Supply Diagnostic Incentives under Endogenous Information Asymmetry

Authors: Mohammad E. Nikoofal, Mehmet Gumus

Publication: Production and Operations Management, Forthcoming


This paper develops a dyadic supply chain model with one buyer who contracts the manufacturing of a new product to a supplier. Due to the lack of experience in manufacturing, the extent of supply risk is unknown to both the buyer and supplier before the time of contract. However, after the contract is accepted, the supplier may invest in a diagnostic test to acquire information about his true reliability, and use this information when deciding on a process improvement effort. Using this setting, we identify both operational and strategic benefits and costs of diagnostic test. Operationally, it helps the supplier to take the first-best level of improvement effort, which would increase efficiency of the total supply chain. Strategically, it enables the buyer to reduce the agency costs associated with implementing process improvement on the supplier. Besides these benefits, diagnostic test increases the degree of information asymmetry along the supply chain. This in turn provides the supplier with proprietary information, whose rent would be demanded from the buyer in equilibrium. Benefit-cost analysis reveals two key factors in determining the value of diagnostic test: (i) degree of endogenous information asymmetry between supply chain firms, and (ii) the relative cost of diagnostic test with respect to process improvement cost. Our results indicate that when both are high, the mere presence of diagnostic test can result in less reliable supply chain. This implies that when incentives are not properly aligned, information asymmetry amplified due to diagnostic test neutralizes all its benefits.

Published: 23 Jul 2018

A Model of Two-Sided Costly Communication for Building New Product Category Demand

Authors: Michelle Y. Lu , Jiwoong Shin

Publication: Marketing Science, Vol. 37, No. 3, May-June 2018


When a firm introduces a radical innovation, consumers are unaware of the product’s uses and benefits. Moreover, consumers are unsure of whether they even need the product. In this situation, we consider the role of marketing communication as generating consumers’ need recognition and thus market demand for a novel product. In particular, we model marketing communication as a two-sided process that involves both firms’ and consumers’ costly efforts to transmit and assimilate a novel product concept. When the marketing communication takes on a two-sided process, we study a firm’s different information disclosure strategies for its radical innovation. We find that sharing innovation, instead of extracting a higher rent by keeping the idea secret, can be optimal. A firm may benefit from the presence of a competitor and its communication effort. The innovator can share its innovation so that competitors can also benefit, which encourages rivals to enter the market. The presence of such competition guarantees a higher surplus for consumers, which can induce greater consumer effort in a two-sided communication process. Moreover, the increased consumer effort, in turn, prompts complementarity in the communication process and lessens the potential free-riding effect in communication between firms. Additionally, it encourages the rival firm to exert more effort, especially when the role of consumers becomes more important. Sharing innovation with a rival serves as a mechanism to induce more efforts in a two-sided communication process.

Published: 23 Jul 2018

Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis

Authors: Eduard Calvo, Ruomeng Cui and Juan Camilo Serpa

Publication: Management Science, Volume 65, Issue 12, December 2019, Pages 5651-5675.


In the U.S., four in ten public infrastructure projects report delays or cost overruns. To tackle this problem, regulators often scrutinize the project contractor’s operations. We investigate the causal effect of government oversight on project efficiency by gleaning 262,857 projects that span seventy-one U.S. federal agencies and 54,739 contractors. Our identification strategy exploits a regulatory bylaw: if a project’s anticipated budget exceeds a threshold value, the contractor’s operations are subject to surveillance from independent procurement officers; otherwise, these operational checks are waived. Using a regression discontinuity design, we find that oversight is obstructive to the project’s operations, especially when the contractor (i) has no prior experience in public projects, (ii) is paid with a fixed-price contract that includes performance-based incentives, and (iii) performs a labor-intensive task. In contrast, oversight is least obstructive — or beneficial — when the contractor (i) is experienced, (ii) is paid with a time-and-materials contract, and (iii) performs a machine-intensive task.

Published: 10 Jul 2018

Supply Chain Proximity and Product Quality

Authors: Robert Bray, Juan Camilo Serpa and Ahmet Colak

Publication: Management Science, Volume 65, Issue 9, September 2019, Pages 4079-4099.


We explore the effect of supply chain proximity on product quality by merging four independent data sources from the automotive industry, collecting: (i) auto component defect rates, (ii) upstream component factory locations, (iii) downstream assembly plant locations, and (iv) product-level links connecting the upstream and downstream factories. Combining these four datasets allows us to trace the flow of 27,807 products through 529 supplier factories and 275 assembly plants. We estimate that increasing the distance between an upstream component factory and a downstream plant by an order of magnitude increases the component’s expected defect rate by 3.9%. We also find that shorter inter-factory spans are associated with more rapid product quality improvements, and that supply chain distance is more detrimental to quality when automakers: (i) produce early generation models or (ii) high-end products, (iii) when they buy components with more complex configurations, or (iv) when they source from suppliers who invest relatively little in research and development

Published: 11 Jun 2018

Cutting the Cord: Mutual Respect, Organizational Autonomy, and Independence in Organizational Separation Processes

Authors: Rene Wiedner and Saku Mantere

Publication: Administrative Science Quarterly, Forthcoming


Based on a longitudinal, qualitative analysis of developments in the English National Health Service, we develop a process model of how organizations divest or spin off units with the aim of establishing two or more autonomous organizational entities while simultaneously managing their continued interdependencies. We find that effective organizational separation depends on generating two types of respect—appraisal and recognition respect—between the divesting and divested units. Appraisal respect involves showing appreciation for competence or the effort to achieve it, while recognition respect requires considering what someone cares about—such as values or concerns—and acknowledging that they matter. The process model we develop shows that open communication is crucial to the development of both. We also find that certain attempts to gain organizational independence and respect may unintentionally undermine the development of autonomy. Counterintuitively, we find that increasing or maintaining interorganizational links via communication may facilitate organizational separation, while attempts by units to distance themselves from one another may unintentionally inhibit it. By linking organizational separation, autonomy, independence, and respect, this paper develops theory on organizational separation processes and more generally enhances our understanding of organizational autonomy and its relations with mutual respect.

Published: 4 Jun 2018

Informed Options Trading Prior to Takeover Announcements: Insider Trading?

Authors: Patrick Augustin, Menachem Brenner, Marti G. Subrahmanyam

Publication: Management Science, May 21, 2019


We quantify the pervasiveness of informed trading activity in target companies' equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012. About 25% of all takeovers have positive abnormal volumes, which are greater for short-dated out-of-the-money calls, consistent with bullish directional trading before the announcement. Over half of this abnormal activity is unlikely due to speculation, news and rumors, trading by corporate insiders, leakage in the stock market, deal predictability, or beneficial ownership filings by activist investors. We also examine the characteristics of option trades litigated by the SEC for alleged illegal insider trading. While the characteristics of such trades closely resemble the patterns of abnormal option volume in the U.S. takeover sample, we find that the SEC litigates only about 8% of all deals in it.

Published: 24 May 2018

Inspiration from the 'Biggest Loser': Social Interactions in a Weight Loss Program

Authors: Kosuke Uetake, Nathan Yang 

Publication: Marketing Science, Forthcoming


We investigate the role of heterogeneous peer effects in encouraging healthy lifestyles. Our analysis revolves around one of the largest and most extensive databases about weight loss that track individual participants' meeting attendance and progress in a large national weight loss program. The main finding is that while weight loss among average performing peers has a negative effect on an individual's weight loss, the corresponding effect for the top performer among peers is positive. Furthermore, we demonstrate that our results are robust to potential issues related to selection into meetings, endogenous peer outcomes, individual unobserved heterogeneity, lagged dependent variables, and contextual effects. Ultimately, these results provide guidance about how the weight loss program should identify role models.

Published: 4 May 2018

A Large-Scale Approach for Evaluating Asset Pricing Models

Author: Laurent Barras

Publication: Journal of Financial Economics, Forthcoming


Recent studies show that the standard test portfolios do not contain sufficient information to discriminate between asset pricing models. To address this issue, we develop a large-scale approach that expands the cross-section to several thousand portfolios. Our novel approach is simple, widely applicable, and allows for formal evaluation/comparison tests. Its benefits are confirmed in empirical tests of CAPM- and characteristic-based models. While these models are all misspecified, we uncover striking performance differences between them. In particular, the human capital and conditional CAPMs largely outperform the CAPM which suggests that labor income and time-varying recession risks are primary concerns for investors.

Published: 1 May 2018

Ruslan Goyenko paper "Illiquidity Premia in Equity Option Markets" selected Editor's Choice in Review of Financial Studies

Professor Ruslan Goyenko's paper "Illiquidity Premia in Equity Option Markets" with Peter Christoffersen, Kris Jacobs and Mehdi Karoui was selected as Editor's Choice article in the March 2018 issue of Review of Financial Studies.

Published: 29 Mar 2018

Asset Pricing with Countercyclical Household Consumption Risk

Authors: George M. Constantinides and Anisha Ghosh

Publication: Journal of Finance, Vol. 72, No. 1, February 2017


We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical, while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross section of excess returns.

Read article: Journal of Finance

Published: 29 Mar 2018

What Is the Consumption-CAPM Missing? An Information-Theoretic Framework for the Analysis of Asset Pricing Models

Authors: Anisha Ghosh, Christian Julliard, Alex P. Taylor

Publication: The Review of Financial Studies, Volume 30, No. 2, February 2017


We consider asset pricing models in which the SDF can be factorized into an observable component and a potentially unobservable one. Using a relative entropy minimization approach, we nonparametrically estimate the SDF and its components. Empirically, we find the SDF has a business-cycle pattern and significant correlations with market crashes and the Fama-French factors. Moreover, we derive novel bounds for the SDF that are tighter and have higher information content than existing ones. We show that commonly used consumption-based SDFs correlate poorly with the estimated one, require high risk aversion to satisfy the bounds and understate market crash risk.

Read article: The Review of Financial Studies

Published: 29 Mar 2018

The Effects of Asymmetric Social Ties, Structural Embeddedness and Tie Strength on Online Content Contribution Behavior

Authors: Rishika Rishika and Jui Ramaprasad

Publication: Management Science, Forthcoming


For a social media community to thrive and grow, it is critical that users of the site interact with each other and contribute content to the site. We study the role of social ties in motivating user preference expression, a form of user content contribution, in an online social media community. We examine the role of three types of ties, reciprocated, follower and followee ties, and assess whether the structural and relational properties of a user’s social network moderate the social influence effect in user contribution. A unique disaggregate level panel dataset of users’ contributions and social tie formation activities from an online music platform is employed to study the impact of social ties. To address identification issues, we adopt a quasi-experimental approach based on dynamic propensity score matching. The results provide strong evidence of the influence of online network ties in online contribution behavior. We find that the influence of reciprocated ties is the greatest, followed by influence from followee ties and then follower ties. Additional analysis reveals that reciprocated and followee ties have even greater influence when they contribute new information for a focal user. Structural embeddedness and tie strength among network ties are found to amplify the effect of social contagion in online contribution. We conduct several sensitivity and robustness checks that lend credible support to our findings. The results add to the greater understanding of social influence in online contribution and provide valuable managerial insights into designs of online communities to enable greater user participation.

Published: 26 Mar 2018

Love Unshackled: Identifying the Effect of Mobile App Adoption in Online Dating

Authors: JaeHwuen Jung, Ravi Bapna, Jui Ramaprasad and Akhmed Umyarov

Publication: MIS Quarterly, Forthcoming


The proliferation of smartphones and other mobile devices has led to numerous companies investing significant resources in developing mobile applications, in every imaginable domain. As apps proliferate, understanding the impact of app adoption on key outcomes of interest and linking this understanding to the the underlying mechanisms that drive these results is imperative. In this paper, we explore the changes in user behavior induced by adoption of a mobile application, in terms of engagement and matching outcomes in the online dating context. We also identify three mechanisms that are somewhat unique to the mobile environment, but are hitherto unestablished in the literature, that drive this shift in behavior – ubiquity, impulsivity and disinhibition. Our main identification strategy uses propensity score matching combined with difference-in-differences, coupled with a rigorous falsification test to confirm the validity of our identification strategy. Our results demonstrate that mobile app adoption induces users to become more socially engaged as measured by key engagement metrics such as visiting significantly more profiles, sending significantly more messages, and importantly, achieving more matches. We also discover various mechanisms facilitating this increased engagement: ubiquity of mobile use – users login more, and login across wider range of hours in the day. We find that men act more impulsively, in that they are less likely to check the profile of a user who messaged them before replying to them. This effect is not visible for women who continue to be deliberate in their checking before replying even after adoption of the mobile app. Finally, we find that both men and women exhibit disinhibition, in that users initiate actions to a more diverse set of potential partners than they did before on dimensions of race, education and height.

Published: 26 Mar 2018

Designing Risk-Adjusted Therapy for Patients with Hypertension

Authors: Manaf Zargoush, Mehmet Gumus, Vedat Verter, Stella Daskalopoulou

Journal Name: Production and Operations Management, Forthcoming


Hypertension has not been well studied by operations researchers from a clinical decision support perspective. Moreover, little personalized (i.e. patient-centric) guidance is available regarding the number and combination of antihypertensive medications. To fill this gap, we develop a Markov Decision Process (MDP) to characterize the optimal sequence (and combination) of antihypertensive medications under the standard medication dose. Our model is patient-centric as it takes into account a set of relevant patient characteristics such as age, gender, blood pressure level, smoking habits, diabetes status, and cholesterol level. Based on a set of intuitive assumptions, we prove that our model yields a series of structured optimal policies. Having calibrated our model based on real data and medical literature, we analyze these optimal policies and discuss their insights to the real practice. We also compare the benefits, in terms of quality adjusted life expectancy, QALE, obtained from our results with those obtained from British Hypertension Society (BHS) guideline.

Published: 20 Mar 2018

Did Europe Move in the Right Direction on E-Waste Legislation?

Authors: Shumail Mazahir, Vedat Verter, Tamer Boyaci and Luk van Wassenhove

Publication: Production and Operations Management, Forthcoming


This paper presents an analytical framework of the product take back legislation in the context of product reuse. We characterize existing and proposed forms of E-waste legislation and compare their environmental and economic performance. Using stylized models, we analyze an OEM’s decision about new and remanufactured product quantity in response to the legislative mechanism. We focus on the 2012 waste electrical and electronic equipment directive in Europe, where the policy-makers intended to create additional incentives for the product reuse. Through a comparison to the original 2002 version of the directive, we find that these incentives translate into improved environmental outcomes only for a limited set of products. We also study a proposed policy that advocates a separate target for the product reuse. Our analysis reveals that from an environmental standpoint, the recast version is always dominated either by the original policy or by the one that advocates a separate target for the product reuse. We show that the benefits of a separate reuse target scheme can be fully replicated with the aid of fiscal levers. Our main message is that there cannot be a single best environmental policy that is suitable for all products. Therefore, the consideration of product attributes is essential in identification of the most appropriate policy tool. This can be done either by the implementation of different policies on each product category or by implementation of product based target levels.

Published: 19 Mar 2018


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