Why do intermediaries divert search?

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e., inducing consumers to search more than they would like): (i) trading off higher total consumer traffic for higher revenues per consumer visit; and (ii) influencing stores’ choices of strategic variables (e.g., pricing). We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to online and brick‐and‐mortar intermediaries.     

Prominence and consumer search

This article examines the implications of “prominence” in search markets. We model prominence by supposing that the prominent firm will be sampled first by all consumers. If there are no systematic quality differences among firms, we find that the prominent firm will charge a lower price than its less prominent rivals. Making a firm prominent will typically lead to higher industry profit but lower consumer surplus and welfare. The model is extended by introducing heterogeneous product qualities, in which case the firm with the highest‐quality product has the greatest incentive to become prominent, and making it prominent will boost industry profit, consumer surplus, and welfare.     

Spatial competition in retail markets: movie theaters

Retail markets are extremely important, but economists have few practical tools for analyzing the way dispersed buyers and sellers affect the properties of markets. I develop an econometric model of retail demand in which products are location specific and consumers have preferences over both geographic proximity and other store and product characteristics. The model uses data on the observed geographic distribution of consumers within a market to (1) help explain observed variation in market shares and (2) affect predicted substitution patterns between stores. Using data from the U.S. cinema industry, I use the estimated model to evaluate the form of consumer transport costs, the effect of a theater's price and quality choices on rivals, the effects of geographic differentiation, and the nature and extent of market power.     

Remuneration, Retention, and Reputation Incentives for Outside Directors

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation (SD) change in typical firm performance. Cross‐sectional patterns of director equity awards conform to agency and financial theories.     

The Relation Between Insider-Trading Restrictions and Executive Compensation

In this study I investigate the relation between firm‐level insider‐trading restrictions and executive compensation. Using a trading‐window proxy for the existence of such restrictions, I test predictions that insiders will demand compensation for these restrictions and that firms will need to increase incentives to restricted insiders. I find that firms that restrict insider trading pay a premium in total compensation relative to firms not restricting insider trading, after controlling for economic determinants of pay. Furthermore, these firms use more incentive‐based compensation and their insiders hold larger equity incentives relative to firms that do not restrict insider trading. These results hold after controlling for the endogenous decision to restrict insiders and are consistent with the notion that insider trading plays a role in rewarding and motivating executives.     

Price discrimination in input markets

We analyze the short‐ and long‐run implications of third‐degree price discrimination in input markets. In contrast to the extant literature, which typically assumes that the supplier is an unconstrained monopolist, in our model input prices are constrained by the threat of demand‐side substitution. In our model, the more efficient buyer receives a discount. A ban on price discrimination thus benefits smaller but hurts more efficient, larger firms. It also stifles incentives to invest and innovate. With linear demand, a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run, which is once again the opposite of what is found without the threat of demand‐side substitution.     

Comparative advertising: disclosing horizontal match information

Improved consumer information about horizontal aspects of products of similar quality leads to better consumer matching but also to higher prices, so consumer surplus can go up or down, while profits rise. With enough quality asymmetry, though, the higher‐quality (and hence larger) firm's price falls with more information, so both effects benefit consumers. This occurs when comparative advertising is used against a large firm by a small one. Comparative advertising, as it imparts more information, therefore helps consumers. Although it also improves the profitability of the small firm, overall welfare goes down because of the large loss to the attacked firm.     

Does It Pay to Be Socially Responsible? Evidence from Spain's Retail Banking Sector

This paper extends the research on the relation between financial performance and corporate social responsibility in two respects. First, it develops a model of strategic competition that includes consumer perceptions with respect to firm social performance. It is shown that in the presence of a positive valuation of social responsibility practices by consumers, a firm that endorses this responsible behaviour may obtain a better strategic position in the market, along with higher margin, demand, and profit. Second, the model's predictions are tested with a sample of Spanish banking firms. The empirical analysis confirms that consumers significantly value other features apart from price in making deposit and mortgage decisions, particularly a financial institution's social responsibility. A more disaggregated analysis shows first, that not every CSR dimension has relevance for consumers and second, that customers equally value activities that can have a direct impact on their well‐being (e.g., culture and leisure), as well as other activities that can be viewed more generally as public goods (e.g., heritage and the environment). These conclusions are of interest in the debate about a firm's social or ethical activities. It is shown that, provided that consumers value corporate social responsibility activities, firms can improve both their competitive position in the market and their profits by behaving in a socially responsible manner. Therefore, the design and implementation of corporate social responsibility practices could confer upon firms an initial competitive advantage over their competitors.     

The determinants of corporate sustainability performance

This paper investigates the factors that drive high levels of corporate sustainability performance (CSP), as proxied by membership of the Dow Jones Sustainability World Index. Using a stakeholder framework, we examine the incentives for US firms to invest in sustainability principles and develop a number of hypotheses that relate CSP to firm‐specific characteristics. Our results indicate that leading CSP firms are significantly larger, have higher levels of growth and a higher return on equity than conventional firms. Contrary to our predictions, leading CSP firms do not have greater free cash flows or lower leverage than other firms.     

Corporate Social Responsibility,Tax Aggressiveness,and Firm Market Value

This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit‐maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non‐CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non‐CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms’ five‐year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms’ five‐year effective tax rates are also positively associated with their governance index. I also find that firms’ overall CSR ranking and governance scores are positively associated with their market value.     

Aggressive leaders

I characterize the incentives to undertake strategic investments in markets with Nash competition and endogenous entry. Contrary to the case with an exogenous number of firms, when the investment increases marginal profitability, only a “top dog” strategy is optimal. For instance, under both quantity and price competition, a market leader overinvests in cost reductions and overproduces complement products. The purpose of the strategic investment is to allow the firm to be more aggressive in the market and to reduce its price below those of other firms. Contrary to the post‐Chicago approach, this shows that aggressive pricing strategies are not necessarily associated with exclusionary purposes.     

Search costs,demand‐side economies,and the incentives to merge under Bertrand competition

We study the incentives to merge and the aggregate implications of mergers in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. When search frictions are substantial, firms have an incentive to merge and to retail their products within a single store, which induces consumers to begin their search there. Such a merger lowers the profits of the outsiders and may benefit consumers due to more efficient search. Overall welfare may even increase. If the merged entity limits itself to coordinating the prices of the constituent firms, merging may not be profitable.     

Leverage,executive incentives and corporate governance

This paper analyses the effect of executive incentives and internal governance on capital structure. Using a large sample of non‐financial US‐listed firms over the period 1999–2005, it is found that managers have different attitudes towards leverage when offered different incentive schemes; leverage initially decreases in bonuses and stock incentives and then increases in these incentives after a certain incentive level, suggesting the existence of the entrenchment–alignment effects under these incentive schemes. In contrast, leverage initially increases in option incentives and then decreases after a certain option incentive level. When all of these incentive schemes are combined together into a single incentive package, the entrenchment–alignment effects prevail. It is also found that leverage increases in internal governance and managers behave differently under different governance regimes such that the entrenchment–alignment effects prevail under weak governance firms, whereas the alignment–entrenchment effects prevail under strong governance firms. The results also suggest that managers’ target leverage ratio is less than the one predicted by theory or preferred by firm shareholders.     

Dynamic pricing: when to entice brand switching and when to reward consumer loyalty

This article develops a theory of dynamic pricing in which firms may offer separate prices to different consumers based on their past purchases. Brand preferences over two periods are described by a copula admitting various degrees of positive dependence. When commitment to future prices is infeasible, each firm offers lower prices to its rival's customers. When firms can commit to future prices, consumer loyalty is rewarded if preference dependence is low, but enticing brand switching occurs if preference dependence is high. Our theory provides a unified treatment of the two pricing policies and sheds light on observed practices across industries.     

Targeted advertising and advertising avoidance

I examine how the increasing ability of firms to target their ads influences market outcomes when consumers have access to advertising‐avoidance tools. Although firms generally benefit from improved targeting, consumers need not. I also show that there may be too little blocking of ads in equilibrium and consider the role of targeted advertising when niche firms compete against mass‐market firms.     

Oligopolistic markets with sequential search and production cost uncertainty

This article analyzes a sequential search model where firms face identical but stochastic production costs, the realizations of which are unknown to consumers. We characterize a perfect Bayesian equilibrium satisfying a reservation price property and provide a sufficient condition for such an equilibrium to exist. We show that (i) firms set on average higher prices and make larger profits compared to the scenario where consumers observe production costs, (ii) expected prices and consumer welfare can be non‐monotonic in the number of firms, and (iii) the impact of production cost uncertainty vanishes as the number of firms becomes very large.     

Imperfect competition and quality signalling

We examine the interplay of imperfect competition and incomplete information in the context of price competition among firms producing horizontally and vertically differentiated substitute products. Incomplete information about vertical quality (consumer satisfaction) signalled via price softens price competition. Low‐quality firms always prefer the incomplete information game to the full‐information analog. Moreover, for “high‐value” markets with a sufficiently high proportion of high‐quality firms, these firms also prefer incomplete information to full information. We find that an increase in the loss to consumers associated with the low‐quality product may perversely benefit low‐quality firms; we consider applications to tort reform and professional licensing.     

Exclusive contracts and demand foreclosure

A firm may induce some customers to sign exclusive contracts in order to deprive a rival of the minimum viable size, exclude it from the market, and enjoy increased market power. This strategy may result in socially inefficient exclusion even if the excluded firm is present at the contracting stage and can make counteroffers. In addition, allowing for breach penalty clauses decreases firms’ incentives to exclude rivals, because such clauses allow a firm to use customers as a conduit for the transfer of another firm’s profits.     

Empirical Evidence of Risk Shifting in Financially Distressed Firms

This paper provides evidence of risk‐shifting behavior in the investment decisions of financially distressed firms. Using a real options framework, I show that shareholders' risk‐shifting incentives can reverse the expected negative relation between volatility and investment. I test two hypotheses that are consistent with risk‐shifting behavior: (i) volatility has a positive effect on distressed firms' investment; (ii) investments of distressed firms generate less value during times of high uncertainty. Empirical evidence using 40 years of data supports both hypotheses. I further evaluate the effect of various firm characteristics on risk shifting, and estimate the costs of the investment distortion.     

Why Do Canadian Firms Cross‐list? The Flip Side of the Issue

We investigate the relation between managerial incentives and the decision to cross‐list by comparing Canadian firms cross‐listed on US stock exchanges to industry‐ and size‐matched control firms. After controlling for firm and ownership structure characteristics, we find a positive association between substantial holdings of vested options held by CEOs prior to cross‐listing and the decision to cross‐list. Further, firms managed by CEOs with substantial holdings of vested options exhibit positive announcement returns and negative post‐announcement long‐run returns. CEOs of cross‐listed firms seem to take advantage of the aforementioned market behaviour, because they abnormally exercise vested options and sell the proceeds during the year of listing only when their firms underperform during the subsequent year. In addition, there is a positive relation between substantial holdings of vested options and discretionary accruals during the year of listing, consistent with the view that CEOs manage earnings to keep stock prices at high levels. Overall, these results have significant implications for the cross‐listing literature, suggesting an association between cross‐listing and CEO incentives to maximize CEO private benefits.