level theorizing about sustainable competitive advantage. Our analysis formalizes the notion of barriers to imitation, particularly those based on time compression diseconomies where the faster a firm develops a resource the greater the cost. Time compression diseconomies are derived from a micro-model of resource development with diminishing returns to effort. We use a continuous time model of the flows of development costs and market revenues, which allows us to integrate strategic and financial analyses of firm investment problems.We examine two dimensions of sustainability: whether the resources underlying a firm's competitive advantage are economically imitable and, if so, how long imitation takes. Surprisingly, we show that sustainable competitive advantage does not necessarily lead to superior performance. We find that imitators sometimes benefit from reductions in their absorptive capacity and that innovators should license either all or none of their knowledge. Despite recent criticisms, we reaffirm the usefulness of a resource-level of analysis for strategy research, especially when the focus is on resources developed through internal projects with identifiable stopping times.

Keywords: Sustainability of Competitive Advantage, Imitation, Timing of Resource Development, Absorptive Capacity


Departments: Finance, GREGHEC (CNRS)

We explore how financial distress and choices are affected by noncognitive abilities. Our measures stem from research in psychology and economics. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.

Keywords: Noncognitive abilities, financial distress, financial choices, saving, unsecured debt, behavioral finance, psychology and economics


Departments: Strategy & Business Policy


Departments: Economics & Decision Sciences

Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.

Keywords: monetary policy, forward guidance, communication, heterogeneous beliefs, disagreement


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