MIT Sloan Technological Innovation, Entrepreneurship & Strategy Seminar

Spring 2010 Schedule

Mondays – 11:30am-1 pm (E52-598)

Date	Speaker (Affiliation)	Title and Abstract
Feb. 1^st	Woody Powell (Stanford)	Chance, Necessité, et Naïveté: Ingredients to Create a New Organizational Form (with Kurt Sandholtz) To appear in J. Padgett and W. Powell, eds., The Emergence of Organizations and Markets, chapter 12.
Feb. 22^nd	Rodrigo Canales (Yale)	The Dark Side of Decentralized Banks: Market Power and Credit Rationing in SME Lending (with Ramana Nanda) Abstract: Using loan-level data from Mexico, we study the relationship between the organizational structure of banks and the terms of lending to small businesses. We find that banks with decentralized lending structures – where branch managers have autonomy over the terms of lending – give larger loans to small firms and those with more "soft information". However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to cherry pick customers and restrict credit when they have market power, even more so to smaller firms that have fewer outside options for external finance. These findings highlight a ‘darker side’ to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.
Mar. 8^th	Ramana Nanda (HBS)	Entrepreneurship and the Discipline of External Finance Abstract: Using micro data from Denmark, I confirm Hurst and Lusardi’s (2004) finding that the propensity to start a new firm is relatively flat until the 80th percentile of personal wealth, and rises most sharply after the 95th percentile. In addition, I show that this pattern is particularly strong for those entering less capital intensive industries. The wealthiest individuals starting these firms with low dependence on external finance have lower pre-entry wages compared to those who stay in employment. Their firms are also more likely to fail. This pattern is less true only for the wealthiest individuals in the data, and not present for those starting firms in capital intensive industries. These findings suggest that a lot of the entry at the top end of the wealth distribution may be driven by low-ability individuals who do not face the discipline of external finance.
Apr. 5^th	Gaël Le Mens (Pompeu Fabra)	Path-Dependence and the Dynamics of Organizational Mortality: Age-Dependence Revisited Abstract: This paper proposes a novel theoretical framework to model the dynamics of organizational mortality. The main theoretical contribution is a clarification of the relations between organizational fitness, endowment, organizational capital and mortality hazard. If the mortality hazard is a function of the stock of organizational capital, and the rate of accumulation of organizational capital is a function of the fitness level, organizational fitness becomes the key factor in predicting the evolution of the mortality hazard. The paper demonstrates how this new perspective can cast a new light on the much studied relation between organizational age and organizational hazard of mortality. It also introduces a novel approach to modeling organizational obsolescence as a consequence of drifting tastes and increasing organizational inertia.
Apr. 12^th	Lourdes Sosa (LBS)	Division of Labor across Organizational Forms during a Technological Discontinuity: Evidence from Gene Therapy Research Abstract: Studies in creative destruction have shown incumbents underperform entrants in the R&D of radical innovation, even if not in sales. In this paper, based on a combination of interview, historical and quantitative data on the transition of the anti-cancer drug market into biotechnology, I show that the abovementioned pattern is driven by the high R&D performance of diversifying entrants. Contrastingly, de novo entrants underperform both diversifying and incumbent firms. However, I also show that de novo entrants carry out the largest proportion of the variant of biotechnology with the highest risk: gene therapy. The explanation behind this pattern is twofold. First, in the highest-risk variant, established firms have no capabilities to re-use. Therefore, the lack of re-usable capabilities does not confer de novo firms a disadvantage in that variant. And second, projects in the highest-risk variant are less likely to starve when housed in more even-risk internal markets, a characteristic more often found in de novo firms. Therefore, their particular organizational structure confers de novo firms an advantage in that variant. It is in this sense that, through a discontinuity, established firms (whether incumbents or diversifying entrants) take advantage of their capability re-use whereas de novo firms take advantage of their organizational structure, and a division of labor arises. Overall, this paper clarifies the role of the novo firms in the industrial dynamics of radical innovation: risk bearing. I discuss implications for research in creative destruction and for the broader discussion of strategy vs. structure.
Apr. 26^th	Henry Weil (MIT Sloan)	Why Markets Make Markets Abstract: Many models of markets are based on assumptions of rationality, transparency, efficiency, and homogeneity in various combinations. They assume, at least implicitly, that decision makers understand the structure of the market and how it produces the dynamics which can be observed or might potentially occur. Are these models acceptable simplifications, or can they be seriously misleading? The research described in this article explains why markets routinely and repeatedly make "mistakes" that are inconsistent with the simplifying assumptions. System Dynamics models are used to show how misestimating demand growth, allowing financial discipline to lapse, unrealistic business planning, and misperception of technology trajectories can produce disastrously wrong business decisions. The undesirable outcomes could include vicious cycles of investment and profitability, market bubbles, accelerated commoditization, excessive investment in dead-end technologies, giving up on a product that becomes a huge success, waiting too long to reinvent legacy companies, and changes in market leadership. The article illuminates the effects of bounded rationality, imperfect information, and fragmentation of decision making. Decision makers rely on simple mental models which have serious limitations. They become increasingly deficient as problems grow more complex, as the environment changes more rapidly, and as the number of decision makers increases. The amplification and tipping dynamics typical of highly coupled systems, for example, bandwagon, network, and lemming effects, are not anticipated. Examples are drawn from airlines, telecommunications, IT, aerospace, energy, and media. The key conclusions in this article are about the critical roles of behavioral factors in the evolution of markets.
May 10^th	Jim Rebitzer (BU)	Search For Search Frictions Abstract: Search frictions occur whenever information about competing products or services is slow to arrive to market participants. The imperfections resulting from search frictions can, in theory, produce anomalous outcomes with important implications for market efficiency, firm strategy and public policy. The empirical study of frictions has lagged behind theory, however, because empirical settings complex enough to produce significant frictions are also settings where it is hard to confidently link observed outcomes to frictions. This paper uses a novel audit-methodology to identify the empirical effect of frictions on market outcomes. We study the market for a single, homogeneous commodity where frictions emerge as a result of the fact that prices are determined via time consuming negotiations. Using experienced negotiators trained to follow a common negotiation strategy, we are able to test some of the core predictions of work-horse models of search frictions while controlling for much of the otherwise confounding heterogeneity. Consistent with models of search frictions, we find that the law of one price does not hold and that the distribution of seller prices is significantly right skewed. Our structural estimates yield reasonable parameter values that indicate the presence of moderate frictions. Although frictions are moderate, they are nevertheless enough to transfer a significant portion of consumer surplus from buyers to sellers.