MIT Reports to the President 1994-95

RESEARCH

ECONOMICS, FINANCE AND ACCOUNTING (EF&A)

Applied Economics

Professor Ron Adiel's work has been in the area of earnings management in the insurance industry. His current work focuses on reinsurance as a tool for enhancing the financial reports of insurance firms. Other topics of interest include the valuation of insurance firms, and differences in reporting behavior of insurance companies across different countries.

Professor Ernst R. Berndt is carrying out additional research on the diffusion of technological innovations on the measurement of price changes that incorporate quality variations on workplace productivity impacts of improved health status, and on productivity measurement. Much of this work focuses on the pharmaceutical industry.

Professor S. Lael Brainard is starting research on the effects of offshore production on domestic employment, after completing research on the relationship between multinationals and trade and on strategic trade policy. She teaches classes on international trade and competition and on international macroeconomics. She will be on leave as a White House Fellow for academic year 1994-95.

Professor Henry D. Jacoby has continued research on global climate change and the application of techniques of corporate finance to the evaluation of resource projects under highly variable output prices. He also serves as a co-director of the Joint Program on the Science and Policy of Global Change, a shared activity of the M.I.T. Center for Global Change Science and the M.I.T. Center for Energy and Environmental Policy Research.

Professor Don O. May has just completed a project that investigates how managerial motives influence incentives to make diversifying acquisitions. His current projects also relate to the potential conflicts between managers and owners. Most notably he is investigating how portfolio managers change their security holdings given past performance and the firm's compensation structure.

Professor Robert S. Pindyck continued his research on irreversible investment decisions, focusing on investments of uncertain cost, and capital replacement decisions. He also conducted research on environmental economics, studying the implications of irreversibility's for environmental policy design.

Professor Nancy L. Rose studies competitive interactions among firms and the determinants and effects of government regulatory policies. Her current research projects include an investigation of airline pricing behavior, analysis of executive compensation and corporate governance practices, and the effects of regulatory reform on generic competition in pharmaceuticals.

Professor Julio J. Rotemberg has continued to work on the analysis of the effects of imperfect competition on fluctuations in economic activity. In joint work with Michael Woodford he has shown the extent of imperfect competition in the U.S. economy can rationalize the extent to which economic activity has tended to drop after the pre-1980 oil price increases. He has also continued to work on economic models which explain relationships among employees inside organizations.

Professor Richard Schmalensee continued to serve as Director of the Center for Energy and Environmental Policy Research. He has continued to study topics related to the economics of environmental policy and global climate change. He has also studied competition policy in Russia. He continued to serve on the Executive Committee of the American Economic Association. He was elected a fellow of the American Academy of Arts and Sciences.

Professor Thomas M. Stoker has continued to work on the development of semi-parametric estimation techniques and their application to economic problems. He has also done further work on the implications of aggregation for the analysis of consumer demand.

Professor Alwyn Young continued his research on economic growth and development in the newly industrialized economies of East Asia.

Finance

Professor John C. Cox continued his work on intertemporal consumption and portfolio policies. He developed efficient methods of computing optimal policies in a variety of new circumstances. He also extended his previous work on the term structure of interest rates.

Professor John Heaton is investigating the implications of models in which individual agents cannot completely diversify their idiosyncratic income. The implications of the models for savings, asset returns, and income distribution are being compared with actual data. Over the past year he taught a Ph.D. level course in monetary economics and a core course in finance theory for masters students.

Professor Andrew Lo has established the Laboratory for Financial Engineering, a partnership between industry and academia designed to support and promote basic research in quantitative financial economics. As of June, 1995, sponsors of the LFE include: Gary and Joan Bergstrom, Bridge Information Systems, Commodities Corporation, Commodities Corporation, CS First Boston, Investment Technology Group,The Mathworks, Sun Microsystems, Inc., and Teknekron.

Institute Professor Franco Modigliani has devoted his research to two subjects. The first is the stagnation that is continuing in Europe, where unemployment is reaching the magnitude of the "Great Depression." He has concluded that it is almost entirely due to the restrictive policies of the Bundesbank and to the fact that the other members of the EMS are boxed in by the EMS rules and have no way of pursuing an independent reflationary policy, except by abandoning the EMS. He has been particularly interested in contrasting the developments in France, which has continued to adhere to the so-called "Franc fort" policy, reaching unemployment rates of around 13%, with those of the United Kingdom and Italy, which have left the EMS either voluntarily or been forced out. Both countries have moved to floating exchanges, thereby freeing themselves from the restraints of the Bundesbank interest rate policies. Unfortunately however, in the case of Italy, political turmoil has resulted in devaluation and danger of inflation, to the point where, in his latest writings and TV appearances, he has recommended reentry into the EMS. He has also advocated the notion that the system of fixed parity can only work with far greater coordination of policies, especially wage policy, that is now conceived. His other main interest has been a study of saving behavior in China. This behavior is extraordinary, with the saving rates very low until the end of the 70's and becoming the highest in the world in the following decade. In research undertaken with the support of the People's Bank of China, and in cooperation with Larry Cao on their staff, it has been shown that this behavior can be accounted for primarily by the Life Cycle Hypothesis together with very marked movement in population trends and some intermittent large spurts of inflation.

Professor Stewart C. Myers continued to work on assessing organizational theories of corporate financing in which the mature firm is viewed as self-interested value-maximizing coalition and dividend policy is analyzed as an implicit contract with outside investors. He is working with Professor Lakshmi Shyam-Sunder on empirical tests of corporate financing policy and the evaluation of alternative approaches to estimating the cost of capital.

Professor David Scharfstein has been doing research on a wide variety of topics in theoretical and empirical corporate finance. His recent projects include analyses of Japanese corporate financing arrangements, the economics of financial distress, corporate risk management, and the links between product market competition and corporate financial structure.

Professor Jeremy Stein continues to work on a broad range of theoretical and empirical topics in corporate finance and asset pricing. His current research includes an analysis of the links between corporate financial structure and monetary policy.

Professor Jiang Wang has been working on equilibrium models of security prices and trading volume under asymmetric information. He is also working on the problem of optimal contracting between investors and money managers.

Accounting

Professor Paul M. Heady has worked on four research areas. The first examines how firms perform after mergers and acquisitions. The second examines problems faced by firms' managers in communicating information on their firms' performance to outside investors. The third research topic examines the measurement of performance in the pharmaceutical industry. Finally, he has examined how different forms of organizational design (joint venture versus wholly-owned subsidiary) is related to firm performance mentality.

Professor Alfred Kofman is working on the design of new performance measurement, evaluation, and incentive systems. He is testing the implications of his conceptual models in the manufacturing companies associated with the Leaders for Manufacturing program. He is also studying the impact of management information systems on organizational learning and modeling the incentive mechanisms that may lead managers to behave in counterproductive or myopic ways. Professor Kofman has continued his research on collusion-proof mechanism design and optimal communication algorithms.

MANAGEMENT SCIENCE

The Management Science area encompasses the following concentrations: marketing, operations management, information technology, probability and statistics, and operations research. New initiatives, are being implemented by the members of the area.

Members of all the subgroups have continued to play a role in the Leaders for Manufacturing Program (LFM) in a wide variety of functions. In particular Steve Graves is a co-director of the program. A significant number of LFM students have been and are being advised by faculty of the Management Science area.

Awards and Honors

Arnold Barnett and Robert Freund received Awards for Teaching Excellence given by the Sloan School Graduate Management Society for the academic year 1994-95. Erik brynjolfsson won awards for both Best Overall Paper and Best Paper on the Conference Theme at the International Conference on Information Systems. He was also awarded the Douglas Drane Career Development Professorship. Chris Kemerer's paper with C. Hess, won Best Paperof the Year (1994) at Management Information Systems Quarterly. John Little was the first President Elect of the society INFORMS (INstitute For Operations Research and Management Science), a merger of TIMS and ORSA. Stuart Madnick (with Tarek Abdel-Hamid) won the 1994 Jay Wright Forrester Award for the "best contribution to the field of System Dynamics in the preceding five years." Tom Magnanti won the Kimball medal given by the Operations Research Society of America for outstanding service to the profession. Vien Nguyen has been appointed to the Robert Noyce Career Development Professorship to a three year term. Birger Wernerfelt was winner of the 1994 Strategic Management Society's Wiley Best Paper Award for the best paper published more than five years earlier in the Strategic Management Journal. Wanda Orlikowski and JoAnne Yates' paper was selected as the Best Paper in Organizational Communication and Information Systems at the 1995 Annual Meeting of the Academy of Management. Karl Ulrich and Steve Eppinger's book, "Product Design and Development", received the Academy of Management, TIM Division Best Books List 1995 award.

Operations Management

Professor Gabriel R. Bitran has been working on the development of models to analyze manufacturing operations with variable yields. These are typical of semiconductor manufacturing and other high technology environments, such as fiber optics. He has continued his research in the service industry studying reservation systems. The context in which the study is being performed is the hotel industry. The objective is to develop models to allow managers to match supply and demand. Professor Bitran continues to work on a methodology for assessing the status of quality in services.

Professor Stephen C. Graves continues to focus on supply chain modeling and strategic placement of inventories across a supply chain.

Professor Charles H. Fine is studying supply chain design with a focus on manufacturing equipment development and sourcing in the semiconductor and automobile industries. His work attempts to understand how manufacturing firms can better manage concurrent design and development of products, processes, and supply networks.

Professor Lawrence Wein continues to develop new methods and principles for the scheduling and control of production operations, as modeled by a network of queues. He is also developing new procedures for efficiently allocating resources (e.g., kidneys to be transplanted, vaccines, chemotherapeutic drugs) in a numb er of health care problems.

Professor Karl T. Ulrich has several projects in the area of product development.

Professor Steven Eppinger's research activities are applied to improving product design and development projects. This research focuses on organizing complex design processes in order to accelerate industrial practices. His research is conducted with the Leaders for Manufacturing Program and the International Center for Research on the Management of Technology.

Professor Anantaram Balakrishnan has modeled and solved large-scale optimization problems to support telecommunications and manufacturing planning. In the telecommunications domain, his research has addressed algorithmic development and worst-case analysis for new classes of hierachical network design problems. His manufacturing research focuses on electronics assembly and metal forming operations. He is also investigating the use of transactional data from shop-floor operations for problem diagnosis, planning, and improvement of manufacturing performance.

Professor John Sterman's research includes field-based and experimental studies of human performance in dynamic decision-making environments. He designs and evaluates the effectiveness of "management flight simulators" for research and teaching, and studies the use of such tools among corporations. He also investigates the dynamics of learning in organizations, and directs a project designed to understand why many of the quality and organizational improvement programs adopted by firms over the past decade are abandoned, even after generating successful results. He also continues his research on the application of nonlinear dynamics in human systems ranging from individuals to the economy.

Operations Research and Statistics

Using statistical and probability methods. Professor Arnold Barnett has studied subjects that shape public policy, particularly in the areas of aviation safety and criminal justice. He has also done recent work on voting systems, war casualties, and the question "When is a model good enough?"

Professor Gordon Kaufman continues to focus on the exploration of primary energy resources and on statistical and mathematical problems in resource estimation and global climate change. He is also studying how to assess large and complex system uncertainties when given an incomplete specification of the probability structure of such systems, as well as statistical analysis of software reliability.

In addition, Professor Roy Welsch has studied nonlinear process control, robust experimental design, the use of graphics in statistical analysis, computer guided diagnostics in statistics, and risk management in financial credit services.

Professor Bin Zhou has various interests in applied statistics including financial time series analysis and design of experiments. His recent research focuses on statistical issues, such as the f-consistency and the optimal observation frequencies of parameter estimation, in analyzing high frequency financial time series. He developed a de-volatilization technique in modeling and forecasting foreign exchange market.

Professor Dimitris Bertsimas has worked on combinatorial optimization, probabilistic analysis of combinatorial problems, stochastic and dynamic optimization and applications of or in the airline industry.

Professor Robert Freund has studied generalized "condition numbers" for systems of conic inequalities, new methods for solving linear programming problems, and has studied methods for analyzing the reliability of stochastic networks using realm matrices.

Professor Thomas Magnanti has studied optimization models and algorithms for problems in communication system design, and begun to develop a new on-campus/off-campus graduate degree program in systems design and management.

Professor Jeremy Shapiro has continued to work on a variety of applications of mathematical programming in manufacturing, supply chain management, and financial planning.

Professor James Orlin has worked on developing faster algorithms and improved heuristics for problems in network and combinatorial optimization. He is also working on problems in computational molecular biology.

Professor Vien Nguyen has worked on topics in applied probability, diffusion processes, queuing theory, and performance analysis of queuing networks that arise in manufacturing and telecommunication applications.

Information Technologies

The increasingly widespread availability of information from numerous sources both within and external to organizations and the rapid changes in information technology poses significant opportunities and challenges to management. The Information Technologies Group addresses these issues by experimenting with new technologies such as expert systems and heterogeneous databases, by examining a variety of strategic information applications, and by studying underlying organizational issues.

Professor Erik Brynjolfsson focuses his research on the economic impacts of information technology, including organizational design and productivity. He has developed models of the relationship between information costs and the allocation of decision rights within and among firms. His econometric work assesses some of these models and also estimates the impact of information technology on various measures of economic performance. His recent findings show that information technology has contributed much more to productivity than indicated by earlier studies.

Professor Thomas Malone established the Center for Coordination Sciences which focuses on developing computer systems that help people work together in groups and organizations, predicting and suggesting changes in human organizational structures that accompany the use of information technology, and developing computer systems whose internal structure is based on insights gained from analyzing human organizations. A major new effort focuses on the development of a "Process Handbook" to help companies explore new ways to conduct business.

In related research, Professor Stuart Madnick has been analyzing Composite Information Systems (CIS) that facilitate applications requiring inter-organizational and intra-organizational information exchange. A specific focus has been "context interchange" which deals with differing meanings between the source and the receiver. A prototype system, called CIS/TK, which currently integrates multiple disparate information systems has been developed by this group. Extensions to deal with rapidly changing semantics and identification of sources in the emerging "information highway" are being developed.

Professor Chris Kemerer has developed models to aid the management of software development and is developing and testing measures of software productivity. His most recent work focuses on metrics and models for evaluating object-oriented technologies.

Professor Wanda Orlikowski's research concerns the relationship between information technology and organizational change. She has continued her research into the automation of systems development work, the role of electronic communication media and groupware in coordinating work, and the restructuring of organizations through information technology.

Professor Richard Wang has extended his work on the issue of "where is the data from?" in database management to address issues involved in developing Quality Data Base Management Systems (QDBMS). Professor Wang continues to provide leadership to the newly-formed Workshop on Information Technologies and Systems (WITS) which serves as the forum for the exchange of ideas by faculty and leading industry practitioners in the Information Systems field, and initiated the Total Data Quality Management (TDQM) Consortium with Professor Stuart Madnick.

Dr. Amar Gupta continued his research on automated reading of handwritten characters, especially on bank checks, and the MIT Technology Licensing Office has applied for patent rights on the architecture and algorithms invented by him and his researchers. His work on integration of heterogeneous information systems envisages the design of a new national transportation information infrastructure. Jointly with Professor Stuart Madnick, he established the Productivity from Information Technology (PROFIT) initiative.

Professor Paul Resnick designs electronic brokerage services for the information superhighway. He has developed GroupLens, a system for sharing subjective evaluations of products, especially information products. He has also analyzed market-based mechanisms for compensating the evaluators.

Dr. John Rockart continues his work on critical success factors, systems development, and management of data resources. He is expanding his work on executive support systems downward into the organization as Management Support Systems and is exploring the use of information technology to manage interdependent organizations of a firm.

Dr. Jeffrey Meldman continues to track developments in the legal protection of information, particularly proprietary rights in software and personal rights of privacy.

Marketing

Professor John Little has focused much of his energy on "The Consumer Packaged Goods Project," an activity to understand the impact of large, single-source data sets. One focus of this project is in modeling advertising effects, that is, using laboratory experiments with extensive panels of households to understand how television exposures affect both brand choice and the size of packages bought by customers. Other foci are on how newspaper features affect store choice and how cents-off coupons affect profitability. John Little is also working on the development of some basic "laws of manufacturing,"

Professor Glen Urban having assumed the position of Dean, has continued his research on new-product development. One major focus (with John Hauser) has been on the refinement of a multi-media system to accelerate information to consumers so that we can observe and predict decision processes that normally take place over a period of months. The newest application (with Bill Qualls) is to forecast the adoption of a new medical device (hematology). He has also continued his research on the advantage to being first to market by statistical analysis of the market's ethical pharmaceuticals to treat ulcers (with Prof. Berndt). In addition, he has published Design and Marketing of New Products, (2nd edition) with John Hauser.

Professor John Hauser's research over the past year has focused on designing products in response to the voice of the customer and on managing business for long-term profit based on customer satisfaction. Together with Birger Wernerfelt they have developed practical, yet theory-based, methods to motivate employees to focus on customer satisfaction. This year they developed methods to to provide incentives to upstream research employees based on the evaluations of intermediaries such as product-development teams. John Hauser is continuing this work with a focus on metrics to evaluate R&D.

Professor Birger Wernerfelt has continued his research on how selling formats are developed. For example, he has explored why in the United States consumers bargain with automobile dealers but in some European countries the price is taken as posted. Similarly, in Japan, the dealer comes to the consumer but in the United States the consumer comes to the dealer. He has completed papers on salespeople and brochures, on employees and independent contractors, and on alternative ways to govern trading relationships.

Professor William Qualls' areas of specialization are group decision behavior and modeling marketing response behavior. He uses behavioral paradigms to aid in explaining and predicting marketing phenomena and managerial behavior. Most recently his research has focused on how firms can maximize their profitability through customer and employee satisfaction.

Professor Drazen Prelec has focused his activities on the contemporary research in consumer behavior that is influenced by economic models and psychological concepts and theories. He is examining several problem areas of individual decision-making, all basic to our understanding of human action which illustrate how economic intuition and psychological reality clash in an interesting and scientifically productive way.

BEHAVIORAL AND POLICY SCIENCES (BPS)

ADMINISTRATION

MIT Reports to the President 1994-95