Columbia Business School Research

The U.S. Social Security system is in need of reform. Its trustees forecast that, absent changes, contributions will fall below benefits in 2012, and the system's trust fund will be exhausted in 2030. Many have discussed achieving system solvency by raising taxes and cutting benefits, but recently a more fundamental reform has been proposed, namely, privatization of some or all aspects of Social Security. This article identifies key economic issues that must be addressed in the debate over a privatized system in the U.S.

A popular prediction in persuasion research is that decreased ability to process information increases reliance on peripheral cues and decreases reliance on central claims. This paper explains why this prediction does not necessarily hold when processing capacity is impaired by high arousal. Three experiments suggest that two types of processes underlie arousal effects on persuasion. Arousal induces selective processing of cues that are diagnostic at the expense of cues that are nondiagnostic - the selection effect.

We develop a simple approximation for multistage production-inventory systems with limited production capacity and variable demands. Each production stage follows a base-stock policy for echelon inventory, constrained by production capacity and the availability of upstream inventory. Our objective is to find base-stock levels that approximately minimize holding and backorder costs. The key step in our procedure approximates the distribution of echelon inventory by a sum of exponentials; the parameters of the exponentials are chosen to match asymptotically exact expressions.

The optimal number of items to be included in a service bundle for a profit-maximizing firm that uses pure components, pure bundling, or mixed bundling strategies is determined. When applied to Venkatesh and Mahajan's (1993) data, the number of events held is shown to have a substantial impact on firm profits. The pricing strategies of a nonprofit organization that seeks to maximize usage subject to a nondeficit constraint is also studied. Using the same data, it is shown that, compared to a profit maximizing firm, a usage-maximizing nonprofit organization 1. charges lower prices, 2.

It is an everyday marketplace occurrence that brands lose and gain share. However, a brand's sales gain or loss can be attributable to very different factors, and thus understanding the sources of sales gain or loss would seem to be an important aspect of a brand manager's job.

We consider the problem of allocating production capacity among multiple items, assuming that a fixed proportion of overall capacity can be dedicated exclusively to the production of each item. Given a capacity allocation, production of each item follows a base-stock policy, i.e., each demand triggers a replenishment order to restore safety stocks to target levels. We present procedures for choosing base-stock levels and capacity allocations that are asymptotically optimal.

We develop lower and upper bounds on the prices of American call and put options written on a dividend-paying asset. We provide two option price approximations one based on the lower bound (termed LBA) and one based on both bounds (termed LUBA). The LUBA approximation has an average accuracy comparable to a l,000-step binomial tree. We introduce a modification of the binomial method (termed BBSR) that is very simple to implement and performs remarkably well. We also conduct a careful large-scale evaluation of many recent methods for computing American option prices.

In this paper, we critically examine the recommended practice of matching currency footprints. We argue that while matching currency footprints reduces profit variability, this practice can also cause reductions in expected profitability, a point that appears to have been overlooked in current literature. The expected profit effects of matching depend on the trade-off between possible expected cost savings of sourcing abroad verses the loss of what we refer to as "strategic flexibility" in responding to competitors' pricing and quantity decisions.

This study investigates the manner in which consumers make investment decisions for mutual funds. Investors report that they consider many nonperformance-related variables. When investors are grouped by similarity of investment decision process, a single small group appears to be highly knowledgeable about its investments. However, most investors appear to be naive, having little knowledge of the investment strategies or financial details of their investments. Implications for mutual fund companies are discussed.

Examines the effectiveness of incentives to promote household saving in the United States. Individual retirement accounts; 401(k) plans; Cost-benefit approach to saving incentives; Welfare-theoretic approach to saving incentives.

We derive efficient and highly accurate approximations for the customer waiting-time distributions experienced in stochastic economic lot scheduling systems (SELSPs) that are governed by general base-stock policies under a cyclic or more general periodic item sequence. SELSPs involve settings where several items need to be produced in a common facility with limited capacity, under significant uncertainty regarding demands, unit production times, setup times, or combinations thereof.

This articles studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. We incorporate some insights of the recent corporate finance literature into a valuation framework. The basic framework is an extensive form game determined by the terms of a debt contract and applicable bankruptcy laws. Debtholders and equityholders behave noncooperatively. The firm's reorganization boundary is determined endogenously. Strategic debt service results in significantly higher default premia at even small liquidation costs.

Many sequential planning problems can be represented as a shortest path problem in an acyclic network. This includes all deterministic dynamic programs as well as certain stochastic sequential decision problems. In this article, we identify a large class of shortest path problems for which a general efficient algorithm for the simultaneous solution and detection of minimal forecast horizons is developed.

Simulation has proved to be a valuable tool for estimating security prices for which simple closed form solutions do not exist. In this paper we present two direct methods, a pathwise method and a likelihood ratio method, for estimating derivatives of security prices using simulation. With the direct methods, the information from a single simulation can be used to estimate multiple derivatives along with a security's price. The main advantage of the direct methods over re-simulation is increased computational speed.

Classical economic theory mainly examines decision making from a normative perspective. Social and cognitive psychology's view of decision making is more descriptive. This article presents a structured synthesis of a third stream of research, which intersects economics and psyhology, and is known as Behavioral Decision Theory. This stream of research shows that decision makers often deviate from prescritive norms. This article explains why such deviations occur and what they imply for marketing.

We study the effect of changing buffer sizes in serial lines withgeneral blocking, a mechanism that incorporates limited intermediate finished goods inventory at each stage, as well as limited intermediate raw material inventory. This model includes ordinarymanufacturing, communication, andkanban blocking as special cases. We present conditions under which increasing buffer sizes or re-allocating buffer capacity increases throughput, and in some cases characterize optimal allocations.

A study was conducted to interpret the price-earnings ratio (P/E) and the market-to-book ratio (P/B) and describe their articulation. It also aimed to explain the role of book rate-of-return on equity in determining the ratios and the relation between them. The P/E ratio signifies future growth in earnings positively related to expected future return on equity and negatively related to current return on equity. On the other hand, the P/B ratio indicates only expected future return on equity.

This paper offers an exact definition of the value created by firms together with their suppliers and buyers. The "added value" of a firm is similarly defined, and shown under certain conditions to impose an upper bound on how much value the firm can capture. The key to a firm's achieving a positive added value is the existence of asymmetries between the firm and other firms. The paper identifies four routes ("value-based" strategies) that lead to tthe creation of such asymmetries. Our analysis reveals the equal importance of a firm's supplier and buyer relations.

We examine conditions under which "Veblen effects" arise from the desire to achieve social status by signaling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a "single-crossing property," they may emerge when this property fails. In that case, "budget" brands are priced at marginal cost, while "luxury" brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth.

Industries differ widely in how much managerial discretion, or latitude of action, they allow. This research contributes to the reliable and valid measurement of this important but hard-to-measure construct. We found that (1) a panel of academics showed very high consistency in rating managerial discretion in diverse industries, (2) a panel of security analysts agreed strongly with the academics, and (3) the panel ratings were highly related to archival indicators of discretion posited by Hambrick and Finkelstein.

We give a unified presentation of stability results for stochastic vector difference equations Y_n+1 = A_n ⊗ Y_n ⊕ B_n based on various choices of binary operations ⊕ and ⊗, assuming that {(A_n, B_n), n ≥ 0} are stationary and ergodic. In the scalar case, under standard addition and multiplication, the key condition for stability is E[log |A₀|]<0. In the generalizations, the condition takes the form γ <0, where γ is the limit of a subadditive process associated with {A(n), n≥0}.

Theoretical work on financing costs under asymmetric information has linked shifts in firms' internal funds and investment spending, holding constant investment opportunities. An impediment to convincing tests of these models is the lack of firm-level data on the relative cost of internal and external funds. We use a tax experiment, the surtax on undistributed profits in the 1930s, to identify firms' relative cost of internal and external funds by calculating surtax margins.

This article analyzes the time variation in conditional means and variances of monthly and quarterly excess dollar returns on Eurocurrency investiments. All results are based on a vector autoregression with weekly sampled data on exchange-rate changes and forward premiums of three currencies. Both past exchange-rate changes and forward premiums predict future forward-market returns. Moreover, past forward-premium volatilities predict the volatility of exchange rates. Expected forward-market returns are very variable and persistent and exhibit marked comovements.

This paper examines CEO pay in the banking industry and the effect of deregulating the market for corporate control. Using panel data on 147 banks over the 1980s, we find higher levels of pay in competitive corporate control markets, i.e., those in which interstate banking is permitted. We also find a stronger pay-performance relation in deregulated interstate banking markets. Finally, CEO turnover increases substantially after deregulation.

This study proposes a typology of reasons why people substantially delay important consumer decisions The delay reasons we study are drawn from delay typologies identified in other contexts as well as from the product diffusion literature. Two studies reported here examine why subjects delay consumer decisions. These support most of the reasons in the proposed typology, while some unanticipated delay reasons also emerge.

This paper attempts to find characteristics of product categories, brands, and ad copy that lead to either increased or decreased effectiveness of advertising spending on ad awareness, brand awareness, or purchase intentions, as measured through tracking data.