Idiosyncratic Investment Research Articles

Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates

We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound. (JEL E12, E23, E31, E43, E52, E62, H63)

Micro venture capital

AbstractResearch SummaryRecently, the venture capital (VC) industry has experienced the entry of several new capital providers. Using US data on investors and their portfolio startups from 2000 to 2022, we document the emergence of a new type of investors: the micro VC. Our analysis reveals that micro Venture Capitalists (VCs) have an idiosyncratic investment strategy, which differs from traditional VCs. Compared with these investors, micro VCs invest in riskier startups, that is, early‐stage ventures initiated by less experienced founders; yet, micro VCs are less likely to syndicate, stage their investments, and replace the startup founders. Additionally, startups funded by micro VCs are less likely to experience successful exits than those backed by traditional VCs. These results can be traced to a mix of smaller capital endowments, less sophisticated limited partners, and lesser human capital of which micro VCs dispose, and that may induce them to spread their thin capital across many investments to maximize returns. Our analysis also uncovers important differences in the strategies pursued by micro VCs and business angels.Managerial SummaryThe VC industry is increasingly populated by a variety of investors with disparate characteristics and objectives. One such type of investors is represented by the so‐called micro VC firms. These are VC firms that manage funds typically below $50 million and focused primarily on investing in founder‐led startups. We leverage comprehensive VC data in the United States to answer three questions: (1) Who leads micro VC firms? (2) How do micro VC firms invest? (3) How do startups backed by micro VC perform? We find that micro VC firms are often led by relatively inexperienced entrepreneurs with little VC experience, and these firms are supported by less sophisticated limited partners. Although micro VC firms invest in riskier startups, they are less engaged in syndication and investment staging than traditional VC firms. Finally, micro VC‐backed startups have a lower probability of successful exit as compared with those backed by traditional VC firms. Collectively, our results suggest that micro VCs differ from traditional VCs beyond being “micro.”

Impact of socioeconomic values collaboration on performance in franchising

Franchises exist within cultures and societies that establish distinct socioeconomic beliefs, values, opportunities, and threats, all of which can affect firms’ operational success. Disagreements between franchisees and franchisors about such social or economic issues potentially disrupt their cooperative equilibrium, whereas collaborations that prioritize shared socioeconomic values may facilitate successful long-term relationships. Using primary data, gathered through a survey of U.S. franchisees, the authors test a proposed model of franchisee performance. The structural equation modeling results reveal that socioeconomic values–based collaborations indirectly enhance performance, through their effects on customer relationship management cooperation and franchisor idiosyncratic investment. Control of local marketing mix decisions by the franchisee provides positive moderating effects.

Micro VC

Given its spectacular growth in recent years, venture capital is gaining significant attention among strategy scholars. In this paper, we shed light on a novel and unexplored phenomenon, namely the emergence of small-sized VC funds (micro VC hereafter). Using US data from 2000 to 2020, we show that micro VC has experienced a remarkable increase, which is economically larger than that of business angels and traditional VC. Moreover, we show that micro VC has an idiosyncratic investment style, more focused on founders and early-stage firms. Studying the performance implications for startups, we find that being backed by micro VC has a much smaller effect than traditional VC on the subsequent number of rounds and the amount raised. Moreover, while micro VC increases the likelihood of startups’ success, the effect is half of that of traditional VC. Micro VC’s performance is even poorer when the fund manager is a former founder.

The Implications of Strategic Inventory for Short-Term vs. Long-Term Supply Contracts in Nonexclusive Reselling Environments

Problem definition: Although it is well known that a reseller’s ability to hold strategic inventory under a short-term supply contract can potentially benefit both the reseller and a supplier, existing research on strategic inventory focuses almost exclusively on exclusive reselling environments. However, in practice, multiple suppliers often sell to the same nonexclusive reseller, and it is not uncommon for suppliers to ask for future commitments to order quantities from resellers in return for their own commitment to wholesale prices. We investigate how the possibility of strategic inventory influences competing suppliers’ choices between short-term transactional and long-term commitment contracts to a nonexclusive reseller. Methodology/results: Using a game-theoretic model, we consider the interactions between two partially substitutable suppliers and a single, nonexclusive reseller over a two-period horizon in which demand is deterministic. We demonstrate that in nonexclusive reselling environments, where more than one supplier sells its product through the same reseller, the use of strategic inventory under short-term contracts intensifies the price competition between suppliers. We show how this effect can be mitigated when one or both suppliers offer a long-term contract. Moreover, we show that long-term contracts can arise as an equilibrium outcome, particularly when products are more substitutable or holding costs are large. Managerial implications: By considering the interactions between two partially substitutable suppliers and a nonexclusive reseller in a multiperiod setting, we contribute to the literature on strategic contracting and long versus short-term contracts. Our research provides managers with a new explanation, beyond the need to encourage idiosyncratic investments or eliminate the possibility of hold-up, for why long-term contracts may benefit suppliers in practice, who face competition while selling through a nonexclusive reseller.

Bubbly bailout

We provide a theory to investigate the implications of time-varying bailout policy for rational bubbles in an infinite-horizon production economy. In particular, we ask two questions. First, should the government bailout asset bubbles? Second, if yes, how? In our model, firms face idiosyncratic investment opportunities and financial frictions, and creating new bubbles incurs real resources. Intrinsically useless assets can alleviate firms' credit constraints and enhance investment efficiency with additional liquidity. However, asset bubbles are vulnerable to market sentiment and resource-consuming. The time-varying probability of bubble burst causes both asset price volatility and economic fluctuations. In the presence of this tradeoff, we examine the efficiency and the welfare implications of the time-varying bailout policy. We find that the optimal bailout policy is leaning against the wind, striking a balance between the crowding-in and crowding-out effect.

Specific investments, cognitive resources, and specialized nature of research production in academic institutions: why shared governance matters for performance

AbstractNew institutional economics (NIE) studies institutions and how they emerge, operate, and evolve. They also include organizational arrangements, intended as modes of governing economic transactions. Universities offer an exciting ground for testing the role of different institutional arrangements (governance forms) in coordinating (academic) transactions. In a context of contractual incompleteness where production is characterized by a highly specialized nature and requires the cooperation among co-essential figures, we argue that shared governance models (versus models with more concentrated authority) foster idiosyncratic investments in human capital and promotes performance. From the evolutionary viewpoint, we explain why institutions based on shared governance have developed within universities. The normative question of how universities should be governed is a debated issue in the literature. Since the 1980s, the new public management paradigm provides a theoretical framework that suggests analyzing university like firms. It is based on the firm's archetypical conception as top-down hierarchical organizations and as a descending sequence of principal–agent problems. We advance a different interpretation of the university–firm analogy leveraging on the NIE and its developments. To empirically analyze our hypothesis, we collected original data from Italian universities in 2015. We find that more shared decision-making processes are correlated with better research performance.

Cross-border investments and uncertainty: Firm-level evidence

This paper studies the impact of uncertainty on cross-border investments. We build a data-set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average effect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions.

Cross-border Investments and Uncertainty: Firm-level Evidence

This paper studies the impact of uncertainty on cross-border investments. We build a data set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average e_ect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions.

The Implications of Strategic Inventory for Short-Term vs. Long-Term Supply Contracts in Non-Exclusive Reselling Environments

Problem Definition: Although it is well known that a reseller’s ability to hold strategic inventory under a short-term supply contract can potentially benefit both the reseller and a supplier, existing research on strate- gic inventory focuses almost exclusively on exclusive reselling environments. However, in practice, multiple suppliers often sell to the same non-exclusive reseller, and many supply contracts involve long-term commit- ments to the price and quantity from both the supplier and the reseller. We investigate how the possibility of strategic inventory influences competing suppliers’ choices between short-term transactional and long-term commitment contracts to a non-exclusive reseller. Methodology/Results: Using a game-theoretic model, we consider the interactions between two partially sub- stitutable suppliers and a single, non-exclusive reseller over a two-period horizon in which demand is deter- ministic. We demonstrate that in non-exclusive reselling environments, where more than one supplier sells its product through the same reseller, the use of strategic inventory under short-term contracts intensifies the price competition between suppliers. We show how this effect can be mitigated when one or both suppliers offer a long-term contract. Moreover, we show that long-term contracts can arise as an equilibrium outcome, particularly when products are more substitutable or holding costs are large. Managerial Implications: By considering the interactions between two partially substitutable suppliers and a non-exclusive reseller in a multi-period setting, we contribute to the literature on strategic contracting and long versus short-term contracts. Our research provides managers with a new explanation, beyond the need to encourage idiosyncratic investments or eliminate the possibility of hold-up, for why long-term contracts may benefit manufacturers in practice, who face competition while selling through a non-exclusive reseller.

The impact of job training on temporary worker performance: Field experimental evidence from insurance sales agents

AbstractDespite the limited incentives they provide for idiosyncratic investment, temporary work arrangements are becoming increasingly common. Using evidence from a field experiment conducted among salespeople in a Kenyan insurance firm, this paper examines the consequences of providing job training for temporary workers. The findings show that providing access to training significantly increases firm revenue, primarily due to performance increases among higher‐ability workers. The findings from the study are consistent with temporary workers willingness to invest in job training when the job‐specific returns from doing so are sufficiently high.

Information and Inequality

This paper studies wealth inequality in a Blanchard/Yaari model with idiosyncratic investment returns. Its key innovation is to assume that individuals can buy information. Information reduces uncertainty about the unknown mean investment return. Reduced estimation risk encourages investment in higher yielding risky assets. As a result, endogenous information acquisition amplifies wealth inequality. Wealthy individuals buy more information, which leads them to invest a higher share of their wealth in higher yielding assets, which then makes them even wealthier. The model's empirical implications are studied using Monte Carlo simulations and perturbation approximations. An empirically plausible decrease in information costs can explain about two-thirds of the observed increase in the top 1% wealth share.

Academic Shared Governance and Performance: Theoretical Issues and Empirical Evidences

In the debate surrounding various reforms in higher education systems, performance, along with how universities should be governed, have been main issues. We argue that the demand for shared governance, i.e., faculty participation in decision‐making vs. concentrated or top‐down decision‐ making, is driven by the characteristics of academic transactions. Especially in universities, shared governance prevents that the unilateral allocation of authority paves the way to the abuse of authority, which would depress incentives to undertake optimal idiosyncratic investments in human cognitive resources, or prevent cooperation in a context characterized by contractual incompleteness and transactions involving multiple specific investments and coessential resources. To empirically analyze our hypothesis, we collect original survey data of Italian universities in 2015. We find that shared decision‐making processes are correlated with better performance.

Trust, Investment and Competition: Theory and Evidence from German Car Manufacturers

Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality|but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and disappear for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers|but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).

Securitized markets, international capital flows, and global welfare

We study the effect of collateralized lending and securitization on international capital flows and welfare in a two-country general equilibrium model with idiosyncratic investment risk. The low-margin country (Home) endogenously supplies more safe assets and enables more risk sharing. Upon financial integration, capital flows from Foreign (high-margin country) to Home, leading to lower interest rates and a larger global supply of safe assets. Unlike in standard models with partial equity issuance, in our model, Home can lose from financial integration due to the endogenous reduction in risk sharing and aggregate shocks can generate large gross capital flows.

Independent minority directors and firm value in a principal–principal agency setting: evidence from Italy

Following the agency theory, this paper contributes to the literature on board independence as a mechanism to mitigate agency costs by investigating the impact of independent minority directors on firm value in a principal–principal setting. Independent minority directors might alleviate agency costs associated to the risk of self-dealing transactions and, in turn, increase firm value. However, since non-controlling shareholders are also self-interested, particularly for firms characterized by strong uncertainty about future financial results and high information asymmetry, independent minority directors might negatively impact firm value by creating frictions within the board, increasing the risks of potential hold-ups by minority shareholders and limiting the ex-ante incentives of the block-holder to undertake profitable idiosyncratic investments. By examining a sample of Italian listed companies, we find some evidence about a positive relationship between the proportion of independent minority directors and firm value. Although weaker, a positive relationship between the proportion of independent minority directors and firm value is also found for firms characterized by high information asymmetry and—therefore—exposed to the risk of opportunistic actions by minority shareholders against the dominant shareholder. Our results shed new light on the relationship between board composition and firm value in a concentrated ownership setting, revealing the role played by independent minority directors in mitigating agency costs.

The Influence of Intellectual Property Rights on Poaching in Manufacturing Outsourcing

Manufacturers are often placing their intellectual property (IP) at risk by outsourcing to suppliers in countries with weak IP rights. Thus, understanding how to safeguard their IP from poaching, which is a supplier's unauthorized use of a buyer's proprietary information, is of critical practical importance for manufacturers that outsource to suppliers in countries with weak IP rights. To investigate this phenomenon, we use dyadic data from globally dispersed manufacturer–supplier relationships to examine how the IP rights of a supplier's location affects poaching and how IP rights influence the effectiveness of two transactional characteristics—supplier idiosyncratic investments and media‐rich communication—on poaching. We examine these two transaction characteristics because they are representative of two forms of safeguards which create self‐enforcing agreements that do not require legal enforcement—economic and relational. We find that the strength of IP rights not only has a direct effect on poaching, but it also influences the relationships for both transaction characteristics. Intriguingly, when IP rights are weak, we find that not only are supplier idiosyncratic investments less effective in reducing poaching, but increases in these investments are associated with an increase in poaching. This finding illustrates that the strength of IP rights is a determinant of the degree to which supplier idiosyncratic investments are transaction specific. For suppliers in countries with weak IP rights, media‐rich communication is found to be more effective in reducing poaching. This finding illustrates the importance of manufacturers’ boundary spanners in building relationships with suppliers in countries with weak IP rights.

A Becker–Tomes model with investment risk

Recent studies find that sufficiently volatile idiosyncratic investment risk plays an important role in generating wealth inequality. I introduce idiosyncratic investment risk into the Becker and Tomes (J Polit Econ 87:1153–1189, 1979) model and find an explicit expression of the stationary wealth distribution in this simple model. This explicit expression brings us new insights of how bequest motives and estate taxes influence wealth distributions. I find that inheritance increases wealth inequality in models with idiosyncratic investment risk through exaggerating labor earnings uncertainty, while inheritance decreases wealth inequality in the Becker and Tomes (1979) model through mitigating labor earnings uncertainty. This causes estate taxes to have different impacts on wealth inequality in my model and the Becker and Tomes (1979) model.

Benevolent dictatorship and buyer-supplier exchange

In this research, we identify and advance the concept of benevolence as a key social exchange mechanism in buyer-supplier exchange. Specifically, we (1) advance a theoretical model of benevolence to include affective, calculative, and normative dimensions, (2) highlight specific actions and resources that a focal firm uses to promote the perception of benevolence, including concessions, idiosyncratic investments, and reputation, and (3) identify how these perceptions, mediated by its own rising commitment to the exchange, impact the focal firm's economic response (i.e., concessions and idiosyncratic investments). In particular, we explore the possibility of “benevolent dictators” in exchanges marked by power asymmetry. Our model and conclusions are drawn from the confidential reports of over 500 informants at the boundaries of firms across multiple industries. Our results demonstrate the differential effects of a partner firm's actions and reputation on the three forms of benevolence and find evidence for how powerful partner firms can signal their benevolence to weaker firms through the use of concessions, dedicated investments and marketplace reputation. Moreover, we show that the responses of the partner firm to the focal firm's benevolence are not simply a reciprocation of the focal firm's actions, but are instead mediated through the enhanced commitment of the focal firm with implications for theory and management practice.

A Model of economic mobility and the distribution of wealth

This paper introduces new techniques to obtain a closed-form rank-by-rank characterization of the equilibrium distribution of wealth in a model in which finitely lived households face uninsurable idiosyncratic investment risk. A central result is that the extent of inequality is determined entirely by two factors. The first factor, household exposure to idiosyncratic investment risk, increases inequality. The second factor, cross-sectional mean reversion of household wealth, decreases inequality. We show that economic mobility is decreasing in inequality and increasing in mean reversion, a result that is consistent with recent empirical observations about the geographic variation in mobility that exists both domestically and internationally. Our approach allows us to examine the implications of increased market completeness in the form of a risk-sharing subgroup of households. We show that a risk-sharing subgroup rises or falls in the equilibrium wealth distribution depending on the level of inequality, and that its presence raises welfare and the rate of wealth accumulation for all households in the economy.