Category Archives: Academic Research

The Strategic Decentralization of Recruiting

31 Sunday Jan 2021

Posted by in Academic Research, Auction, Organization

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Why do firms decentralize recruiting? Larger firms are impersonal, slow to act, and struggle to leverage expertise. Thus, we expect larger firms to decentralize hiring more often. This intuition, however, is flawed (thomas-jungbauer.com/research/).

A 2017 study by Mercer indicates that, for the large part, the opposite is true. In “The Strategic Decentralization of Recruiting,” co-authored with my colleague Yi Chen, we show how market power in professional labor markets may justify this behavior.

The bigger a firm, the larger its market power, i.e., its ability to dampen wages across the market. On the other hand, when a firm delegates hiring to divisions, it increases wages through competition among its divisions.

Outside competitors, however, foresee that this increased level of competition makes aggressive bidding less worthwhile, and reduce their own bids for workers. As a consequence, the delegating firm may hire more skilled workers without overly raising wages.

We describe this tradeoff between market and commitment power, and the resulting delegation patterns as a function of firm size and its productivity. We find that both highly productive as well as non-productive firms never decentralize recruiting in a given labor market.

Branding Vertical Product Line Extensions

12 Tuesday Jan 2021

Posted by in Academic Research, Strategy

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“Branding Vertical Product Line Extensions,” a paper with Christian Schmid from U Vienna. We build a stylized model to analyze the optimal branding decision of a firm expanding its product line as a function of the vertical direction of the extension and the level of competition.

We assume that consumers are not only affected by the quality of the product they consume, but every product sold under the same brand. This relation may arise due to product confusion, conspicuous consumption, etc. The main result of the paper is that firms may employ branding as a commitment device to soften quality competition.

Under competition, firms do not recoup their full investment in R&D, advertisement, factories, etc. Therefore, they opt for the branding regime that minimizes investment. Interestingly, that means that firms often choose the branding regime preferred by consumers when expanding downwards but not when expanding upwards.

Our paper provides a potential explanation why in some markets we see firms successfully expanding downwards under an umbrella brand and upwards with individual brands (think Mercedes vs. Toyota/Lexus) and vice versa in other markets (GAP/Old Navy vs. Adidas).        

The Organization of Innovation: Property Rights and the Outsourcing Decision

04 Friday Dec 2020

Posted by in Academic Research, Innovation

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Why do firms outsource research and development for some products while they opt to conduct R&D in-house for similar ones? In our new paper, Sean Nicholson, June Pan, Michael Waldman and I argue that companies want to protect their existing product portfolio. If a firm already successfully operates in a given product category, it is more reluctant to relinquish control of the research and development of new products in order to limit cannibalization of their existing successful products.

We build a novel theoretical model and show that a firm is more likely to conduct R&D for a new product in-house if a.) the company already sells a product in the same product category, b.) the longer the patent on the existing product, and c.) the higher the market share of the existing product are. Data from the pharmaceutical industry strongly supports our findings. We control for various measures of competition and patent existence to exclude simple category specific expertise as an explanation.

Self-reported actions, signaling, and auditing

05 Friday Jun 2020

Posted by in Academic Research, Signaling

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Actions that affect the value of a service are often self-reported rather than publicly observable. The diligence of a contractor, the education level of job applicant, or the true mileage of a used car are typically reported by the seller. This opens the door for lying and misrepresentation.

In “Self-Reported Actions, Signaling, and Auditing,” my co-author Mike Waldman and I present a model in which multiple receivers bid for the service of a sender, the value of which depends on a action taken by the sender. Instead of the action itself, receivers only observe a message reported by the sender indicating which action was taken. Receivers may opt for costly auditing to verify that the message matches the action.

We find that lying may increase social welfare when the action serves as a signal of a desirable trait of the sender. A positive likelihood of misrepresentation lowers the value of the action as a signal, and therefore counteracts the well-known over-investment result in the signaling literature. Therefore, factors that promote misrepresentation, such as a lower disutility of lying or a higher auditing fee, may increase social welfare.

This result stands in stark contrast to cases in which the action does not signal the sender’s type. We also find that the level of auditing is inverse U-shaped in the probability of the sender being dishonest, and that receivers may audit more often if the action does not serve as a signal, despite gaining less information when auditing. We apply our insights to education signaling, college applications, and odometer fraud in the used car market.

Find the full text paper HERE . I will present it at this year’s virtual editions of the EEA and the ESWC.