Publication records

When setting budgets, managers may place constraints on how resources can be used in an effort to mitigate opportunistic behavior by subordinates. These restrictions can affect the ability of the subordinate to succeed in the budgeted task, but may also have an unintended spillover effect on the ability to innovate. Using an experiment, we find that individuals working under higher budgetary constraints are more efficient in their use of budgeted resources, but are less successful in the budgeted tasks, than their counterparts working under lower budgetary constraints. Importantly, we find that imposing budgetary constraints also causes employees to subsequently generate fewer highly original and creative ideas in an unrelated activity. These findings suggest that budget structures can have unintended consequences on the innovative capabilities of organizations. This paper contributes to the expansive budgeting literature by showing budgetary control design has organizational performance implications beyond the specified budgeted activity.

 

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In this paper we study how the coexistence of access regulations for legacy (copper) and fiber networks shapes the incentives to invest in network infrastructure. To this end, we develop a theoretical model explaining investment incentives by incumbent telecom operators and heterogeneous entrants and test its main predictions using panel data from 27 EU member states over the last decade. Our theoretical model extends the existing literature by, among other things, allowing for heterogeneous entrants in internet access markets, as we consider both other telecom and cable TV operators as entrants. In the empirical part, we use a novel data set including information on physical fiber network investments, legacy network access regulation and recently imposed fiber access regulations. Our main finding is that more stringent access regulations for both the legacy and the fiber networks harm investments by incumbent telecom operators, but, in line with our theoretical model, do not affect cable TV operators.

 

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We study the optimal pricing problem of a monopolistic firm facing customers with limited attention and capability to process information about the value (quality) of a single offered product. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true quality and price, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem assuming that the firm can also use the price to signal the quality of the product to customers. To delineate the economic incentives of the firm, we first characterize the pricing and revenue implications of customer’s limited attention without signalling, and then use these results to explore Perfect Bayesian Equilbiria (PBE) of the strategic pricing signalling game. As an extension, we consider heterogeneous customers with different information costs as well as prior beliefs. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

 

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Firms commonly run field experiments to improve their freemium pricing schemes. However, they often lack a framework for analysis that goes beyond directly measurable outcomes and focuses on longer term profit. We aim to fill this gap by structuring existing knowledge on freemium pricing into a stylized framework. We apply the proposed framework in the analysis of a field experiment that contrasts three variations of a freemium pricing scheme and comprises about 300,000 users of a software application. Our findings indicate that a reduction of free product features increases conversion as well as viral activity, but reduces usage – which is in line with the framework’s predictions. Additional back-of-the-envelope profit estimations suggest that managers were overly optimistic about positive externalities from usage and viral activity in their choice of pricing scheme, leading them to give too much of their product away for free. Our framework and its exemplary application can be a remedy.

 

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Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

 

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Operations management scholarship has focused on reference-group adoption positively influencing focal-facility adoption; i.e., positive imitation parameters manifest due to the presence of mimicry and contagion. We instead argue that the incentive to adopt a quality-management system can be inversely related to reference-group diffusion. Our theoretical model formalizes the potential for strategic substitution and negative imitation parameters to be applicable in quality-management adoption. We compile a dataset of 2,895 facility-level observations that allows for three different industry-level reference groups; i.e., domestic industry, domestic exporters and foreign exporters. When undertaking probit estimations that do not account for appropriate fixed effects, we find positive imitation parameters which support the presence of mimicry and contagion. Yet when accounting for fixed effects, the imitation parameters turn negative in line with the presence of strategic substitution. Furthermore, the negative influence of reference-group adoption on focal-facility adoption is robust across the three reference groups.

 

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This paper investigates whether, and if so, to what extent, Level 3 fair values disclosed by European banks provide useful information to investors and are reflected in firm value changes. Using a unique sample of 416 hand-collected firm-year observations from European banks reporting under IFRS, in contrast to previous research conducted in the US, we find no overall evidence that changes in Level 3 fair values are associated with changes in firm value. However, the value relevance of Level 3 fair values depends on the category assigned to financial instruments. Level 3 fair values that are held for trading are reflected in firm value. Further analyses suggest that this effect is driven predominantly by banks that operate in market-based economies and hire audit firms with deep industry expertise

At the author's request the PDF file of this working paper was removed. Please contact the authors for further information.

 

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Many industries, including consumer electronics and telecommunications equipment, are characterized with
short product life-cycles, constant technological innovations, rapid product introductions, and fast obsolescence. Firms in such industries need to make frequent design changes to incorporate innovations, and the
effort to keep up with the rate of technological change often leaves little room for the consideration of product
reuse. In this paper, we study the design for reusability and product reuse decisions in the presence of both
a known rate of incremental innovations and a stochastic rate of radical innovations over time. We formulate
this problem as a Markov Decision Process. Our steady-state results confirm the conventional wisdom that a
higher probability of radical innovations would lead to reductions in the firm's investments in reusability as
well as the amount of reuse the firm ends up doing. Interestingly, the design for reusability decreases much
more slowly than the actual reuse. We identify some specific scenarios, however, where there is no tradeoff
between the possibility of radical innovations and the firms reusability and reuse decisions. Based on over
425,000 problem instances generated over the entire range of model parameters, we also provide insights
into the negative impact of radical innovations on firm profits, but show that the environmental impact of
increased radical innovation is not necessarily negative. Our results also have several implications for policy
makers seeking to encourage reuse.

The LeChatelier-Samuelson principle states that as a reaction to a shock, an agent's short-run adjustment of an action is smaller than the long-run adjustment of that action when the other related actions can also be adjusted. We extend the principle to strategic environments and define long run as an adjustment that also includes other players adjusting their strategies. We show that the principle holds for both idiosyncratic shocks (affecting only one player's action directly) and common shocks in supermodular games, only for idiosyncratic shocks in submodular games if the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly), and only for idiosyncratic shocks in other games of strategic substitutes or heterogeneity satisfying Morishima Conditions. We argue that the principle might also explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

 

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This paper provides a legal and economic analysis of the European rules for regional state aid according to Article 107 (1) and (3) TFEU. It summarizes the historical evolution and the trends of regional aid rules and describes the economic rationale behind them. The main principles are discussed with reference to recent academic research, leading cases and the State Aid Modernization initiative (“SAM”). The current rules for the assessment of compatibility as laid down in the general block exemption and the regional aid guidelines 2014 are critically reviewed in light of these principles.

 

View all ESMT Working Papers in the ESMT Working Paper Series here. ESMT Working Papers are also available via SSRN, RePEc, EconStor, and the German National Library (DNB).