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Despite a heated debate on the perceived increasing complexity of financial regulation, there is no available measure of regulatory complexity other than the mere length of regulatory documents. To fill this gap, we propose to apply simple measures from the computer science literature by treating regulation like an algorithm - a fixed set of rules that determine how an input (e.g., a bank balance sheet) leads to an output (a regulatory decision). We apply our measures to the regulation of a bank in a theoretical model, to an algorithm computing capital requirements based on Basel I, and to actual regulatory texts. Our measures capture dimensions of complexity beyond the mere length of a regulation. In particular, shorter regulations are not necessarily less complex, as they can also use more "high-level" language and concepts. Finally, we propose an experimental protocol to validate measures of regulatory complexity.

We examine how the U.S. Food and Drug Administration Amendments Act (FDAAA) of 2007, which requires additional disclosures regarding clinical trial results, impacts information asymmetry between the disclosing pharmaceutical firm and capital market participants, the general public, academics, and practitioners. We document a reduction in information asymmetry in capital markets. We also document an increase in adverse event and product problem complaint reports filed against the pharmaceutical firms to the FDA and a higher number of drug and medical device recalls for affected firms after the FDAAA enactment. Finally, cross-sectional analyses suggest that the increase in FDA complaint reports and recalls after the FDAAA enactment was more prominent in firms with a higher bid-ask spread decrease. Taken together, our results suggest that the FDAAA has some benefits for both investors and consumers.

Data is increasingly regarded as an essential infrastructural resource for economic growth, innovation and the overall wellbeing of society. Thanks to our enhanced capability to collect, process and use data, we are able to know where the epicentre of an earthquake is, how to limit a pandemic such as Zika from spreading or even how to reduce pollution in cities.This data ‘revolution’ must be contextualised within a broader, 3-centurylong attempt to neutralise irrationality in human decisionmaking by gaining increased access to information. Yet, while virtually every organisation today, including small companies or grassroots movements, is a data entity, only a few of them (generally in the private sector) have collected vast amounts of data (be it personal or non-personal) and acquired a unique capability to make sense of such information.As a result, most of this much-prized data is in the hands of businesses, not of public authorities, with the latter lagging behind in embracing the power of data to inform their daily policies and service-delivery actions. Hence the challenge — entrusted by the European Commission to our expert group — to explore the creation of an enabling environment for privately held data to be shared with (or at least be accessible to) public authorities in complying with their public-interest missions. For the time being, most of the efforts focus on getting the supply-side ready (e.g. by developing data-sharing models, de-risking data sharing or re-skilling personnel) for B2G data sharing, but omit the need to sensitise and prepare the demand side (the public authorities). More critically, at a time in which reputation-based mechanisms transcend the mere financial rating and venture into state-driven ‘social credit’ scoring, the role that citizens play in the data-sharing equation remains limited and ancillary to most of the solutions at stake.This report, which has benefited from the experience and dedication of 23 experts coming from different walks of life, strives to address both of these systemic shortcomings. By carving out a role to play for both the public sector and citizens, it offers an initial set of ethically-aware paths the EU might chart to break new ground in advancing and accompanying B2G data sharing. The hope is that by following some of this expert advice the EU might become a global leader in fostering not only a market for B2G data access, but also a sensible, inclusive and participatory data culture through a set of viable, practicable and scalable welfare-enhancing solutions. Only a more cautious, humble and humanised approach to the unprecedented amount of data we produce and collect every day may pave the way for a future in which it is the human factor that defines our daily life experiences

This article offers an original case study of the failed sale of Victoria’s Secret’s business to examine the deep consequences of the COVID-19 pandemic in the context of M&A transactions. After presenting the case, it draws two lessons from it by: (1) proposing a multi-layered analysis of the effects of covid-19 depending on the type of event considered and on the contract language, and (2) exploring the possible reshaping of the termination right in connection with the dramatic variations of the target’s value during the interim period caused by COVID-19.

In the face of rising income inequality (Acemoglu & Autor, 2011; Atkinson, Piketty, & Saez, 2011; Piketty, 2014; World Economic Forum, 2014), one recent proposal is to provide consumers with information about the income inequality across those involved in the production of each good, at the point of purchase. This has been shown to depress overall inequality (Hill, 2020), though its impact depends crucially on whether people are willing to pay more for goods whose production involves less income inequality. Here we investigate this largely unexplored empirical question through an incentivised, behavioural choice experiment on a representative sample of the English population. We find that a large majority are willing to pay significantly more for goods associated with less inequality. How much more people are willing to pay varies with political leaning and increases with the extent of the inequality reduction, but is positive across the political spectrum and for all studied inequality differences. Moreover, it is typically higher when inequality is reported in more intuitive and informa- tive formats. Our results bode well for the effectiveness of product-level inequality information provision as a tool for moderating income inequality, promising impacts even in markets where all goods involve relatively high inequality levels and potential participation across the political spectrum.

Crossmodal sensory correspondences between shape and taste are well-established (e.g., angular–bitter, rounded–sweet). However, the extent to which these correspondences reliably influence consumer taste judgments is less clear, as are the processes underlying the effects. This research addresses both issues. Across seven experiments, we show that whether shape–taste correspondences influence taste judgments depends on their associative strength in memory, and that a significant shape–taste correspondence spontaneously affects taste judgments only when its associative strength reaches a sufficient threshold. We further demonstrate the effects in a child development context, in which children’s age, as a naturally occurring proxy of associative strength, moderates shape–taste crossmodal effects on taste judgments. We also demonstrate that the generation of shape–taste crossmodal effects is driven by a simple spreading activation model that is moderated by associative strength, is highly automatic, and occurs even when cognitive and visual resources are constrained. The findings suggest that 1) managers must go beyond establishing simple crossmodal correspondences to determine whether sufficient thresholds are met, 2) the shape–taste associations can apply to products marketed to older children, and 3) the effects are likely to occur even in cognitively noisy retail environments.

A dozen of green and sustainable labels have emerged on the financial markets of the Member States of the European Union since the creation of a first label in 1997 in France, allocated to nearly 1,360 financial products, demonstrating a quantitative success, especially in France. This article analyzes the development of such green and socially responsible labels in Europe over the past decades , their construction dynamics, and questions the real benefits of a proliferation of labels in this industry. Does the multiplicity of factors contributing to the development of labels achieve the desired end or does it encumber the market with loud but uncertain signals? While household savings are at their highest and there is a demand for financing the ecological transition, does the proliferation of labels not complicate the readability of the market ? We show that, instead of simplifying the choice of agents, the multiplication of labels tends to increase the noise provided by each of the quality signals and deteriorate confidence. Economic agents have less interest in benefiting from a generic label but are looking for less demanding labeling at a lower cost. The whole system can therefore play in a counterproductive way, each actor minimizing the intrinsic effort provided. As the number of labels grows, the information asymmetry grows and end investors may therefore turn away from labeled products. Only regulator can counter this trend.; Une dizaine de labels verts et durables ont vu le jour sur les marchés financiers des États membres de l'Union européenne depuis la création d'un premier label en 1997 en France, attribués à près de 1360 produits financiers, démontrant un succès quantitatif, notamment en France. Cet article analyse l'évolution de ces labels verts et durables en Europe au cours des dernières décennies, leur dynamique de construction, et s'interroge sur les réels bénéfices d'une prolifération de labels dans ce secteur. La multiplicité des facteurs contribuant au développement des labels atteint-elle le but recherché ou encombre-t-elle le marché de signaux forts mais incertains? Alors que l'épargne des ménages est au plus haut et qu'il existe une demande de financement de la transition écologique, la multiplication des labels ne complique-t-elle pas la lisibilité du marché? Nous montrons que, au lieu de simplifier le choix des agents, la mutliplication des labels tend à accroître le bruit fourni par chacun des signaux de qualité et détériorer la confiance. Les agents économiques ont moins intérêt à bénéficier d’un label générique mais recherchent à moindre coût une labelisation moins exigeante. L’ensemble du système peut donc jouer de façon contreproductive, chaque acteur minimisant l’effort intrinsèque fourni. L’asymmétrie d’information s’accroît à mesure que le nombre de labels grandit et les investisseurs finaux risquent donc de se détourner in fine des produits labelisés. Seul le regulateur peut contrer cet effet.

We investigate how Activist Short Sellers (AShSs) expose publicly listed firms in an increasingly popular form of “research reports” openly denouncing alleged frauds, flawed business models, accounting irregularities, and wrongdoings. We focus on six AShSs that issued research reports that often led to a strong negative market reaction. Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive dataset of 383 research reports targeting 171 unique firms, and three first-hand interviews with AShSs. Drawing on Aristotle’s rhetoric, we first examine how AShSs use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by AShSs for stylized narratives related to credibility-based (ethos), emotions-based (pathos), and logic-based (logos) rhetorical strategies. To assess the impact of these strategies, we examine the extent to which the AShSs’ rhetorical strategies resonate in 3,665 press articles. As expected, the press often refers to logos-based arguments. Interestingly, the press also brings up frequently pathos-based and ethos-based statements. Considering the importance of the press in shaping investors’ opinions, our study points to AShSs’ narratives playing a major role in policing financial markets. Theoretically, we show that AShSs, as dissenting market participants, produce narratives that go beyond the language of formal rationality – as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.

This paper explores the effects of online customer ratings on debt capacity. Using a large sample of Parisian restaurants, we find a positive and economically significant relation between customer ratings and bank debt. We use the locally exogenous variation in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Customer ratings affect financial policy through a reduction in cash flow risk and higher resilience to demand shocks. Restaurants with good ratings use their extra debt capacity to invest in tangible assets. Finally, favorable online ratings relax credit constraints mostly for moderately constrained restaurants.

Stunning animals before slaughter and avoiding unnecessary suffering is mandatory throughout the EU. Although the EU Animal Slaughter Regulation allows for a ‘religious exception’ departing from such a practice, it also expressly enables Member States to adopt “national rules aimed at ensuring more extensive protection of animals at the time of killing”. That’s how Denmark, Sweden and Slovenia were able to, ban slaughter without stunning tout court. The Flemish region falls short of banning un-stunned slaughter, by prescribing instead reversible stunning. This method, by rendering the animal unconscious only for the time it takes to cut its throat, seems to respect the religious requirement of it remaining alive so the blood is pumped out by its still beating heart. According to well-established scientific evidence, this method is not only less traumatizing for the animal, and makes its handling easier for the butcher, but it is also accepted by a growing number of representatives of these religious communities. However, reversible stunning - as prescribed by the Flemish region - now faces a major legal challenge across Europe, having been challenged before the Belgian Constitutional Court, which has in turn referred the matter to the Court of Justice of the EU. This amicus curiae brief argues that a legislation – like the Flemish decree in question – prescribing an alternative stunning procedure for the slaughter carried out in the context of a religious rite is permissible under Union law, not least having regard to the guarantees of religious liberty and freedom contained in the Charter. It presents reversible stunning as a method that successfully balances the apparently competing values of religious freedom expressed in ritual slaughtering on the one hand and the concern for animal welfare on the other under current EU law.

Consumers often arrive at the point of purchase with a particular product to purchase in mind and must search for this target product in the product display. Drawing on visual crowding theory, we suggest that an individual’s ability to find a target product in a display varies according to the embeddedness of the target, which depends on the locations of the target and non-target products in the display. We refer to the visual impact of non-target products on target products that results in an inability to differentiate and recognize the target product as “target visual crowdedness (TVC).” Across five experimental studies, we manipulate TVC and show that as TVC increases the duration of the visual search increases. Eye-tracking data provide evidence of how TVC affects attention and information processing in target product search tasks. We develop a visual crowdedness metric that quantifies TVC and can be used by researchers and practitioners to estimate the visual search effort needed to find a product in a display.

We propose a new methodology to implement unconditionally optimal dynamic mean-variance portfolios. We model portfolio allocations using an auto-regressive process in which the shock to the portfolio allocation is the gradient of the investor's realized certainty equivalent with respect to the allocation. Our methodology can accommodate transaction costs, short-selling and leverage constraints, and a large number of assets. In out-of-sample tests using equity portfolios, long-short factors, government bonds, and commodities, we find that its risk-adjusted performance, net of transaction costs, is on average more than double that of other benchmark allocations.

This paper argues that central bankers should raise inflation to signal their credibility to forward guidance policies. As inflation can be stabilized in normal times either because of central banker's credibility (e.g. because of reputation concerns) or because of his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation before a liquidity trap, jeopardizing the efficiency of forward guidance policy. We derive optimal policy in a new-Keynesian model subject to liquidity traps where agents are uncertain about the central banker's type and we show that the credible central banker can signal his type by raising inflation before a trap. We show that this signaling motive can justify level of inflation well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.

Consistent with salience theories of choice, we find that managers overreact to salient risks. We study how managers respond to the occurrence of a hurricane event when their firms are located in the neighborhood of the disaster area. We find that the sudden shock to the perceived liquidity risk leads managers to increase the amount of corporate cash holdings, even though the real liquidity risk remains unchanged. Such an increase in cash holdings is only temporary. Over time, the perceived risk decreases, and the bias disappears. This bias is costly for shareholders because it leads to higher retained earnings and negatively impacts firm value by reducing the value of cash. We examine alternative explanations for our findings. In particular, we find only weak evidence that the possibility of risk learning or regional spillover effects may influence our results.

The Intergovernmental Panel on Climate Change has developed a novel framework for assessing and communicating uncertainty in the findings published in its periodic assessment reports. But how should these uncertainty assessments inform decisions? We take a formal decision-making perspective to investigate how scientific input formulated in the IPCC’s novel framework might inform decisions in a principled way through a normative decision model.

This paper investigates the determinants of value and growth investing in a large administrative panel of Swedish residents over the 1999-2007 period. We document strong relationships between a household's portfolio tilt and the household's financial and demographic characteristics. Value investors have higher financial and real estate wealth, lower leverage, lower income risk, lower human capital, and are more likely to be female than the average growth investor. Households actively migrate to value stocks over the life-cycle and, at higher frequencies, dynamically offset the passive variations in the value tilt induced by market movements. We verify that these results are not driven by cohort effects, financial sophistication, biases toward popular or professionally close stocks, or unobserved heterogeneity in preferences. We relate these household-level results to some of the leading explanations of the value premium.

Scotland is the first jurisdiction in the world to introduce a minimum price per unit of alcohol to reduce consumption. The relevant industry did not hesitate to challenge this new alcohol control policy before courts. The ensuing judgment contains a wealth of insights stemming from regulatory autonomy to proportionality review. What is the role of a national court in the review of national measures restricting free movement? In particular, how should it review the proportionality of those measures when adopted on public health grounds, and on the basis of what evidence? What is the burden of proof that the relevant Member State must discharge? Those are essentially the questions referred by a Scottish court to the Court of Justice when called upon to determine the compatibility with EU law of Minimum Unit Prices for alcohol introduced by the Scottish Government. Although rather recurrent in the Court’s free movement case law, the question of the standard of review, and corresponding burden of proof epitomises the struggle currently faced by national courts in striking the right balance between the proper functioning of the market and due recognition and protection of national regulatory autonomy. As such, this preliminary reference offered an opportunity to address “the information gap on what the Court of Justice expects defendant States to establish” in order to justify their measures under the proportionality stages of free movement analysis. But there is more. This case also raises deeper epistemic and methodological questions faced by any court of law when asked to review the proportionality, and in particular the necessity, of an individual policy intervention that belongs to a wider ‘political strategy’. Indeed, those strategies – as exemplified in the present case by the Scottish policy designed to combat the devastating effects of alcohol – generally entail the enactment of a full ‘regulatory mix’ of policy interventions. In those circumstances, how can we pinpoint the effect of a given policy option when it is part of a set of measures? How can we distinguish the effect, in terms of health gains deriving from a drop in alcohol consumption, to be ascribed to the introduction of MUP when such a measure coexists with other measures (more than 40 in Scotland) that have been introduced? And what when the contested measure has never been tested before? While this judgment confirms the gradual empirical turn made by the Court in its own review of the proportionality of national restrictive measures, it also provides some pragmatic guidance on how national courts may realistically engage in that review. Given the growing number of Member States ready to experiment with new policies aimed at tackling inter alia lifestyle risk factors, such as tobacco use, harmful consumption of alcohol and unhealthy diets, this appears as welcome development. Ultimately, the ensuing number of national restrictive measures of trade enacted on public health grounds, such as the UK standardised packaging for cigarettes, its sugar tax or the Hungarian ‘fat tax’, is set to put to test the Court’s approach towards both the qualification of those measures as restrictions and their justification under EU law.

This paper contains the on on-line appendix to the paper with the same title forthcoming in ILRR.; Is the Bayh-Dole intellectual property regime associated with more and better academic entrepreneurship than the Professor Privilege regime? The authors examine data on US PhDs in the natural sciences, engineering, and medical fields who became entrepreneurs in 1993–2006 and compare this to similar data from Sweden. They find that, in both countries, those with an academic background have lower rates of entry into entrepreneurship than do those with a non-academic background. The relative rate of academics starting entrepreneurial firms is slightly lower in the United States than in Sweden. Moreover, the mean economic gains from becoming an entrepreneur are negative, both for PhDs originating in academia and non-academic settings in both countries. Analysis indicates that selection into entrepreneurship occurs from the lower part of the ability distribution among academics. The results suggest that policies aimed at supporting entrepreneurial decisions by younger, tenure-track academics may be more effective than general incentives at increasing academic entrepreneurship in general.

Problem Definition: Project managers are responsible for setting and then revising projects' goals. As uncertainty related to project performance is resolved, a project manager is tasked with comparing ongoing costs, and potentially achieved scope, to a baseline plan. We question whether project managers can rationally anticipate and track this revision process. Academic/Practical Relevance: In practice, projects often fail to meet their goals and are subject to changes in scope, cost, and scheduled time. We consider the implications of behavioral tendencies and the revision strategy on decisions made and on overall project performance. Methodology: Our stylized model compares a rational project manager to a behavioral one. Specifically, we offer a framework for modeling mental accounting—which includes loss aversion and reference point updating—and narrow framing. We use the model to explore how project-level decisions are made. Results: We show that mental accounting results in insufficient adjustments of project scope and cost during revisions, and prevents abandoning projects even when doing so is optimal. Ultimately, mental accounting and narrow framing decrease projects' actual profits. Managerial Implications: We offer practical prescriptions for mitigating harmful effects of loss aversion, reference-point updating, and narrow framing. Beyond training, hiring less loss averse project managers, and practicing scenario planning, we show that reviewing a project using a cost milestone instead of a scope milestone helps maintain the reference cost equal to the budgeted cost, thereby inducing overall better decisions.

Problem definition: Contrary to classic applications of matching theory, in most contemporary on-demand service platforms, matches can not be enforced because workers are flexible – they choose their tasks. Such flexibility makes it difficult to manage workers while keeping customers satisfied. We build a framework to compare platform matching policies with less flexible and more flexible workers, and empirically quantify by how much worker flexibility hurts customer satisfaction and customer equity. Academic/Practical relevance: In academic literature, there is no established framework that allows for the comparison of matching policies in on-demand platforms. Further, the link between worker flexibility and customer satisfaction is understudied. Methodology: We propose a tripartite framework for empirical evaluation and comparison of the operational policies with different degrees of worker flexibility. Step 1: Predictive modeling of customer satisfaction based on estimation of individual unobservable characteristics: customer difficulty and worker ability (item-response theory model). Step 2: Evaluation of the effect of matching policy (under a given level of flexibility) on customer satisfaction (bipartite matching). Step 3: Quantification of the associated monetary impact (customer lifetime value model). Results: We apply our framework to the dataset of one of the world's largest on-demand platforms for residential cleanings. We find that customer difficulty and cleaner ability are good predictors of customer satisfaction. Granting full flexibility to workers reduces customer satisfaction by 3% and customer lifetime revenue by 0.2%. We propose a family of matching policies that provide sufficient flexibility to workers, while alleviating 75% of the detrimental effect of worker flexibility on customer satisfaction. Managerial implications: Our results suggest that, in platforms with flexible workforce, the presence of worker and customer heterogeneity reduces customer satisfaction through matching inefficiency. Our empirical framework helps practitioners to decide on the right level of worker flexibility and the means for achieving it.

We examine the impact of a new mobile-based, dockless bike-sharing service on public transportation. In contrast to traditional rental bikes that are parked at fixed stations, the dockless bikes can be picked up and returned at literally anywhere. This dockless feature of the shared bikes likely provides a solution to the last mile problem, potentially making it a complement to public transportation. Assembling a unique panel data of shared-bike rides and subway traffic, we estimate the relationship between shared-bike ridership and public transportation. Our results show that increases in shared-bike rides lead to increases in subway traffic. This positive effect is stronger for peak hours during weekdays and non-peak hours during weekends. We argue this effect is most likely driven by shared bikes promoting public transportation use and substituting for private cars (substitution effect) and also stimulating new travel (stimulating effect). Overall, we find that dockless shared bikes, in contrast to most of the other sharing economy phenomenon, acts as a complement rather than a substitute for public transportation. In addition, increased use of dockless shared bikes has a positive societal impact, leading to less urban congestion and better environmental protection.

We consider a model of bottleneck congestion in discrete time with a penalty cost for being late. This model can be applied to several situations where agents need to use a capacitated facility in order to complete a task before a hard deadline. A possible example is a situation where commuters use a train service to go from home to office in the early morning. Trains run at regular intervals, take always the same time to cover their itinerary, and have a fixed capacity. Commuters must reach their office in time. This is a hard constraint whose violation involves a heavy penalty. Conditionally on meeting the deadline, commuters want to take the train as late as possible. With the intent of considering strategic choices of departure, we model this situation as a game and we show that it does not have pure Nash equilibria. Then we characterize the best and worst mixed Nash equilibria, and show that they are both inefficient with respect to the social optimum. We then show that there exists a correlated equilibrium that approximates the social optimum when the penalty for missing the deadline is sufficiently large.

We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, we exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.

With metrics and analytics spreading into every profession and discipline, evidence-based decision-making is on the rise. Legal practice is also concerned by this trend, as reflected in the growing use of quantitative data by law firms with respect to their corporate clients. Based on the examination of the potential uses of legal indicators in an evidence-based approach to transnational law practice, this article argues that indicators can provide lawyers operating in a transnational context with a relevant source of evidence to move towards a quantitatively informed practice of law. While most academic literature on legal indicators focuses on their governance effects, writings on evidence-based law have not yet investigated the contribution that indicators can make to law practice. This article aims to bridge this gap. It provides a methodological assessment of eight major business law indicators and illustrates four potential applications: (1) ranking and benchmarking, (2) screening, (3) measuring legal risk, and (4) supporting litigation. The article concludes that transnational lawyers should employ transnational legal indicators on a daily basis as an opportunity to reengineer legal practice along the lines of the management culture in which transnational firms now live in.

International audience; This paper proposes an indirect inference (Gourieroux, Monfort and Renault, 1993; Smith, 1993) estimation method for a large class of dynamic equilibrium models. Our approach is based on the observation that the econometric structure of these systems naturally generates auxiliary equilibria that can serve as building blocks for estimation. We use this insight to develop an accurate estimator for the long-run risk model of Bansal and Yaron (2004). We demonstrate the accuracy of our method by Monte Carlo simulation and estimate the long-run risk model on U.S. data. We also illustrate the good performance of the methodology on an asset pricing model with investor learning.

In this paper, we develop a theoretical model and offer a first empirical test of how competitive dethronement affects managerial risk taking. Drawing on the mechanism of endowment effect and reference-dependent utility theory, we predict that former market leaders take more risks compared to, otherwise identical, competitors. We empirically test this prediction using two contexts allowing us to use different methods to operationalize risk. The first setting draws on field data from a two-month banking sales contest. The second, quasi-laboratory, data comes from an educational game. Consistent with model’s prediction, we find that dethronement is associated with increased risk taking but that the endowment effect leading to such response decays over time. In contrast, a mere decline in performance ranking does not have the same effect.

While single-brand reward programs encourage customers to remain loyal to that one brand, coalition programs encourage customers to be “promiscuous” by offering points redeemable across partner stores. Despite the benefits of this “open relationship” with customers, store managers face uncertainty as to how rewards offered by partners influence transactions at their own stores. We use a model of multi-store purchase incidence to show how the value of points shared among partner stores can explain patterns in customer-level purchases across them. The model is used to empirically test hypotheses on how reward spillovers among partners are driven by: (1) differences in policies on reward redemption, (2) the overlap in product categories between stores, and (3) geographic distance between stores within a city. In addition, we leverage variation generated by a natural experiment, i.e., a devaluation of the program's points, to demonstrate how the value of points influences the positioning of partner stores within the coalition and the purchasing patterns across them. We conclude by delineating some managerial implications for the design of a coalition's reward policies, including a simulation showing that customer-centric targeted rewards can be an effective strategy to compensate for the devaluation.

This study assesses the legal feasibility of a EU instrument that would impose mandatory human rights due diligence (“HRDD”) requirements on companies in the garment and textile sector. The proposal serves as an example of a sector-specific approach to HRDD requirements, and could be modified to develop similar proposals in other sectors. The study also illustrates the differences between a sector-specific and a cross-sectoral approach by highlighting the implications of each in the following areas: legal bases, personal scope, and requirements and enforcement.

We exploit detailed transaction and position data for a sample of long-short equity hedge funds to document new facts about the trading activity of sophisticated investors. We find that the initiation of both long and short positions is associated with significant abnormal returns, suggesting that the hedge funds in our sample possess investment skill. In contrast, the closing of long and short positions is followed by return continuation, implying that hedge funds close their positions too early and “leave money on the table.” As we demonstrate with a simple model, this behaviour can be explained by hedge funds being (risk) capital constrained and facing position monitoring costs. Consistent with our model, we document that the return continuation following closing orders is more pronounced when these constraints become more binding (e.g., after negative fund returns or increases in volatility).

Nudge is a concept of policy intervention that originates in Thaler and Sunstein's (2008) popular eponymous book. Following their own hints, we distinguish three properties of nudge interventions: they redirect individual choices by only slightly altering choice conditions (here nudge 1), they use rationality failures instrumentally (here nudge 2), and they alleviate the unfavourable effects of these failures (here nudge 3). We explore each property in semantic detail and show that no entailment relation holds between them. This calls into question the theoretical unity of nudge, as intended by Thaler and Sunstein and most followers. We eventually recommend pursuing each property separately, both in policy research and at the foundational level. We particularly emphasize the need of reconsidering the respective roles of decision theory and behavioural economics to delineate nudge 2 correctly. The paper differs from most of the literature in focusing on the definitional rather than the normative problems of nudge.

We develop a model in which collateral serves to protect creditors from the claims of competing creditors. We find that borrowers rely most on collateral when cash flow pledgeability is high, because this is when it is easy to take on new debt, diluting existing creditors. Creditors thus require collateral for protection against being diluted. This causes a collateral rat race that results in all borrowing being collateralized. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment, i.e. there is a collateral overhang. Our results suggest that the absolute priority rule, by which secured creditors are senior to unsecured creditors, may have an adverse effect — it may trigger the collateral rat race.

We study intergenerational risk sharing taking place in one of the most common retail investment products in Europe---life insurance savings contracts---focusing on the 1.4 trillion euro French market. Using regulatory and survey data, we show that contract returns are an order of magnitude less volatile than the returns of assets backing the contracts. Contract return smoothing is achieved using reserves that absorb fluctuations in asset returns and that generate intertemporal transfers across generations of investors. We estimate the average annual amount of intergenerational transfer at 1.4% of contract value, i.e., 17 billion euros per year or 0.8% of GDP. While theory asserts that intergenerational risk sharing cannot take place in competitive markets because it relies on non-exploited return predictability, we show that: (a)~contracts returns are indeed predictable; (b)~investor flows barely react to predictable returns; (c)~observed fees offset the estimated gain from exploiting contract return predictability.

The correlation across US states in house price growth increased dramatically between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one third of the rise in house price correlation over the period.

Managerial devices are rapidly developing as a means for driving the legal behaviour of organisations, including those of states and corporations. This article explores the managerial rationality underpinning global legal indicators, and the constraints they convey on legal behaviour. In particular, it argues that indicators are better understood as part of a system of management control and distributed governance, which is steadily eroding state-centred forms of authority, including state law. In this context, legitimacy and reactivity are contingent to their cycle of production and implementation, which is fourfold: data-collecting, benchmarking, auditing and allocating incentives. Each process is meant to generate respectively subjectification, self-knowledge by comparison, accountability and stimulus for action. Indicators with higher degrees of legitimacy become entrenched in institutional practices and legal decision-making processes. The article concludes that regulatory spaces where indicators unfold need critical and political scrutiny to expose their pernicious effects, undesirable uses, and inevitable misuses.

Do equity crowdfunding investors herd? We build a model where informed and uninformed investors arrive sequentially and choose whether and how much to invest. We test the model using data of investments on a leading European equity crowdfunding platform. We show theoretically and find empirically that the size and likelihood of a pledge is affected positively by the size of the most recent pledges, and negatively by the time elapsed since the most recent pledge. The empirical analysis is inconsistent with naive herding, independent investments, or exogenously correlated investments.

We investigate the mechanisms that shape social comparison in organizations and generate social comparison costs. In particular, we focus on heterogeneity in the strength and type of incentives and argue that, from an efficient design perspective, such variance in rewards is a double-edged sword. While the sorting and incentive effects that result may increase productivity, the social comparison processes that arise may dampen it. We posit that the mechanisms underlying these behavioral costs are shaped not only by the magnitude of reward variance, but by the formal and informal design elements shaping the distance of advantaged peers. In other words, the more proximate socially, structurally or geographically are those to whom one socially compares, the larger the behavioral response. Empirically, we use an unanticipated event during which outlets of a bank, previously operating under essentially homogenous incentives, were assigned to tournament groups with differing ex ante probabilities of winning a prize — an event that increases variance in awards and hence generates an impetus for social comparison. We find that units with more socially, geographically, and structurally proximate peers assigned to ‘advantaged’ tournament groups decreased their productivity. We discuss implications of these results for organizational design and boundaries.

We examine the relation between the presence of U.S. government as a major customer and a supplier firm’s loan contract terms, using major corporate customers as a benchmark. We find that firms with major government customers are associated with fewer covenants and a lower likelihood of having performance pricing provisions in their loan contracts. In contrast, we do not find such associations for firms with major corporate customers. Further, we find no evidence that the existence of major government customers is related to the supplier firm’s loan spread, security, or maturity. We conjecture that lenders benefit from the stricter monitoring of the government as a major customer and thus use fewer covenants and performance pricing provisions when lending to firms with major government customers than when lending to those with major corporate customers. We provide evidence consistent with this conjecture.

This paper examines the evolution of drug use in Colombia over the past years. Our analysis, based on surveys from the Dirección Nacional de Estupefacientes, shows that drug consumption grew substantially between 1996 and 2013. The growth occurred for both genders, all ages, socioeconomic strata and types of occupation. The results also suggest that men of high socioeconomic strata who regularly consume alcohol and cigarettes and who are between 18 and 24 years of age are more likely to use drugs. Finally, the paper presents some indirect evidence that contradicts the alleged effects of the judgment of the Constitutional Court (Sentencia C-221 of May 1994) that decriminalized the personal dose on the consumption of drugs in Colombia.

We study organizational search in the presence of intuitive biases. Drawing from work on the psychology of human decision making, we construe biases as unjustified preferences that arise due to automatic, spontaneous thinking. This property of decision making gives rise to a mechanism we label generative recurrence. Present this mechanism, unjustified preferences produce two opposing effects on organizational adaptation: they curb excessive experimentation but at the expense of knowledge accumulation. In the context of organizational search, these regularities allow behavioral treatments to strategically leverage the value of biases. Specifically, our results suggest that re-biasing (adopting the opposite bias) often dominates both de-biasing (eliminating the bias) as well as consistently unbiased search. Our paper provides evidence that managing rather than eliminating biases can be an effective instrument of behavioral strategy.

Debt is a significant source of funding of political campaigns, with almost half of all campaigns relying on some form of debt. We analyze the incentives created by this type of debt financing. We show that indebted politicians raise more funds in subsequent elections, especially from special interest groups. Consistent with votes-for-money arrangements, indebted politicians vote for the benefit of those interest groups that help funding their reelection campaigns. The findings support the hypothesis that debt creates distortions, as it forces indebted politicians to take policy positions that are not aligned with the local constituents’ interests.

We develop and apply a new set of empirical tools consistent with the tenets of value-based business strategies, leveraging the principle that “no good deal comes undone” and the methods of revealed preferences, to empirically estimate drivers of value creation. We demonstrate how to use these tools in an analysis of value creation in buyer–supplier relationships in the UK corporate legal market. We show that our approach can uncover evidence of subtle mechanisms that traditional methods cannot easily distinguish from each other. Furthermore, we show how the estimates can be used as parameters of biform games for out-of-sample analyses of strategic decisions. With readily available data on relationships between firms, this approach can be applied to many other contexts of interest to strategy researchers.Managers need to understand the drivers of value creation for customers in order to make competitive positioning decisions and understand when they can capture value under competition. However, estimates of the relative importance of each driver are typically difficult to obtain. In this paper, we help remedy this problem by demonstrating a novel method that obtains estimates of the contribution of various drivers of value creation from commonly available data of buyer–supplier relationships. These estimates can then be used to inform the strategy-making process. Word count: 84 words.

This on-line appendix contains more details on the sampling process, more details on the sample, a comparison to a matched sample of Canadians, more technical details on various measures and procedures, and further robustness analysis.

The observed smoothing of earnings (i.e. negative contemporaneous correlation between accruals and cash flows) is the joint product of the role of accruals in smoothing out transitory fluctuations in operating cash flows (noise reduction role) and the role of accruals in providing timely gain and loss recognition (contracting role). These two roles of accruals have opposite effects on earnings smoothing properties. We demonstrate that failing to control for changes in timely gain and loss recognition as firms shift to IFRS can lead to erroneous inferences regarding the effects of IFRS adoption on earnings smoothing, and consequently on researcher’ conclusions about how IFRS adoption has affected accounting quality. Our results are consistent with IFRS adoption resulting in a change in the contracting role rather than the noise reduction role of accruals. A decrease in timely loss recognition, an increase in timely gain recognition, and a net decrease in asymmetric timely loss recognition are what drives the change in observed smoothing of earnings.

We propose a theory of one of the most economically significant stock market anomalies, i.e. the "profitability" anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

We debate the motivation for and effectiveness of public policies to encourage individuals to become entrepreneurs. Reviewing established evidence we find that most western world policies do not greatly reduce or solve any market failures but instead waste taxpayers’ money, encourage those already intent on becoming entrepreneurs, and mostly generate one-employee businesses with low growth intentions and a lack of interest in innovating. Most policy initiatives that would have the effect of promoting valuable entrepreneurship would not be recognizable as such, because they would primarily address other market failures: a central-payer healthcare would remove health-care related distortions affecting employment choices; greater STEM education would produce more engineers of which some start valuable new firms; and labor market reform to encourage hiring immigrants in jobs they have been educated for would reduce inefficient allocation of talent to entrepreneurship.

We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks' domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio--known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

We use two sequential randomized controlled trials (RCTs) to study the impact of the first two editions of a 12-day intensive training program that cost about 12,000 euros (approx. $14,878) per participant to encourage youth to become leaders in social entrepreneurship. The first edition of the program showed no robust treatment effects. The program was adjusted to reduce leadership training and increase “hard skills” entrepreneurship training. The second edition of the program had treatment effects on entrepreneurial activities and the creation of a new venture during the program, as well as subsequent start-up activity. In both RCTs, participants who had made more entrepreneurial progress before the start of the program made more progress afterward, irre-spective of treatment. Those with the highest pretreatment expectations made the least progress, irrespective of treatment. Training people to learn entrepreneurship seems to be difficult and costly, but repeated field experiments will increase our knowledge of the impact of entrepreneurship training.

A long tradition in social science research emphasizes the potential for knowledge to flow among firms colocated in dense areas. Scholars have suggested numerous modes for these flows, including the voluntary transfer of private knowledge from one firm to another. Why would the holder of valuable private knowledge willingly transfer it to a potential and closely proximate competitor? In this paper, we argue that geographic concentration has an effect on the expected compliance with norms governing the use of transferred knowledge. The increased expected compliance favors trust and initiates a process of reciprocal exchange. To test our theory, we use a scenario-based field experiment in gourmet cuisine, an industry in which property rights do not effectively protect knowledge and geographic concentration is common. Our results confirm our conjecture by showing that the expectation that a potential colocated firm will abide by norms mediates the relationship between geographic concentration and the willingness to transfer private knowledge.

Research summary: Limited attention has been paid to the crucial role of individuals' motivation and social interactions in capability development. Building on literature in social psychology and behavioral economics that links heterogeneity in individual social motives to social interactions, we explain how the variation, selection, and retention processes underlying a group's deliberate capability development are affected by the composition of the group in terms of individuals' social motives in interplay with the organizational-level motivational levers designed by managers. Our multilevel theoretical model suggests that individual-level heterogeneity leads to the development of capabilities along different paths. For practice, this implies that, according to the composition of the group in terms of social motives, capabilities are more or less technically and evolutionary adequate and a source of business process performance. Managerial summary:We propose that when a group of employees engages in developing one of the firm's capabilities, capability development will follow a different path according to what motivates most of the employees composing the group. We identify and discuss three paths. Two of these paths (convergence and congruence) can help improve business process performance in a stable environment, the third one (open-ended) in a dynamic environment. Our work invites managers to not only think in terms of more or less capability development, but also in terms of capability development path(s): the path(s) in which groups in the firm are currently engaged and the one(s) that are desirable given the firm's objectives and the nature of the environment(s) the firm faces in deploying its business processes.

We investigate the conflict between the ex ante and ex post criteria of social welfare in a new framework of individual and social decisions, which distinguishes between two sources of uncertainty, here interpreted as being objective and subjective, respectively. This framework makes it possible to endow the individuals and society not only with ex ante and ex post preferences, as is usually done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the Pareto principle. After characterizing the two social welfare criteria, we present two compromises between them, one based on the ex ante criterion and absorbing as much as possible of the ex post criterion (Theorem 1), the other based on the ex post criterion and absorbing as much as possible of the ex ante criterion (Theorem 2). Both solutions translate the assumed Pareto conditions into weighted additive utility representations, as in Harsanyi’s Aggregation Theorem, and both attribute to the individuals common probability values on the objective source of uncertainty, and different probability values on the subjective source. We discuss these solutions in terms of the by now classic spurious unanimity argument and a novel informational argument labeled complementary ignorance. The paper complies with the standard economic methodology of basing probability and utility representations on preference axioms.