THE DETERMINANTS OF RESEARCH GROUP PERFORMANCE: TOWARDS MODE 2?*

This paper explores the determinants of performance of research groups in the context of the emergence of knowledge as a key intangible asset. It focuses specifically on how best to configure knowledge producers for optimal effectiveness in the current research environment. It explores the under‐researched area of the organization and management of research groups located in and at the interface of university research and focuses on medical and medical‐related research groups. The discussion is embedded within the current debate concerning modes of organization in knowledge production. Factors identified with high‐achievement are: strong leadership; finding, motivating and retaining talent; strategies of related diversification; strongly linked theory and practice and, in particular, network connectedness. Such groups exhibit an increasingly complex internal environment, facilitating a flexible response to an increasingly complex external environment. It finds evidence of Mode 2 working, with increasing use of collaborative strategies and some evidence of a thematic emphasis emerging, although to a lesser extent than the literature suggests, since participants are still working from a strongly disciplinary base. Driven by the more competitive environment, both intellectual and commercial forms of entrepreneurship are present. At the hub of this complex web of inter‐related factors is network connectedness, which proves to be centrally facilitative in mobilizing the other necessary resources.     

Consumption Commitments and Employment Contracts

We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.     

Bank Loans, Bonds, and Information Monopolies across the Business Cycle

Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold-up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk alone. We test this hypothesis by comparing the pricing of loans for bank-dependent borrowers with the pricing of loans for borrowers with access to public debt markets, controlling for risk factors. Loan spreads rise in recessions, but firms with public debt market access pay lower spreads and their spreads rise significantly less in recessions.     

Optimal Fines under Announced and Surprise Inspections

This paper examines optimal fines in a regulatory framework where the regulator can choose either surprise or announced inspections to monitor a firm for compliance. The firm can invest in detection avoidance, but it receives a fine if the regulator discovers that it is noncompliant. In the welfare maximization problem, we focus on the trade‐off between the frequency of inspections and the magnitude of the fine. We find that when inspections are unannounced, the optimal fine is maximal, but when they are announced, the optimal fine may be less than maximal.     

Integration of a Financial Literacy Curriculum in a High School Economics Class: Implications of Varying the Input Mix from an Experiment

We taught a mere seven‐period financial literacy curriculum to two 12th grade economics classes, where one treatment was Financial Fitness for Life^® (FFFL)‐intensive and the other was “stock market learning” (SML)‐intensive. Two control groups received no financial literacy treatment—an 11th grade group with no exposure to economics and a 12th grade economics class. The 12th grade economics classes, i.e., the two treatment groups and one control group, also worked on identical stock market portfolio assignments that their teachers required independently of our curriculum. In a test of overall financial knowledge, the FFFL‐intensive group outscored both control groups and the SML‐intensive groups, even on questions that were not taught in our curriculum. We conclude that an FFFL‐intensive input mix was beneficial in directly adding to financial knowledge and also in terms of leading to spillovers in such knowledge.     

Selection from Many Investments with Managerial Private Information*

We investigate capital investment problems when a manager knows the costs of a set of available projects, while the owner only holds probabilistic beliefs about these costs. With mutually exclusive projects, an optimal policy can be defined by a series of cost targets, one for each of the possible projects. The project with the lowest reported cost relative to the target is chosen, and funded as if the cost were equal to the target. The optimal investment policy can deviate from a traditional policy of selecting the project with the highest, positive net present value (NPV) in a number of ways. First, under-investment arises to limit the manager's ability to capture the economic rents. Second, when investment takes place, it is not always the project with the highest NPV that is implemented. Third, projects with lower cost variability can be favored. We extend the analysis to non-mutually exclusive projects. With two independent projects, batch processing is superior to individual appraisal whenever both optimal individual appraisal cost targets are interior. Individual appraisal ignores the impact of individual targets on incentives to report the costs of other potential projects. Batch processing can improve individual assessment by cost effective switching of investment away from the individual projects and into the batch as a whole. The results suggest that the common practice of analyzing batches of capital requests in an annual capital budgeting cycle provides advantages in the organization's attempt to deal with asymmetric information and incentive problems.