MIT Sloan School of Management News Briefs

News Briefs offers you timely leads about research and other work by MIT Sloan faculty that can help you with stories you are developing now — or might be developing in the future. Please contact us if you'd like further information about either a topic or its author.

September 2008

Jiang Wang on Increasing Liquidity
Government Bailouts Not Best Solution
During the current upheaval in the credit market, a big question is whether the government should bail out financial institutions and, if so, what is the best way to do that. We've seen everything from central banks resorting to the relaxation of lending conditions by cutting rates and broadening the collateral accepted, to the U.S. Treasury coordinating market participants to collectively supply pools of liquidity. However, Wang found that government bailouts — interventions to directly inject liquidity into the market — are not necessarily such a good thing and can actually decrease market efficiency.

Mozaffar Khan on Insider Trading
Evidence Found of Significant Front-Running
In the wake of allegations of front-running on Wall Street and an SEC investigation, Khan has found evidence of significant front-running. Front-running, which is trading in advance of a large trade in order to profit from the price movement that usually follows, can happen when people are tipped off about an impending large sale. A brokerage employee might tip off a favored client like a large hedge fund or a brokerage might trade on its own prior to executing a client's large trade. Both scenarios are illegal, as the trades are not based on public information. Khan said, “If there is leakage, then we need enforcement by the SEC of existing regulations and they need to investigate who is doing the leaking to stop it.”

Arnold Barnett proposes a Cure for Electoral College chaos
Would Replace Winner-Takes-All With ‘Weighted Vote Share’ System
Worried that the Electoral College could again become “the funhouse mirror of American politics” this fall, Barnett and a Yale colleague are proposing a “weighted vote share” system, under which candidates' election showings become the average of their popular vote results in each state and the District of Columbia, weighted to reflect the individual state's proportion of total Electoral College votes. Such an approach, Barnett says, would eliminate the most troubling consequences of the current winner-take-all system — and it would require candidates to pay more serious attention to states they now often ignore.

Reilly Sees Important Role for Biofuels in Future Energy Policy
U.S. Ethanol Policy “Misguided” But Not Major Source of Food Price Hikes
In a research paper that has attracted major interest, Reilly and his co-authors find that while biofuels are not a total solution, they still hold important promise. A new generation of technologies offers the promise that biofuel production can be rapidly expanded to help reduce climate change while triggering only relatively modest price increases in agricultural products.

Joseph Doyle on Healthcare Spending Outcomes
Tourists Fare Better at Hospitals that Spend More Money If you have a heart attack while on vacation, your chances for a positive outcome are better if you seek treatment in a hospital that tends to spend more. A recent study by Doyle showed that tourists who become ill and receive emergency care at “high-spending” hospitals have significantly lower mortality rates compared to tourists who end up in “lower-spending” hospitals. With the U.S. spending over $2 trillion per year or 16% of GDP on healthcare, there is a presumption that much of that spending is wasted. However, Doyle stated that “high levels of spending may be justified because it also seems to increase survival rates in emergency situations.”

Emilio Castilla on “Performance-Reward Bias”
Merit-Based Reward Systems Can Increase Gender and Race Bias in Workplace Merit-based rewards and other common performance management practices used by the majority of U.S. companies today can actually increase bias and reduce equity in the workplace. Such practices and policies can result in women and minorities receiving less compensation than white men despite equal scores on their performance evaluations, said Castilla, noting that this “performance-reward” bias can be overcome by increasing accountability and transparency in the organizational processes and routines that connect performance evaluations and wage increase decisions.

Duncan Simester on Implications of Sales Tax
Online Retailers May See More Than 15 percent Decrease in Sales
When online retailers open a physical store, triggering the requirement to charge sales tax, they could see a decrease of more than 15 percent in online sales. Simester found that U.S. state sales tax laws have a significant impact on both customer and retailer behavior, providing a disincentive for retailers to establish a physical presence in high-tax states as well as a disincentive for customers to make online purchases when sales tax is charged. One way to lessen the impact of sales tax is to offer online price discounts. “The deeper the discount, the less likely customers were to look at competing retailers and the smaller the impact of charging sales tax,” said Simester.

Michael A.M. Davies on the future of personal navigation devices
Auto Makers in Strong Position to Marry Safety Needs and New Navigation Tools
Personal navigation devices such as Tom Tom and Garmin may remain popular for a few years, but as software keeps creating navigation options, traditional PND makers face serious challenges not only from cell phones, which are increasingly equipped with high-end navigation programs, but from automobile makers. Innovation in electronics has always been much faster in cars, says Davies, who notes that some European car makers already combine navigation options with safety requirements.

John Hauser and Glen Urban on Website Morphing
New Technology Can Increase Online Sales 20 Percent
When shopping on a website, some customers appreciate a virtual advisor to help them make product choices. However, more sophisticated customers might find such advisors annoying. To solve this dilemma, Hauser and Urban propose “morphing” a website to change the look and feel of it — not just the content — to instantly adapt to customers' different information needs. The professors found that by using morphing to match website characteristics to customers' cognitive styles, companies could improve sales by 20 percent.

Pai-Ling Yin: Software to drive future home entertainment innovations
A Vision of Fewer Remotes Controls on the Coffee Table
Software, especially technology that can compress and distribute visual content in order to get it to consumers quickly and at high quality, will drive most consumer entertainment options, says Yin. And because they already have TV set-top boxes in so many homes, traditional cable companies are well-positioned to win the high-stakes home entertainment wars, she finds.