Strategy
For economists, a typical toolkit for studying strategy includes the make-or-buy question, contracting, and incentives. I study several settings including autos, venture capital, hospitals, software, foreign aid, and stock exchanges. In each case, I take a magnifying glass to an "umbrella" to discern heterogeneity with implications for how firms differentiate and compete.
"Dark Innovation Measurement and Strategy: Product, Process, and Invisible Innovation in the Automotive Supply Chain" (working paper, 2016)
In my paper with Dan Snow and Sue Helper, we use data from an original, nation-wide survey of the auto supply chain to give the make-or-buy question a new twist, taking into account the type of innovation a supplier can provide. By measuring a wider variety of innovative activity than typically measured, we find that firms cluster into 3 innovation strategies. Toyota's recent switch from Denso, a Japanese firm with which it has a long-term relationship, to Continental, a German firm with high R&D spending, exemplifies the high stakes and added complexity of vertical integration when supplier innovation strategy is considered.
"Hostages and the Emergence of Venture Capital" (working paper, 2016)
I study the emergence of the venture capital industry and the use of hostage exchange to facilitate co-investment in the 1970s. I find evidence for the use of hostages but mainly among established financial firms such as banks and insurance companies, which probably employ this contracting mechanism in their other lines of business. Silicon Valley VCs, who now dominate VC investing but were only 10% of investors in the 1970s, appear to use other, relational mechanisms to promote syndication. A related project, not yet in draft form, looks at long-term contracting differences between so-called East Coast and West Coast styles, possibly tracing its roots from this early period. Differences may be more than a matter of style, though, reflecting an approach to VC involvement that affects innovation.
"Does It Matter Who Your Buyer Is? The Role of Nonprofit Mission in the Market for Corporate Control of Hospitals" (Journal of Law and Economics, 52:2, May 2009)
Hospitals are owned by a dizzying variety of owner types, including for-profit, nonprofit, religious, and government. With Paul Gertler, I use private data on hospital mergers and acquisitions from an investment bank to study whether nonprofits are less managerially efficient than for-profits. The logic behind our test is that if nonprofits were inefficient, then for-profits would pay a premium based on standard accounting information, knowing that inefficient managers could be replaced to make higher profits. We find that nonprofits are efficient and that they sell at a discount if they are similar in type, i.e., if their incentives are aligned. In the process, we also show that the market for corporate control is efficient in this largely private market, and that hospitals do not exercise market power.
"Nonprofit Ownership: Insights from Open Source Software" (working paper, 2015)
Why do nonprofits sometimes compete with for-profits? Software is a good place to look at this question because open source software is the type of nonprofit that poses the greatest threat to firms, the type that is organized by users to create nonrival goods for their own use. This "consumer vertical integration into production" arises in predictable places in software space, but goes far beyond software to include phenomena such as Facebook designing routers or Google designing servers for their own use but then making designs openly available.
"Using Foreign Aid Outsourcing to Discern Motives" (working paper, 2013)
Co-author Natalia Martin-Cruz and I use foreign aid data from Spain to understand why a country might donate to other countries. Unlike other studies of foreign aid, we do not assume philanthropic motives and use actual rather than pledged spending and we know if aid was outsourced to an NGO. We modify transaction cost reasoning to argue that countries first decide their strategic priorities, then outsource non-strategic activities. We show that Spain's aid prioirites include preventing illegal immigration, a long-term use of soft power whose importance is now appreciated in light of the migrant crisis now gripping Europe--but not Spain.
"Information Asymmetry and Platform Strategy" (working paper, 2016)
The stock market is normally a topic left to the field of finance, but co-author Steve Diamond and I explore this particular "umbrella" to distinguish the NYSE from its competitors. Organized and owned by underwriters, the NYSE subsidized investor trading by efficient stock pricing and orderly trading. This benefited underwriters' clients (listed firms) and profited underwriters, but investors gained, too. By contrast, the Nasdaq was owned by broker-dealers, who profit from investor trades of Nasdaq-listed stocks (smaller, newer firms including tech companies). The incentive differences of owners generated differences in strategy (esp. trading mechanisms) and market outcomes, and a comfortable dual-monopoly for decades. This differentiated shared market structure changed in 2007 with the SEC's Regulation NMS, so that now, the volatile Nasdaq and similar ECNs dominate trading of all stocks.