Yale Insights

Articles from the Yale School of Management Insights

To Prevent Financial Crises, Regulate Short-Term Debt

Source: Yale Insights On:

Read On

A run on the National Penny Bank in London in 1888. Image: Universal History Archive/Universal Images Group via Getty Images.

By Roberta Kwok

The financial meltdown of 2007-08 took economists by surprise. Before that, the United States hadn’t suffered from a major crisis since the Great Depression. “There was this unthought assumption that we wouldn’t have one,” says Gary Gorton, the Frederick Frank Class of 1954 Professor of Finance at Yale SOM. “They said, don’t worry about it.”

So why did the banking system break down? Contrary to the popular narrative, the reason was not simply greed, Gorton argues. “There’s an inherent problem with banking,” he says. “And the inherent problem has to do with the nature of their debt.”

Read the study: “The regulation of private money”

One of the functions of banks is to issue short-term debt—which means the lender can get their money back typically in a week or less. For example, when a customer deposits funds in a checking account, she is lending money to her bank. She can get that money back whenever she wants by withdrawing cash or writing a check. As Gorton explains in a new paper, the price of short-term debt is fixed. If a customer writes a check for $100, the recipient accepts that the check is worth $100 and doesn’t argue about its value.

Leading up to the 2007-08 crisis, a kind of short-term debt called the sale and repurchase agreements (repo) market became popular. The process worked like this: A large lender, such as Fidelity, wanted to store money overnight and earn interest. So Fidelity lent, say, $500 million to an investment bank such as Goldman Sachs. To assure Fidelity that its money was safe, Goldman Sachs provided collateral.

With short-term debt, Gorton says, “no one is going to produce information about what’s backing this debt.” The lender doesn’t have time to analyze the collateral in detail. “That collateral has got to be something that Fidelity just takes, no questions asked,” he says. In the repo market, the debt was often backed by securitized bonds, created by pooling together income-creating assets like mortgages.

The problem arises when lenders start questioning the value of the collateral, as they did in 2008. “Everybody thinks, oh wait a minute, this collateral isn’t any good,” Gorton says. Since the price is fixed, the only factor that can change is the amount being lent. In other words, lenders stop lending money to the banks, cutting off their supply of cash—essentially, a bank run. “If you’re Goldman Sachs, and you’re 50% funded in the repo market, and the day comes when the lenders decide they don’t want to lend to you anymore, then you have a really big problem,” Gorton says. Banks were forced to sell assets, and prices plunged.

Regulators have tried to prevent such crises in two ways. One is requiring that short-term debt be backed by high-quality collateral. However, “that’s a system that has never really worked successfully,” Gorton says.

For instance, the U.S. National Banking Acts in the 1860s required national banks to back their money with U.S. Treasury bonds. But Treasuries were in short supply because other companies wanted them too. So a shadow banking system developed, under which checking accounts were backed by loan portfolios. Whenever customers got nervous about their banks’ stability, they lined up to get their money back, spurring frequent crises over the next half-century.

To avoid a repeat of 2007-08, “you need to know what exactly causes the crisis,” says Gary Gorton. “And that means understanding what exactly a bank is.”

In 1933, the U.S. instituted deposit insurance nationwide, meaning that the government would back up the banks. That worked from 1934 to 2007, “which kind of lulled people into this false sense of security,” Gorton says.

So what happened in 2007? Although the repo market was a form of short-term debt, it wasn’t insured. “No one considered it part of banking,” he says.

Regulators need to find all types of short-term debt, measure it, and impose safeguards, Gorton says. Some short-term debt may be issued by companies that aren’t considered banks. “But if some firm is issuing it, in fact it is a bank,” he says. “And it’s vulnerable to runs because, by design, the price is fixed.”

But regulation of short-term debt is not the only answer. If a bank—that is, an organization that issues this type of debt—doesn’t like the rules, it can simply migrate into an unregulated shadow banking system.

So how can banks be kept in the regulated system? The answer lies with their charter value, Gorton says. Setting up a bank requires a license, and the license allows the company to get insurance on deposits. Licensed banks have local monopolies and thus reap extra profits, he says. Charter value is the value of those monopoly profits.

“The way you keep banks in the banking system is you allow them to have charter value,” he says. “Then they want to be a bank, and they don’t want to risk losing their valuable monopoly license.”

Paying attention to these issues is key to preventing more financial crises, Gorton says. To avoid a repeat of 2007-08, “you need to know what exactly causes the crisis,” he says. “And that means understanding what exactly a bank is.”

Can Antitrust Enforcement Protect Digital Consumers?

Source: Yale Insights On:

Read On

New York City subway riders using smartphones

The first antitrust laws and enforcement efforts in the United States were taken in response to the emergence of sprawling industrial conglomerations—the “trusts” in “antitrust”—that amassed inordinate power over the growing American economy. John D. Rockefeller’s Standard Oil, for instance, controlled as much as 90% of refined oil production in the country around the turn of the 20th century. The company was broken up under the Sherman Antitrust Act, spawning successor companies that would eventually become Exxon, Mobil, and Chevron.

In recent months, increasing interest has been focused on applying antitrust law to a new breed of “trusts”—the digital conglomerates that have amassed inordinate power over how citizens communicate, shop, and, possibly, cast their ballots. The Department of Justice and the FTC have initiated antitrust investigations of big tech, and in September, 48 state attorneys general announced that they are collaborating on an investigation as well. 

Fiona Scott Morton, the Theodore Nierenberg Professor of Economics at Yale SOM, has been an intellectual standard bearer for the effort to effectively apply antitrust principles originally crafted for an age of steel and oil to the new digital landscape. Earlier this year, she chaired a committee of scholars that studied consumer harms caused by the market power of digital platforms like Google and Facebook, and proposed updated antitrust enforcement and regulation to address them. In August, she launched the Thurman Arnold Project, an initiative funded by the John S. and James L. Knight Foundation and the Omidyar Network that will leverage resources from across Yale to further understanding and action on these issues. “Antitrust enforcement and competition policy are lagging behind academic knowledge, and new energy is required to bring these issues to public attention and into the policy arena,” Scott Morton said in announcing the creation of [email protected] 

Two new papers co-authored by Scott Morton further this agenda by synthesizing findings from academic research in antitrust to explain how lack of competition can lead to decreased innovation and higher prices for consumers—and what can be done about it. Scott Morton describes the goal of her work as “trying to make the economic literature more understandable to policy makers, and trying to demonstrate where the results are applicable to, in particular, competition enforcement and regulatory issues.”

Scott Morton spoke with Yale Insights about how smart antitrust policy and enforcement can protect innovation and prevent exploitative markups.

Thurman Arnold Project logoThurman Arnold Project at Yale

A new initiative focused on creating, sharing, and applying the scholarship needed for rigorous competition policy and enforcement. Learn more.

Q: Why study antitrust and innovation? 

Antitrust enforcement is geared around consumers and the welfare of consumers. We’re trying to protect consumers by giving them competitive markets. Those competitive markets have firms continually trying to attract a consumer away from a rival. How do you attract a consumer? You attract them with a lower price, a better quality, or a more innovative product. And so the consumer welfare standard encompasses all three of those things.

Why do we particularly care about innovation? I would say today, even more perhaps than in past years, it’s because we’re seeing a lot of products where one side of the market has a zero money price. What are consumers getting out of their interactions with Google if they’re searching or using a map or a calendar? They’re not paying a money price; it’s a barter transaction. They’re giving their data, and they’re getting back some kind of service, and innovation in those services is the main way that the consumer is benefiting. So the maps get better, or the calendar gets more sophisticated, or the mail gets higher capacity.

Read the paper: “Antitrust and Innovation: Welcoming and Protecting Disruption,” by Giulio Federico, Fiona Scott Morton, and Carl Shapiro

Those innovation effects are a really, really important part of the benefit to consumers from competition. And when you look at the way firms compete, if you took an ordinary old market like automobiles, yes, they compete on price, but they most definitely compete on quality. Is the car going to be reliable? Is it going to break down? What kind of miles per gallon does it get? And they’re also competing on innovation. Does the car have Wi-Fi? Does the car have a nifty information system? Does the car have a new kind of braking mechanism, or an airbag that’s different and new? All of these are innovations, and consumers value them when they’re choosing a product. So it’s an important part of competition.

Q: The first line of your paper is, “We write in praise of market disruptors.” Why are disruptors important in keeping that innovation going?

The market disruptor is often a company that is not doing things the same way as everybody else. So Netflix—when they first started mailing out DVDs, you didn’t have to drive down to the video rental store. They came and they were sitting there in your TV room, to be used whenever you felt like watching a movie, and that was really different than the existing technology. The disruptor has a different business model, often, or a different product. They’re doing something innovative, and that really puts stress on the existing incumbent firms. Those existing incumbent firms would rather the disruptor wasn’t there, because they have a new value proposition for consumers. If they’re successful, they are attracting some consumers away.

That whole process of dynamism—new products, consumers moving to the new products, old products fading or having to get cheaper or better to retain the customers—that’s a real source of consumer benefit out in the marketplace.

Q: A disruptor could replace an entrenched company, but it also could put pressure on the company to improve, to try something new.

That’s right. For example, when my colleague Barry Nalebuff launched Honest Tea, one of the things that he did after Honest Tea was Honest Kids, which was a line of low-sugar kid’s drinks. One of the things that he is very proud of is that after they launched Honest Kids, the leading juice box brand reduced the amount of sugar in their juice boxes. 

Q: In this paper you were looking at mergers and how those can affect whether disruptors can get in the market. Would you talk about that?

Let’s imagine that there’s a disruptor that arrives in a particular market and is stealing away customers from the incumbent firms. One of those incumbent firms might want to purchase the disrupting entrant, because by purchasing them, they then control that business model. They could either shut it down, or they could make it more similar to their business model, or they could keep it, because they think maybe it has a future, but they could raise its price, so it doesn’t cannibalize the old business model quite so much.

All of those things are reducing the options for consumers. They’re either raising prices, reducing choice, or lessening the competition between the incumbent and the disruptor. So it’s of concern. Any merger requires evaluation, but a merger where there’s a disruptor that’s creating great benefit for consumers with an incumbent is one where we’re particularly cautious.

Q: What’s an example of this dynamic?

If you thought about the proposed AT&T-T-Mobile merger, there you had T-Mobile disrupting with a number of innovations. They were the first Android handset, for example. They did the first handset where you could connect straight to Facebook. They were being disruptive on the pricing front, too, because they needed customers.

After the merger was blocked, the pricing disruption became more clear, as you saw T-Mobile offering things like free international roaming or unlimited data plans. And these kinds of moves are the sort of effective price decline that intensifies price competition and makes consumers say, “My existing plan isn’t offering free international data. Maybe I should be switching.”

Q: How contentious is your perspective on protecting innovation?

I would say there’s a narrative out there that says that monopolists innovate, and that, I think, is part of the social-cultural baggage we inherited from Xerox PARC and AT&T’s Bell Labs, much of which was extremely important. I think those examples loom large, and what were they due to? They were due to the monopolists having so much profit that they could just run a little innovation center, kind of like a mini-university. And that’s great as far as it goes, but you’re not weighing that against the tremendous other problems that come with being a monopolist, and the price and quality and innovation in the product itself. 

What we see in more controlled environments where, for example, trade barriers fall and a country’s producers are exposed to more competition, is actually that competition stimulates more innovation.

Q: The monopolists kind of innovate at their leisure.

They innovate at their leisure, that’s right.

Q: What do you see as the effective remedies when considering these kinds of mergers? 

The way to take innovation into account in merger review is known. We do it. We look for documents. We look for examples of the firms competing on this dimension already. I don’t think it’s necessary to change practice. We wrote the paper mostly to remind people what an important part of consumer welfare innovation is, because when you look at the macroeconomic literature, huge growth in standards of living can come from innovation—new ways to make engines in a car, for example. Let’s make an electric car. Let’s invent an airbag. So standards of living really are driven by technological innovation. And so we need to be sure, as we do merger review, that we are watching that element of competition very closely, and weighting it in accordance to its importance to consumers.

Q: You also wrote a paper about markups. Why was that?

The paper on markups arose because there’s an increasing macroeconomics literature that documents the rise over the last 40 years of markups in the economy overall. What do I mean by a markup? Price over marginal cost or variable cost. In the case of software, say, variable cost is almost zero, and it’s all the fixed cost of inventing it. If we’re talking about this table, there’s some fixed cost of setting up the factory and the design and so on, but then there’s variable cost in the metal and the plastic and the composites and so on in the table.

Why have markups been rising? The literature points to the highest-markup firms having yet higher markups, and those are coming from very low variable cost—digital products and pharmaceuticals and so on—and then potentially other explanations, such as insufficient competition to drive prices down. The paper tries to divide the interpretation of rising markups into, basically, those two groups—good markups and bad markups. Good markups come from the fact that people want medications, people want websites. To make a nice website you have to pay a website designer and a programmer to create it—that’s a fixed cost. But once you’ve created it, many, many people can visit it at low cost each, and that creates a very high markup.

That kind of high markup is not a competition problem; it’s the nature of the good that the consumer wants, and often the higher fixed cost is a sign of quality. That is to say, a better designed webpage, a more effective drug, a more innovative car—those might all have higher fixed costs to create. 

But then there’s a set of markups that we might say are the problem markups, and these come from prices rising not to cover the fixed cost, but because there is not enough competition. So I make a car, but then there isn’t another car maker to compete with, and therefore the price gets even higher.

Read the paper: “Do Increasing Markups Matter? Lessons from Empirical Industrial Organization,” by Steven T. Berry, Martin Gaynor, and Fiona Scott Morton

Markups that come from insufficient competition might in turn be generated by insufficient antitrust enforcement—competition authorities that are not keeping up with the economy and new products and learning how to enforce in those areas. These markups might also come from rent-seeking behavior in areas like intellectual property, licensing, deregulation. If those processes are captured by the firms themselves, they can end up writing very favorable rules, and then there’s very high markups in those places.

So the paper really walks through a number of these explanations, and the broad conclusions are that quite a bit of the rising markups is probably due to things we would consider good or at least neutral. But we’re also concerned that rising markups might also be driven by insufficient competition enforcement, and that, luckily, is something that we actually know how to fix. We could have stricter laws, we could put more effort into it, and that might really bring markups down that are the wrong kind of markup.

Q: So who’s on your naughty list? What makes for a bad markup?

The bad markups are, well, anti-competitive conduct, firms that exclude, mergers that are anti-competitive. There are also issues around, say, occupational licensing. Many, many states use occupational licensing as a way to create entry barriers into a profession. So do we really need an occupational license for dog shampooers and dog massages, and if we need it, what is the minimum amount of hours and training that’s required for health and safety, as opposed to creating a barrier to entry to a skilled person who is otherwise good at washing dogs?

Q: And are there differences across industries? 

Yes. For example, automobile retailing. Auto dealers are licensed by the state and the manufacturer. Manufacturers are not permitted to sell direct if they have licensed dealers. The dealers make a lot of profit from the fact that they can keep out other entrants. There are lots of ways in which the dealer license protects the dealer and makes the price of cars higher.

Q: What’s the connection between this and the innovation paper? 

One thing you see is innovation and copying—then you get a competition that drives down prices. But if I’m innovating to the right and you’re innovating to the left, then we’re differentiated, and that differentiation is going to appeal to different segments of people. And so while we’re competing, we’re competing much less intensely than if we were doing the same thing. If I sell a bushel of wheat and you sell a bushel of wheat, many consumers will be willing to trade off those things. If I sell a Tesla and you sell a Ford, those are quite different vehicles, and we might be appealing to different kinds of people with those vehicles.

The reason it matters that we’re appealing to different kind of people is that then that means that the return to the innovation is because I’m so different. I maintain my markup because I don’t have price competition from another vehicle. Now maybe there’s a vehicle that gets introduced that runs on a fuel cell, and that’s an exciting vehicle and that competes with the Tesla, but that excitement of pushing technology forward is, again, beneficial to consumers.

Three Questions: Prof. David Bach on the NBA’s China Dilemma

Source: Yale Insights On:

Read On

Houston Rockets star James Harden with young fans during a visit to China in 2016.

How should a global organization navigate an issue like this when it gets caught at the nexus of major markets with conflicting values?

What the NBA is experiencing is the nightmare scenario of CEOs of global enterprises. You have hundreds of millions in revenues and the fruits of many years of hard work on the line on the one hand and foundational values on the other hand. Unlike the NFL, the NBA has celebrated their players, coaches, and GMs speaking out on political issues, including stars LeBron James and Kyrie Irving wearing “I Can’t Breathe” warm up T-shirts to protest policy brutality and Warriors coach Steve Kerr relishing his role as a public foil for President Trump. Meanwhile, they’ve invested heavily to build the brand in China. The rapid escalation since Houston Rockets GM Daryl Morey sent his tweet shows it’s pretty much impossible to satisfy all stakeholders.

There are two goals of effective crisis management: (1) do what you have to do to get the story out of the news and (2) do #1 in a way that minimizes future complications, restrictions, and damage to the enterprise. What follows from this is that neither “tail option” is viable: apologizing profusely to Chinese fans and throwing Morey under the bus would alienate key stakeholders at home; and standing firmly and unapologetically on principles of free speech could shut the NBA out of its most lucrative market for an extended period of time as the challenge in Hong Kong and fervent nationalism engulf China.

The best course of action is therefore to take a stance between the extremes but ensuring such a midway position is principled and not a foul compromise. What does this mean in practice? It means affirming principle but distancing oneself from specific conduct, as in “While we do not endorse X’s personal point of view and join him in regretting that it has caused Y, we affirm our community’s support for his right to Z…” By acknowledging that individual conduct has aggrieved key stakeholders and distancing the organization from it, it becomes easier to move on. Yet by affirming principle, the hope is that efforts to move on do not come at the expense of permanently alienating other key stakeholders, chief among them employees. To be believable, though, any declaration of values or principles must be seen to match the organization’s actions; it must be authentic. Otherwise you risk coming across as either craven or hypocritical. 

The NBA more or less followed this formula when its spokesperson said, “While Daryl has made it clear that his tweet does not represent the Rockets or the NBA, the values of the league support individuals’ educating themselves and sharing their views on matters important to them.” Of course, the effectiveness of this statement was severely diminished by the fact that the NBA put out a separate statement in Mandarin that sounded very different.

The translation of the NBA’s statement into Mandarin was more apologetic than the English version. What does that say about the NBA’s approach?

It suggests that the NBA has not learned one of the most basic lessons about contemporary global business and politics. Particularly in a controversy, you cannot tailor political messages by geography. Sure, we teach our students to segment markets by geography, to think globally and adapt locally to market characteristics. But while that approach often works with product features, it doesn’t work when it comes to politics, values, and principles. 

What Tom Friedman argued in The World is Flat was not that countries don’t matter anymore or that all cultures are converging. What he meant instead was that barriers have come down and information now flows so freely that we can see what is happening over there and vice versa. It took only a few minutes for somebody to share on social media an English translation of the NBA’s apology in Mandarin, which began: “We feel greatly disappointed at Houston Rockets’ GM Daryl Morey’s inappropriate speech, which is regrettable. Without a doubt, he has deeply offended many Chinese basketball fans.” The sharp contrast in tone not only further fueled accusations of hypocrisy, but also ensured that the issue remained very much in the headlines in both countries, thus undermining the attainment of objective #1.

In a situation like this, the best practice is to have one statement outlining exactly one position. Obviously, this means that this statement will not address everybody’s concerns equally, since it will be somewhere in the middle of the distribution. However, the benefits in terms of maintaining credibility and authenticity or, put differently, avoiding the reputation and credibility loss that inevitably results from different messages to different audiences, is certainly worth it.

How can global firms prevent something similar from happening?

An expert in corporate communications working for a large multinational once told me that she very much prefers installing sprinklers to running into a burning house with a fire extinguisher. We are about to see if the NBA installed sprinklers. Does it have enough influencers in the U.S. and China who will speak out in support of the effort to distance the organization from individual conduct while affirming community members’ right to express views on issues that matter to them? Do these supporters understand and buy in to the organization’s values? Does it have friends who will counteract opportunistic behavior by policymakers in both countries? As I tell my students, try to make friends when you don’t need them so that you can call on them when you do need them. Making friends when you are in a bind is much harder.  

It is also important to realize that it’s not only the NBA, its teams, and its players that have dollars on the line. Many Chinese firms benefit handsomely from making and selling merchandise in China and around the world, and in a country that reportedly has 600 million NBA fans, there is a real cost in not streaming games. So the NBA has at least some leverage here. Indeed, we are about to find out if NBA basketball is so popular in China that neither the government nor private firms will find it in their interest to sustain punitive measures over a prolonged period of time.

The bottom line for any global organization is (1) to make sure you have friends and allies who know you and appreciate what values you stand for, and are willing to speak up on your behalf—or at the very least not throw gasoline on the fire even if it might benefit them; and (2) make sure people know and appreciate the value you bring to their community. While it is tempting to see a tradeoff between dollars and principles, more often than not value and values go together.    

When the School Mascot Is a Native American Stereotype  

Source: Yale Insights On:

Read On

A protest before a Washington Redskins-Minnesota Vikings football game in Minneapolis in 2014. Photo: Hannah Foslien/Getty Images.

Video of When the School Mascot Is a Native American Stereotype

In 2018, Cincinnati’s Anderson High School convened a committee to consider changing its team nickname, which has been “Redskins” since 1929. Supporters of the nickname campaigned under the slogan “Once A Redskin, Always A Redskin”; opponents made buttons reading “#WordsMatter.” After a contentious public meeting, the committee chose to adjourn and leave the nickname in place. But tensions continued; this month, graffiti opposing the nickname appeared on the school’s athletics fields

Anderson High School, like thousands of other schools, is struggling to confront racist imagery at the center of its traditions. Sports teams from high schools to the pros continue to use Native American stereotypes as mascots and team names, despite clear messages from Native Americans and others that these mascots are offensive. Confronted with such public pressure, leaders often cite the popularity of the mascots within their communities of fans and alumni. But what does it mean for a diverse community like a university to embrace a racial stereotype?

In 2005, the NCAA banned teams from using “hostile and abusive racial/ethnic/national origin mascots, nicknames, or imagery” at its post-season tournaments, causing some universities to retire their mascots. But retirement meant different things at different institutions. At some schools, Native American symbols were replaced with new mascots and faded from view; at others, the mascot was officially dropped but continued to have a presence on campus and among alumni. 

The University of Illinois, whose former mascot is known as Chief Illiniwek, falls into the latter category. The persistence of Chief Illiniwek gave researchers Michael Kraus (Yale SOM), Xanni Brown (Yale University), and Hannah Swoboda (University of Chicago) the opportunity to examine what acceptance of such a symbol means to a community. They find that the mascot affects students’ sense of belonging in the university community and may decrease willingness to donate in the future.

Q: How prevalent are Native American mascots in sports today? 

Xanni Brown: There are Native American mascots on sports teams from the professional level down to Little League teams. There’s not a lot of official accounting of these, but there’s a website that maintains a list of different mascots in the U.S. by their prevalence, and they rank both “Warriors” and “Indians”—which are mascots that use a lot of Native American imagery—among the top 10 in the U.S., for high schools.

Q: What does the research say about how these stereotypic images harm Native Americans, or other racial minorities?

Michael Kraus: One of the best things to do in a situation where you’re trying to figure out if Native American stereotypes harm indigenous peoples is to ask those peoples. If you ask, the answers are pretty clear: that the images are an inaccurate conception of Native Americans that’s from the past, that confines a group of peoples that is active, and has communities, and is very much alive and well today, as an artifact, rather than as a present group. And so to persist with these images is very clearly, when you ask these peoples, something that’s offensive. So before you do any research, if you just were to ask, the answer’s pretty clear.

Brown: And has been for a long time. The National Congress of American Indians first put out an official call to eliminate the mascots in the late ’60s; since then, some social psychologists have gotten onboard and have started doing some research on it. They’ve shown effects where exposure to these mascots can decrease self-worth and community-worth among Native American students. They’ve also shown that it can increase stereotyping of Native American students by other racial groups. And there’s even a little bit of evidence to suggest that it can increase stereotyping of racial groups broadly. So seeing a Native American mascot can, for example, make you draw more stereotypical conclusions about Asian Americans. 

Q: Tell me about what you wanted to investigate, and how you went about it.

Kraus: I’m from California, and my first job as assistant professor was at the University of Illinois, in Urbana-Champaign, a Big Ten school that doesn’t actually have a mascot. They decommissioned Chief Illiniwek in 2007, after the NCAA said that you couldn’t host NCAA tournaments at a college with a Native American mascot. But as a new assistant professor, you’re at a basketball game, and to see the Chief being a regular part of some of the activities during those basketball games, it was a little bit of a shock, because you think, well wait a minute, the mascot’s gone. You look around the community and you see images of the Chief everywhere—at the bar, on your neighbor’s car. At sports events, people are still wearing clothing with the image on it. All around campus, you can buy images of the Chief. But these are just anecdotes. We wanted to address in our research: To what extent is the Chief really present on campus? And if the Chief is really present on campus, how do students feel about it, and what does it do to students in terms of belonging?

Brown: My high school mascot is the Indians; the next one down the street is the Braves; the next one down the street is the Warriors. I think I was really interested, one, in what the impact of those symbols is, but two, how they persist. I had a lived experience of how you grow up with these symbols and don’t interrogate them, so I was interested in processes of change around these mascots, and how they persist on campuses.

Q: Would you describe the Chief?

Kraus: There’s a lot of the stereotypic Native American imagery with the headdress and clothing, but it’s not tied to any particular group or tribe. The rhetoric around the Chief is really a rhetoric of honor and bravery, and these are the virtues that students are trying to embody with the Chief. In a lot of ways, the persistence of the image on campus is really about upholding that kind of tradition, upholding the honor and bravery of the mascot. 

Brown: Yes. And yet the team’s name is “the fighting Illini,” a reference to the confederation of tribes native to the area, and the actual way in which the Chief is dressed is, while a caricature, similar to that of a Lakota or Sioux Plains Native American.


A student portraying Chief Illiniwek during a University of Illinois at Urbana-Champaign basketball game in 2016. Photo: Erin Hooley/Chicago Tribune/Tribune News Service via Getty Images.A student portraying Chief Illiniwek during a University of Illinois at Urbana-Champaign basketball game in 2016. Photo: Erin Hooley/Chicago Tribune/Tribune News Service via Getty Images.

Q: Were you interested in this university because they had “retired” the mascot but not entirely?

Kraus: One of the things that is interesting about, and I think important about, making the decision to retire the mascot but then still seeing the mascot on campus, is the role of norms, and how norms communicate something separate from what official policies can be on a campus. So if you say we’re not using the mascot, but students around campus can easily find it, can easily wear it, and there are no sanctions for doing that, the mascot can take on a life of its own and become an image of something else, and become a part of the campus community in ways that lead to its image persisting on the campus. So those norms that are present may not be explicit institutional norms in the way that we would think of them, as “This is still our mascot,” but they can still operate if many people on campus are adhering to those norms. So even though the Chief is not part of the campus space, it can still be a big part of it if people are still engaging and wearing the clothing, and if the university is still inviting the Chief to participate in halftime activities in the basketball game, for instance.

Brown: Yeah, and this wasn’t the only school that was affected by this NCAA decision in 2007. There were actually a lot of institutions that were still employing Native American mascots, and a lot of them made different decisions. So one reason we focused on the school we did is because this is a place where we could identify a case study of the persistence of this mascot. We wanted to better understand how that happened, compared to some other schools who did things like replace the mascot, or made a real effort to get people on board with the change.

Q: Did people of different races display images of the mascot at that university? 

Kraus: In the paper what we find, at least in our observations on the campus, is that the people who end up wearing the imagery on campus—and it’s a sample of 1,000 students—70% of them are white Americans. I think the prevalence of white Americans on the Illinois campus is about 45% of students, so a disproportionate number are wearing the Chief, and there are a lot of reasons why that might be happening. One of them might be that white students feel more central and feel more belonging on the campus.

Read the study: “Dog whistle mascots: Native American mascots as normative expressions of prejudice”

Q: Did enthusiasm or disgust for the Chief line up with other behaviors or attitudes toward the university?

Brown: The previous research we mentioned was from our first study. In studies three and four, we manipulate exposure, so participants either see images of the campus that don’t have the stereotypic depiction of the Chief, or they see images that do have the Chief. We find that when people see the Chief, there’s a relationship between their level of prejudice against Native Americans and the amount of belongingness they feel on campus. Whereas in the control condition, where they don’t see the symbol, there’s no relationship between belongingness on campus and the way they feel about Native Americans. 

Kraus: So people higher in prejudice feel more belonging, and people lower in prejudice feel less belonging. When you’re exposed to images of students on campus wearing imagery of the Chief, people low on prejudice feel less belonging.

Q: How do researchers measure racism, and specifically racism toward Native Americans?

Kraus: You can do it very explicitly and ask people about their negative attitudes toward Native Americans outright. Another way is, you do an implicit association task. So if people are not willing to admit to, or are unaware of, their own biases towards Native Americans, you do an association where you have negative words and then Native American imagery, and positive words and non–Native American imagery. Then you can look at the associations, and if people associate negative words with Native Americans, that’s the implicit, unintended, unaware association with bias against Native Americans. We find similar effects both ways.

Q: So the supposed virtues of mascots like this are bravery and honor, and yet these images are associated with negative stereotypes.

Brown: Yeah, and that’s in line with previous work. So there’s the work that looks at the self-worth of Native American students in response to these mascots, and asks them explicitly, what words do you associate with them? I think they use Chief Wahoo from the Cleveland Indians. And they said the same things about the mascot’s qualities that supporters of these mascots say—bravery, nobleness. But then when you ask them how they feel about themselves after they see those mascots, they feel worse. They feel worse about themselves, and they feel worse about their community. So even when these stereotypes are ostensibly positive, or are really seen by the community of the school as positive, they’re still limiting, and they can make the affected people feel worse in a lot of ways.

Q: You also studied how these perceptions might affect giving to the university, using very small donations as a proxy for real-world giving.

Kraus: In the study, participants see images of students on campus living their everyday lives and going to sporting events where the mascot imagery is either present or absent. When the mascot image is present, we see a decrease of about 5% in donations to the university relative to when the mascot is not present. But you see that decrease happening primarily for people who are low in explicit prejudice towards Native Americans. So for people who are low in prejudice towards Native Americans, when they see images of the Chief, they feel presumably less belonging on this campus, and they feel less willing to support the campus through monetary donations.

Q: Do you think that the research on donations will surprise the universities that have Native American mascots or other stereotypic racist imagery on campus? 

Brown: It’s certainly counter to a lot of the narrative you see from schools, and their expectation is that there will be a strong alumni backlash. It’s worth being cautious about a real-life case, because university donations are so driven by outliers, but yes, I think it is somewhat surprising. But also makes sense. If you’re making decisions about how much you identify with and support a campus, one of the questions you’re going to ask yourself is, Do I belong there? And seeing expressions that don’t align with your values, it makes sense that that would shape your willingness to participate and donate to a campus.

Kraus: Yeah, I would register a prediction that campuses that have problems with admitting non-white students, admitting significant numbers of racial minorities, may have similar histories of racist imagery on their campuses. And so the campuses are having this dual problem, where they are trying to increase diversity of their student bodies, but also trying to satisfy some of these tradition- and honor-based needs to hold on to these past mascots. And maybe people are not connecting the dots, but there’s likely to be a link there between the imagery that you have on campus, and this holding on to the past images of the campus, and your ability to recruit a student body that’s broad and diverse. Because those images are directly related to the belonging of the people who could decide to come to your school. And I think we’re trying to connect the dots with this study more directly, and hopefully people will see that connection more robustly when they’re making decisions about the image on campus that can be directly related to some of the goals and initiatives that many universities like Yale have, for creating a student body that’s really representative of the United States.

“Directly talking about images as being racist, images as being offensive to the communities that they’re purportedly supposed to represent, matters for how you create communities.”

Q: Is there a course of action that you would recommend for universities that have had this kind of imagery in the past? 

Brown: First, they can be clear about why they’re making the transition and take some ownership of the decision, not just treat it as a mandate from on high, even if it is something that comes from the NCAA or a governing body. Second, the universities that are successful spend some time investing in the community, getting input on what they want a new mascot to represent, how much continuity they want in terms of color, themes, and things like that, from the old mascot. And then what they’d be looking for in a new mascot. Then, three, they replace it. They replace it in a way that is going to get students excited about it. Arkansas State had a wolf ride a motorcycle into a football game and shoot off fireworks. Those things that build a little bit of excitement in the community can go a long way.

Kraus: And I would say that the mascot persists in part because of how easy it is, how much access students have to images of the mascot that’s now supposed to be retired. And universities have licensing rules. If the school makes a decision to not associate the mascot with the image of the university, there’s not going to be a means for people to have access to the imagery. You just won’t find it on campus anymore.

So the bar is extremely low here. What we’re saying is, you truly replace the mascot, and replace it in ways that don’t allow the former mascot to hang around. These are the two things that you could do that other schools have done. And when we compare image searches between these other schools that have replaced the mascot with the University of Illinois, who didn’t fully replace it, it’s a lot harder to find images of their now-replaced mascot relative to the university.

Brown: Yeah, the first thing you do is stop telling T-shirts that have the old mascot and the current university logo on it. That’s something that schools have control over. And then above and beyond that, there are all these steps you can do to actually create community buy-in to a new mascot.

Q: How does this compare to the problems faced by teams like the Cleveland Indians and the Atlanta Braves?

Brown: The Cleveland Indians have technically retired the mascot of Chief Wahoo, but the nickname is still the Indians, and if you went to a game, I’m sure you would see a lot of imagery that was reflective of the current nickname and the old mascot.

Kraus: It seems like it’s really important to actually go ahead and replace the mascot. And there are some other considerations that you could bring to the table that have to do with, how are our current merchandising marks going to be hit if we change the mascot in such a radical way? But I think of it as being a moral stance, that directly talking about images as being racist, images as being offensive to the communities that they’re purportedly supposed to represent, matters for how you create communities, and how you communicate to people—people who live in Ohio and root for the Cleveland baseball team—to communicate that that baseball team is a part of the broader community, and not just a certain segment of the community. So aside from the numbers about what kind of merchandise you’re going to move, it’s really important to think about who this baseball team is for. And that’s going to lead to a very different set of ideas about what’s necessary for change. 

Q: What’s next?

Brown: One of the things we are hoping to do is see if there is a link between actual diversity outcomes at these schools and decisions they’ve made around these mascots, so looking at an archival dataset of what mascots these schools have, when they change them, and seeing if that predicts racial diversity at both the undergraduate and faculty levels. We’re also potentially interested in looking at the narratives that schools tell around these changes, and what sorts of narratives are effective at creating community buy-in, creating a relatively positive change experience in terms of these mascots, and doing so while minimizing effects like paternalistic attitudes.

A Decision Analysis Approach Points to Better Diagnosis of Prostate Cancer 

Source: Yale Insights On:

Read On

A micrograph showing prostatic acinar adenocarcinoma, the most common form of prostate cancer. Photo: Nephron/Wikimedia.

By Áine Doris

Prostate cancer is the second-leading cause of cancer deaths for men in the U.S. Every year more than 30,000 American men die from the disease. But screening for prostate cancer, a blood test that if positive is followed by a biopsy, is controversial. Proponents argue that screening is the most effective means of catching the disease at an early stage and improving life expectancy for patients. But post-operative analyses show that as many as 40% of patients are being overtreated. 

These patients are receiving painful and invasive treatment—surgery and radiation—even though their cancer is not at a stage where intervention is warranted. For these patients, the tradeoffs are serious. Premature cancer treatment is ineffective in treating disease, but the potential side effects—incontinence and erectile dysfunction among them—can be life-changing. 

For medical professionals, this represents a genuine dilemma. While overtreatment of insignificant tumors can reduce quality of life, delayed treatment of significant cancers increases the incidence of metastatic disease and death.

New research by Yale SOM’s Arthur J. Swersey may help caregivers and patients resolve the dilemma, using operations research tools—techniques conventionally used to understand and improve industrial and business processes. 

With colleagues from Yale School of Medicine, the Cleveland Clinic, Prognos, the University of Iowa, and Indiana University, Swersey created a simulation of the biopsy process and used probably modeling to help make the decision of whether to proceed with treatment or continue with blood-test monitoring. They find that a correctly performed biopsy, combined with proper analysis, could substantially improve the chances of accurately distinguishing insignificant from significant cancers.

Read the study: “Decision models for distinguishing between clinically insignificant and significant tumors in prostate cancer biopsies: an application of Bayes’ Theorem to reduce costs and improve outcomes”

The key, says Swersey, is to use more needles. 

In a prostate biopsy, typically, 10 to 12 needles are used to extract tissue from the prostate, which can then be examined by the pathologist to determine the grade of cancer. 

Working on the hypothesis that 12 needles may not provide a large enough sample for accurate biopsy, Swersey and his colleagues ran a prostate biopsy simulation, increasing the number and length of needles used. 

“Our results are consistent with the principle used in statistics that larger samples provide more information leading to better decisions,” Swersey says.

Using an Excel computer simulation with the prostate represented as an ellipsoid and tumors as spheres, which were randomly located in the posterior part of the gland, Swersey and colleagues simulated the placement of 6, 14, and 20 needles into the prostate. 

They then ran a probability model using this data to find a “cut-off point,” the total length of cancer found in the needle cores below which patients should be actively monitored by blood test, and above which treatment by surgery and radiography would be indicated. The decision is always to treat if the pathology of the biopsy tissue is poor, indicating aggressive disease. 

“Our results are consistent with the principle used in statistics that larger samples provide more information leading to better decisions.”

“What we found is that 20 needles or thereabouts is the optimal number that should be used to provide a higher volume of tissue in the biopsy,” says Swersey. “Beyond that number leads to diminishing returns, partly because you would need to put your patient under anesthesia. But our key finding is that you do need to use at least 20 needles or so, depending on the size of the prostate, if you want to extract a better, more reliable sample that leads to better decisions. In addition, we found that longer needles also improved the ability to distinguish insignificant cancers from minimal tumors.”

So why is the current practice to use only 10 to 12 needles?

Most prostate cancer clinicians believe that inserting more needles into the prostate results in detecting more cancer, including insignificant cancer, without being able to determine whether that cancer is significant and needs to be treated, explains Swersey. So they have been reluctant to increase the number for fear of skewing results even further in favor of intervention.

But Swersey says that the additional data from the biopsy is helpful if it is correctly interpreted, as the probability model does.

“What’s new in our approach is that we run the biopsy data through Bayes’ Theorem,”—a formula to determine the probability of an event based on evidence. That evidence, in this case, is the length of cancer found in the biopsy needle cores. “We consistently found that using larger samples—more needles—as input to our probability model, we got better predictions of whether the cancer is insignificant or not.”

Swersey and his colleagues quantify the costs and benefits of the biopsy while using a different number of biopsy needles, contrasting the negative impact or “cost” to the patient of treating insignificant tumors unnecessarily with the gains in detecting significant cancers. They find that using 20 needles dramatically lowers the costs and increases the benefits.  

Swersey acknowledges that the model he and his colleagues have produced is still “simple” and that more research using 3-D simulations that better mirror real anatomy will be needed to hone results further. It does, nonetheless, provide a significant “first step” in using a data-driven approach to making prostate cancer treatment decisions. 

“Ours is a simplified model but the insights are enormously valuable. Using this new approach of more and longer needles, and probability modeling to inform decision analysis, we have paved a way for the academic community through more research to follow suit.  And taken a significant step forward, I hope, towards improving patient outcomes and ultimately, helping to save lives.”

A New American Revolution: CEOs Fire Back on Guns

Source: Yale Insights On:

Read On

Guns for sale at Dick's Sporting Goods in 2012. Photo: Victor J. Blue/Bloomberg via Getty Images.

This article originally appeared in Chief Executive. 

Walmart’s recent bold moves on gun control, a year after Dick’s Sporting Goods made a similar splash, have triggered a tidal wave of CEO voices. Yesterday’s announcement by 145 business leaders that “[d]oing nothing about America’s gun violence crisis is simply unacceptable” was a historic call to action. As Michael Bloomberg commented, “Business leaders are not afraid to get engaged now.” He added, “CEOs are wired to take action on things that are going to impact their business, and gun violence is impacting everybody’s business now.”

One month after 22 customers were murdered in an El Paso Walmart, Walmart’s humble, soft-spoken, but courageous CEO, Doug McMillon, announced a gun control policy to remove all assault weapons from its stores and agreed to stop selling all guns, except hunting rifles and the ammunition to support such activity. As Senator Dick Durbin of Illinois said, “If you need an assault weapon to kill a deer, you should take up fishing instead.”

“CEOs know how to read the American population they serve better than do political leaders.”

McMillon went a step further than removing such dangerous weapons from Walmart’s retail inventory; he also implored Congress to act, stating: “We believe we have been doing our part to make the country safer. But Congress and the Administration need to do their part as well.”

This move has prompted some to call McMillon a corporate hero. He demonstrates that doing good is not antithetical to doing well. These bold moves are two weeks after a huge earnings beat. Walmart’s full range of business triumphs range from seamless retailing across electronic platforms and stores, with e-commerce sales surging 37%, next-day online delivery in 75% of the nation, same-day delivery through 1,100 stores, same-store sales up almost 3%, 20 straight quarters of U.S. sales gains, 19 quarters of commerce growth, 20 consecutive quarters of sales gains in the U.S., and its 19th quarter of traffic growth.

This move from Walmart follows the bold leadership of Ed Stack, CEO of Dick’s Sporting Goods, when he removed assault weapons from the company’s stores following the Parkland school massacre. After initially taking a hit to revenues, the sporting goods stores soared more than 20% after that move. Stack was not worried about a backlash and had the backbone to transcend it. Moved to tears following the murder of 17 innocent teachers and students in that Florida mass shooting, Stack not only removed the weapons but also launched a campaign in Congress with other CEOs. “What I promised the families in Parkland when I left is that we would keep this conversation going. And that’s what I’ve done,” he said.

The CEO of American icon Levi Strauss, Chip Bergh, spearheaded this latest mass CEO statement. It included a wide range of firms, such as Airbnb, Gap, Pinterest, Lyft, the Brookfield Property Group, Royal Caribbean, Twitter, and Uber. Bergh commented, “To a certain extent, these CEOs are putting their businesses on the line here, given how politically charged this is.”

Walmart’s McMillon said that the company would stop customers carrying guns into their stores, while scores of firms, from Chipotle to Chili’s, Starbucks to Panera, and Walgreens to Wegmans, had spoken out against guns in their establishments even where it’s legal. Business is firing back and finding its voice. 

It is wrong to presume that the NRA and the big business lobby always opposed business regulation and gun control. Earlier generations of business leaders promoted regulation in finance, interstate commerce, travel, telecommunications, and food safety. In fact, business leaders, along with the NRA, supported historic gun regulation, such as the 1934 National Firearms Act outlawing the assault weapons of the day: the submachine guns—Tommy guns—favored by gangsters. They also endorsed the Violent Crime Control Act of 1994, banning military-style semi-automatic assault weapons, but that act expired a decade later.

CEOs know how to read the American population they serve better than do political leaders. Last year, a national gun owner survey sponsored by Americans for Responsible Solutions suggested 67% of gun owners believe the NRA has lost its historic mission promoting gun safety to one of lobbying for gun makers’ interests. According to a Quinnipiac poll released last week, 67% of Americans favor a ban on assault weapons. Ninety-seven percent of Americans favor enhanced background checks and other measures the NRA blocks.

With the nation rattled by 345 mass shootings in 2017, the deadliest year for such incidents, the public is looking to transcend NRA lobbying. With 5% of the world’s population, the U.S. has one-third of the world’s mass shootings—25 times that of other affluent nations.

Opinion leaders create watershed moments when they selectively step out of their lane to take a strong public stand. When the relentlessly non-partisan Johnny Carson rebuked Richard Nixon in the summer of 1974, it was time for him to leave office, and it changed minds. Carson said to the surprise of many, “The public has almost become immune or inured as these revelations come up. ‘Well, all administrations are guilty [the public says],’ and that’s kind of sad to hear. You don’t really believe that politics has to be this way.”

“I’ll probably be accused by people now of being the eastern liberal establishment, and I have made jokes about what is happening—I hope not unfairly. But just trying to make humor about what has happened. But that is considered, when you do that, almost un-American,” said Carson.

The CEOs of Walmart, Levi-Strauss, and Dick’s Sporting Goods are not political fringe, nor do they speak for liberal elites. Like Johnny Carson, they speak for the soul of the nation.

Got a Great Idea? Tell Your Rivals

Source: Yale Insights On:

Read On

Illustration of lightbulbs being released from a cage

By Dylan Walsh

In June of 2014, Tesla CEO Elon Musk announced that the company was opening its library of patents to the manufacturing world. “Tesla Motors was created to accelerate the advent of sustainable transport,” Musk wrote on Tesla’s website. “If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal.” 

The announcement garnered headlines worldwide and dominated discussion on social media—which isn’t surprising given trade secrets tend to be just that: secret, the very engines of competitive advantage. Tesla was releasing to competitors the fruits of a decade of research and development.

But, at least in part, clear business logic backed this decision. Musk noted that the global automobile market is enormous, comprising a fleet of roughly two billion vehicles, and that most of these cars run on petroleum. “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day,” he wrote. Musk was acknowledging that he could use the help of his competitors in transforming the automotive sector, which over the past century had made people extremely comfortable driving cars that burn gasoline.

A new article in Marketing Science by Yale SOM’s Jiwoong Shin and Michelle Yu of McGill explores precisely this issue and finds that, in the case of innovative products, sharing the innovation with rivals can actually increase consumer interest and expand market potential.

Shin spoke with Yale Insights about how managers can understand when it makes sense to dole out trade secrets.

In the paper, you look at building demand for novel products. Why is that a different process than building demand for well-known products?

To an extent, customers know what they need or want, and most products seek to satisfy that. Existing products fill an existing need or want. But when a new innovation comes to the market, customers will wonder, “Do I really need this product? I live perfectly well without it.” New innovations are generally tailored to satisfy some unknown need that customers are not aware of, and this can leave them somewhat puzzled.

For instance, people were perfectly happy before smartphones came on the market. Not many people thought the product was for them. Firms needed to convince customers: “This is a new product that you don’t know you need. I assure you that once you know what it does you won’t be able to live without one.” With an existing product this step doesn’t exist; people don’t need to be convinced to accept it.

What got you thinking about this?

Watching the failure of Google Glass. When Google Glass first came to market, people were almost universally excited about the product. There was a lot of talk; almost everyone was aware of it. And yet I didn’t find anyone who said they were going to buy a pair. People thought it wasn’t for them. It was obvious to me that there was some big discrepancy between awareness and product acceptance.

Usually when we teach the idea of promotion in marketing classes, one of the most important things is to make people aware of our product. If we expose consumers to our advertisements then we believe they will buy what we’re selling. This didn’t seem to be the case with an innovation like Google Glass. Awareness was not good enough. Google had to take the additional step of making people think about and accept the product.

You discuss one interesting way of moving beyond awareness, and that’s actually sharing the blueprints of innovation. Why is that a potentially useful approach?

Assume I come up with a brand new product. If I alone claim that this is the next big thing, then consumers are going to be doubtful about what I’m saying. They know it’s my product. They know I want to push it. This is the case with Google Glass and wearable technology. But if, say, Apple, Samsung, Huawei, and all of Google’s other competitors also say that wearables are the next big thing, then people start thinking it may be. Perhaps the market is actually moving in this direction.

For a consumer to accept a product they need to try to understand what the product is. They have to think carefully about whether they really will get benefits from it. This takes a fair amount of effort—effort that consumers aren’t usually willing to put in. So how do I convince consumers my product is the sort of thing worth thinking about? Ideally I get my rivals together so that we’re all saying this new category is the next big thing. That makes it much easier to convince customers to invest their time.

You use a model to explore this issue. What’s the basic dynamic in your model?

It’s rooted in the law of communication, as economists think about it. “Communication” in this case means I deliver my idea to you. It doesn’t mean I speak and you just listen and then forget what I was talking about—that’s not communication. I give information to you and you understand the information. You have to get it.

Critically, this isn’t a one-sided effort. If I try to explain an idea to you but you’re not really interested, then it’ll never get through, no matter how much effort I invest and how clearly I articulate the idea. If you’re not interested, then communication never happens. For communication to succeed, both sides must put in some effort. In the cases we’re discussing, the firm and the consumer must both put in effort.

Read the study: “A Model of Two-Sided Costly Communication for Building New Product Category Demand”

What we noticed is that these efforts have a particular characteristic: if I’m a firm, once I know that you, the consumer, are interested in what I have to say, then I have more incentive to put in effort because I know you’ll be listening. I’ll try to be clearer. At the same time, when a communication is clear then you, the consumer, have more incentive because it’s easier to understand. So firm and consumer efforts are complementary.

That is the starting point of our model. From there, we asked: if a company wants to convince consumers to put in effort, what if they go ask rival companies also interested in the product category to help them with the communication? If effort on the firm side is high, then consumers may think they’re seeing the next big thing, so they, in turn, put in more effort. If that happens, then all rival companies may stand to benefit.

One tricky part, though, is that efforts on the firm side, between say Google and Apple, are substitutes. If I’m Google, I want Apple to put in a lot of effort so I can freeride. Communication—advertising, in this case—is costly, so if Apple advertises a lot instead of me, then I’m happy.

What do you ultimately find?

We capture this tension that exists between the complementarity of firm and consumer communication efforts and the potential for freeriding on the firm side. If I want a rival to really promote a new product category, then it turns out I have to share a lot of secrets to convince them its worth their time and effort. So how much information a company shares with its rivals depends on how important it is to convince consumers to adopt a new category—to think about it and put effort into understanding it.

In a sense, sharing information is a way of communicating with rivals. It says, “Hey, I’m not going to monopolize this market. Let’s build it out together. You and I can all make money, but we all have to put in effort. We’ll make the pie bigger.” To do that I have to share a lot of information.

This ultimately boils down to the issue of whether companies want to be a big fish in a small pond or a small fish in a big pond. When I share information with my competitors, then we jointly make the market bigger—big pond, small fish. When I monopolize my innovation and don’t share any information—small pond, big fish. Whether or not sharing is better depends on characteristics of the market—in this case how important it is to bring the consumer on-board with an innovative product.

You mention “co-opetition” several times in the paper. What’s the connection between that idea and what you’re discussing?

Co-opetition, which was coined by my colleague Barry Nalebuff, simply means that sometimes you cooperate with your competitor. Our paper provides one micro-foundational mechanism for why firms might do that—because of the costs around communication in the case of innovative products.

If you take the case of Google Glass, consumers might not know anything about the product. Alternatively, you have standard products that people know everything about. It would seem there’s a spectrum between the two. Is there a way in which firms might get a sense of where their product sits on this spectrum?

That’s an important question, and we first have to think about this idea of a spectrum. We know that firms sometimes keep ideas secret for competitive advantage. We also know that they sometimes disclose information to their competitors to help consumers understand an innovation. That was the focus of this paper. Another alternative that we recognize is when firms disclose some information, often publicly, to deter entrance into a market, to preempt their competitors. Think about Samsung’s announcement of a foldable phone. That is a way of saying to competition, “look, we’re already ahead of you, so if you’re thinking about foldable electronics then don’t bother.”

Importantly, Samsung is also talking to consumers. They’re announcing their foldable phone not just to talk about the technology, but to tell consumers they should wait. “Hey, this is the next big product, so wait, don’t buy a new iPhone!” This is a strategy known as disclosure as entry deterrent. How companies approach this spectrum of disclosure, as I mentioned before, depends on characteristics of the market and on the laws of consumer communication.

Coming back to your specific question: do firms know where their products are on this spectrum? I don’t think they know exactly where they are. There’s no equation to figure that out. However, I think good managers have a sense of where things are located. They know when they are entering a market where consumer acceptance is important or when they’re entering one that’s well understood. This is intuition. In a sense, our model is capturing this intuition—the black box of good decisions.

How Evidence Can Make International Development More Effective

Source: Yale Insights On:

Read On

An NGO representative meeting with women in a village in Burkina Faso

Government policy and international development programs from NGOs ought to be built around the best available knowledge and evidence. But efforts to incorporate academic research into such programs have been halting at best. Why?

Yale SOM’s Rodrigo Canales, associate professor of organizational behavior, and Tony Sheldon, executive director of the Program on Social Enterprise and lecturer in the practice of management, with then-MBA students Brendan Lehan ’18 and Tory Grieves ’18 and a large team of research assistants, spent two years conducting hundreds of interviews and developing case studies that make clear the impediments that keep evidence from being effectively integrated into practice. But the research also allowed them to tease out the aspects of a successful approach, drawing on all-too-rare instances of evidence being successfully applied in policies and programs.

The output of their work, supported by the William and Flora Hewlett Foundation, is an integrated model for incorporating evidence into practice. The approach involves bringing together key stakeholders—including academics, policy makers, and practitioners—from design through implementation. This process, the research suggests, allows for dramatically better results, and can feed a virtuous cycle, generating iterative improvement to the integrated model itself. 

Q: What is the Evidence in Practice research project?

Rodrigo Canales: For a long time, we’ve been talking about designing public policies and NGO interventions based on the most rigorous and latest evidence. Everybody agrees that’s how it should be done, yet the most frequent thing you observe is that it’s not. The William and Flora Hewlett Foundation has been puzzled over why. 

Tony Sheldon: We teamed up with them to understand the constraints that prevent evidence from becoming embedded in policy and practice, as well as teasing out some of the variables that were present in situations where policy based on evidence has occurred successfully. We did over 200 interviews and wrote eight original case studies; there definitely were patterns. 

In the unsuccessful cases, there was often dependence on the “waterfall model,” which hopes that evidence produced by experts, who tend to be academics, just naturally cascades to policy makers and from there to implementers. 

But researchers, policy makers, practitioners, and funders define evidence differently, making it hard to translate from one stakeholder group to another. On top of that, they each have different incentives, timelines, and organizational constraints, meaning the waterfall model frequently doesn’t work.

On the other hand, in cases where the best available evidence was incorporated, there was a real effort to align the different stakeholders upfront, so they could convene around addressing a shared problem, in a way that let each contribute while acknowledging the strengths and constraints faced by other stakeholders.

Q: Could you give some examples that illustrate the challenges of incorporating evidence?

Sheldon: One of our case studies is about a group in India that did very rigorous scientific evaluation of a water purification system, then developed a very high-quality product. But, when they moved to distribution, they didn’t look to the social science evidence for what would most likely work.

They sold it in retail shops in rural villages. Yet recently published studies had shown that rather than distributing in retail stores or directly in homes, the best venue is a village’s central pump where people collect their water. They were so careful to apply evidence in some areas but not in others.

Canales: We also looked at a very ambitious program in Mexico aimed at lowering unemployment rates for newly graduated young people. Primer Empleo, or “First Job,” became a central policy for the incoming administration of President Felipe Calderón. 

The goal was genuine and, if you look at the design of the policy, it makes logical sense; however, they never looked at recent research showing that generalized subsidies, though they appear promising, do not tend to work and that what does work is specific, highly focused incentives.

In their design process, they didn’t incorporate the companies that they hoped would be doing the hiring. They didn’t include researchers or NGOs that know the most about recent school graduates—who they are, how they behave, and what they are looking for in terms of employment. As a result, they ended up with a policy that made a lot of sense to policy makers but was effectively inoperable for the potential partners.

Beyond that, their drive to have an impact very rapidly led them to roll it out quickly as a major government program. The issue with government programs is they have to be woven into the official budget, which comes with strict rules for how public funds are used.

Once that happens, a program becomes rigid. With Primer Empleo, as they started getting information that the program, as designed, was not achieving the impact that they wanted, they had very little ability to change it. The law determined what the program could and could not do with the funds. They were not able to course-correct because of how they went about designing the intervention. 

Q: What prevents evidence and insight from flowing between one area of expertise and another?

Canales: Normally, when academics do a study, we try to control for as many factors as possible so the data generated will result in a publishable finding. For example, we want to control for context so that the results are as widely applicable as possible. For practitioners, context may be everything. The NGO implementing an intervention needs to understand how to deal with the specific factors on the ground where they work. The typical abstract academic study often cannot be easily applied to the conditions they are facing. The result is that evidence can’t move from one field to another without translation.

The integrated model helps navigate these differences and, because of what each group brings to the table, collectively they develop a much better answer. It’s a much more participatory and collaborative process. It’s also more complex and takes more time.

One of the critical hurdles is that without really being aware of it, the stakeholders come from very different kinds of organizations; they belong to different professions with different professional norms; they are evaluated on very different factors; they need to deliver very different types of results. 

The academic is worried about publishing and only publishing. The politician is worried about electoral cycles and only electoral cycles. The practitioner is focused on implementation and meeting funders’ demands. They each operate on different currencies of exchange.

Sheldon: We found that recognizing the different currencies of exchange was a necessary step to fostering collaboration. Recognizing the value of each perspective and the evidence that each can bring to bear is what is most likely to create successful collaborations.

The fact that each group has its own currency of exchange can be a barrier to successful integration of evidence, but it can also be an opportunity to convene together in the service of addressing the underlying problem.

Canales: The currency-of-exchange model allows each party to clearly state what they have to offer and what they need to get out of the process.

Academics offer the ability to ask really good questions in very well-defined terms so that we learn effectively. They bring legitimacy. Policymakers can do things at scale that really address big, interesting problems. Practitioners offer experience and very clear information about what works and doesn’t at the ground level. That’s what each brings to the table.

From there, each party can state the minimum they need to remain engaged through the entire process. The academic will say, “I need to be able to publish a paper from our interactions. Otherwise, I can’t remain engaged.” The policy maker will say, “I have elections a year and a half from now, so I have to be able to communicate to the public that what we’re doing makes sense in a way that people will understand and will be politically acceptable to them.” And the implementer will say, “I need to be able to meet the budgetary cycles of my funders and the needs of my clients.” 

In order to be able to collaborate, we need to figure out how to get everyone what they need. We need to figure that out because if we work together, we can do really incredible things, but given our constraints it’s not natural or simple for us to work together. However, once we put currencies of exchange on the table, we can negotiate ways to allow the players to remain engaged throughout. 

Sheldon: It is important that we very intentionally say, “How can we make sure the irreducible needs of each constituency are actually met?”

Q: What does it look like when the integrated model is used?

Canales: South Africa developed an intervention to help reduce unemployment especially among young males. They convened researchers, policy makers, and implementers from the beginning. Jointly, they agreed to target youth unemployment. They agreed that to truly make an impact only government could deliver at the scale required. Since the main venue that the South African government had to address this issue were labor centers, they agreed to design interventions that fit within the constraints and work processes of the labor centers. They agreed to incorporate the latest published academic research as well as to develop new evidence specifically from the South African context. 

It was a very different way of working for everyone involved. The researchers had to adapt how they thought about the problem in order to fit within the government’s constraints. The government had to agree to do a randomized control experiment. Governments never do randomized experiments; they have serious concerns about fairness, equity, and legal constraints. But the researchers persuaded them that the only way to truly learn about what works was to offer interventions in some centers that weren’t offered in others while measuring both. The labor center employees, who had to carry out the experiments, were incentivized by aligning the interventions within their existing structure of evaluation and accountability. 

“Politicians and practitioners are used to trying to avoid failure at all costs. For researchers, we need variance in results to figure out what works.”

By doing all this, very quickly they generated very, very useful information about what worked to improve the situation for unemployed young people, what didn’t work, and why.

They used what they learned in a second, larger intervention. And then the findings of the second intervention were used to develop the next intervention. 

Sheldon: The integrated approach is designed with learning loops that inform the next iteration of the program rather than saying at the start, “We know that this works, so this is what we’re going to do,” which tends to be the pattern of programs that have not been flexible enough to integrate new evidence.

Beyond developing a successful intervention, there are ongoing benefits. The researchers in South Africa established relationships with the government, which have led to additional collaborations around other issues related to unemployment. 

Q: Is it simply a matter of acknowledging the currencies of exchange and negotiating from there or are there other hurdles?

Canales: One of the most difficult misalignments of incentives that we find in this ecosystem of evidence to practice is fear of failure.

Politicians and practitioners are used to trying to avoid failure at all costs. A failure to politicians might mean that government resources were wasted or that some people were actually negatively affected by government policy. For an NGO practitioner, failure might mean that because they weren’t able to show results they’re not going to be eligible for future grants. 

For researchers, we need variance in results to figure out what works. We need some things to work and some things not to work so that we can compare them. In a sense, the thing that doesn’t work is a “failure,” but without failure you cannot learn. 

One of the most important switches in successful cases was this reframing from a binary of success or failure to designing for learning where there will be failure—controlled, small-scale failure—that allows us to learn the specific things we need to learn. 

Additionally, government officials and practitioners tend to want to start as big as possible. When you’re designing for learning, you start as small as you can because you know that you’re likely not going to get it right. Smaller means that everything is more controlled. 

Government officials also need to show results quickly. They are in the public spotlight and the next election is always coming up. Learning takes time, so we have to find ways to build patience into the system. Small pilot projects are one option. For government officials, they are easy to explain; they get relatively quick results that can provide additional political coverage and time for the longer learning cycle to happen.

For practitioners, their biggest constraint is funding. These NGOs are bound to the funding cycles and the demands of donors. This new approach looks different. They have to explain, we’re not just implementing, we’re learning. That doesn’t mean we’re not accountable; it just means our mechanisms of accountability are going to be different. Instead of being evaluated on outputs, which is what we’re normally evaluated on, we will negotiate milestones and the type of learning that we will show you at each milestone.

Q: Where do funders fit in the integrated approach?

Sheldon: The underpinning of enlightened financing is crucial to this whole approach. Often financiers, whether they come from private foundations or multilateral agencies like the World Bank, can help convene the other constituents. But it really takes an enlightened funder to recognize the value of learning for the long term, really tackling the problem, rather than pushing for short- and medium-term outputs that match what we think we already know.

Canales: Sometimes you find financiers who are already enlightened, and they push this learning mindset and methodology into a program. 

With financiers and donors that don’t normally think about things in this way, I’ve found that when you explain the approach to them, they can be convinced with the right language, the right data, or the right examples. Not all of them, but many of them are interested by the idea of committing a smaller amount of funding directed at learning, then, only once you’re sure that the intervention has been proven in context, putting the bigger amounts toward scaling.

But, as Tony said, without financing that is structured for learning and for flexibility, this approach is not going to work. 

Q: Is it challenging to make the integrated model work in different contexts?

Canales: Our research was explicitly designed to take this complexity into account. Every city, every country, every political system is different. 

Sheldon: We did two case studies each in India, South Africa, Mexico, and Ghana. The integrated approach tends to work across cultural and geographic contexts. But it isn’t a cookie cutter model; the integrated approach is saying, “Come with a sense of humility and collaboration and desire to really understand and grapple with the particularities of the problems in this context.” This approach anticipates that ideas from other contexts will need to be adapted. 

Canales: You also need a convener who will help identify who needs to be at the table and then can translate the different languages that different professions bring. The convener can also be a trusted mediator who helps resolve conflicts. 

Sheldon: We often found that there was a champion. Sometimes it was a funder; sometimes it was a government official. The champion provided a safe space for these different constituencies to be willing and able to collaborate together. 

When that happens, the integrated approach can help change the structure of thinking within all these institutions.

Canales: One of the most-cited examples of well-incorporated evidence in practice is a government program designed during the Zedillo administration in Mexico called Prospera, or Prosperity. When President Zedillo started his term, he wanted to address the problem of intergenerational poverty. Rather than very quickly making big waves with a policy announcement, he took a disciplined approach, saying, “We’re going to take two or three years to design this carefully.” 

One of the things that really allowed Prospera to work was that the president explicitly kept it out of the budgetary law and used more flexible funding from foundations and discretionary government funding while the priority was to learn. 

President Zedillo convened experts from universities and international agencies, like the World Bank and Inter-American Development Bank, along with federal government policymakers and partners from local government who really know how things work on the ground. Together, they started a process of trying to design, from evidence, a policy that would work.

They mapped out what was known and what was not known. They identified questions that they would face at the different levels of the problem and the evidence that they would need to gather at each level to answer each question.

The first question was, what do we need to provide families that will actually help them get out of poverty? Recognizing that generalized subsidies or transfers had been demonstrated not to work, they focused on a transfer of cash or other government resources to poor families conditioned on specified behaviors. 

To figure out what kind of incentives and conditions to require, they designed small randomized controlled trials in different locations. Mexico is a very varied country so they wanted to make sure that whatever they discovered could travel across different parts of the country. 

Based on the initial results, they refined the next iteration and ran experiments to figure out how to track outcomes. Then they ran experiments at a slightly larger level on the kinds of rules and organizational structures that would be needed. It was a very ordered process. 

Some experiments were designed to produce rigorous quantitative data. Some developed qualitative data that helped understand why certain organizational structures were working better in some regions versus others. It takes planning and foresight to design experiments that collect all these very different types of evidence.

Periodically they regathered at small conferences to figure out, “What have we learned from the past six months? What are the next questions that we need to answer? How do we answer them?” Collectively they figured out the next steps. Then they would do the next round of experiments, reconvene, and ask, “What did we learn? Where are we now? What’s next?”

Through that process, they developed one of the most successful evidence-based programs in the world to date. It has been replicated and started a wave of targeted government subsidies that have come to be known as conditional cash transfers. 

Q: Where do you hope the work on Evidence in Practice goes in the future?

Canales: Our hope is that this is a two-way street. As these multi-actor partnerships of government officials, local implementers, academic researchers and institutions, and international foundations come together to integrate evidence into practice, we will get better solutions to problems and we will be able to evolve our understanding of the process of integrating evidence into practice. 

The research team for the Evidence in Practice project included Jillian Anderson, Shira Beery, Hitoishi Chakma, Erika Drazen,  Jessica Gallegos, María del Mar Gutiérrez, Elizabeth Karron, Emilie Leforestier, Scott Lensing, Kiersten Abate Sweeney, Ewelina Swierad, Katherine Wong, and Lauren Wyman. Charles Cannon and Design Observer provided crucial design and editing contributions.

Energy Companies Have the Power to Act with Purpose

Source: Yale Insights On:

Read On

Factory smokestacks at sunset

This week’s announcement by Walmart on limiting its own gun sales seems to match last month’s Business Roundtable (BRT) statement to re-frame the broader purpose of a corporation “that serves all Americans.” Over 180 CEOs of leading companies joined this statement, which, beyond merely serving shareholders, promotes a multi-stakeholder orientation. Supporters and critics wrongly saw this extension as a departure from the mission of the Business Roundtable since its creation in 1972.

In fact, the BRT founders were strong advocates of corporate social responsibility regarding employee welfare, equal opportunity, environmental stewardship, and honest business practices, consistent with what the business community now labels “ESG”—environmental, social, and governance principles. BRT leaders—such as Irving Shapiro of DuPont, Thomas Watson of IBM, and Reginald Jones of GE—advocated for the Superfund Cleanup and Acceleration Act, the Foreign Corrupt Practices Act, and affirmative action in the workplace.

This latest Business Roundtable edict supposedly challenged economist Milton Friedman’s admonition that “the social responsibility of business is to increase its profits” with a focus only on the supremacy of shareholders. In reality, Friedman’s statement was not to underscore prevailing practice, but was meant as a correction to the then-surge of corporate do-gooders. Furthermore, even the forgotten rest of Friedman’s commentary acknowledged, “It may well be in the long-run interest of a corporation…to devote resources to providing amenities to that community.”

Nonetheless, the recent BRT statement of a broader business purpose was greeted with immediate criticism. Some raised concerns that this was walking away from shareholder capitalism, would lead to less accountability for performance, and was appeasement to far left progressives. To others, it seems like window-dressing to cover up corporations’ self-interest.

But the U.S. Environmental Protection Agency (EPA) has provided an opportunity for the business community to demonstrate its commitment to match lofty words with credible actions. Last week, the EPA stated an intent to roll back regulations around methane leaks in natural gas extraction. This policy would eliminate critically important environmental protections when the need to address greenhouse gas emissions and climate change have never been more urgent. According to the EPA, methane accounts for around 10% of all U.S. greenhouse gas emissions. Roughly a third of those emissions are generated by the natural gas and petroleum industry.

A number of oil and gas companies have already opposed this rollback in regulations, similar to the concerns expressed by four automakers to a rollback in emission standards. For example, Gretchen Watkins, Shell’s U.S. president, underscored the company’s pledge to reduce its methane leaks to less than 0.2% by 2025. Also last week, BP president Susan Dio stated support for tighter EPA standards: “It’s not only the right thing to do for the environment, there is also a clear business case for doing this.”

Elsewhere in the energy industry, many utility companies reacted with alarm over EPA rollbacks of mercury contamination limits, regulation which was linked to $80 billion in healthcare savings, due to the estimated reduction of mercury-related health issues and premature deaths. In requesting the preservation of the rule, many in the industry reported that they already spent most of the $9.6 billion in necessary compliance costs.

“Taking action will show real intent to respect broader societal interests, and in return, could earn greater trust from citizens and society, even if some skeptics are certain to remain.”

To be true to their principles of a broader sense of purpose, when the government issues policies that fail to address the rising climate threat, it is necessary for leading companies to lead.

Businesses can do so by, first, aligning with other like-minded firms. A recent study published in the American Political Science Review indicates that the breadth of firm participation in strategic self-regulation is essential to its success. It is more impactful and CEOs face less risk of political reprisal when they act in concert.

Second, companies can directly share their research on harmful methane emissions, mercury, and other pollutants, thereby outlining a method of control, and articulating a higher set of standards for themselves.

And, third, corporate leaders can create credibility for their intent by engaging independent auditors who will assess their adherence to these standards and publicly communicate results.

Finally, they can engage downstream users and consumers to shift their purchases to those who follow these standards and thereby create pressure on other companies to follow suit.

Self-regulation is not new. Since medieval times, professional gilds set standards for practice and disciplined violators with sanctions. In industry, there are varied forms, ranging from the Financial Industry Regulatory Authority (FINRA) to the UL’s 120 years of global success enforcing voluntary manufacturing standards for safety, hazardous substances, and quality product performance.

Taking these types of actions will show real intent to respect broader societal interests, and in return, could earn greater trust from citizens and society, even if some skeptics are certain to remain. In turn, this will strengthen companies’ freedom to operate and should contribute to longer-term value creation for everyone—including shareholders. Inaction, or being perceived to endorse an agenda that fails to meet the rising threat of climate change, poses a risk to not only the companies themselves, but the broader business community, and society as a whole.

Equalizing School Spending Boosts Lifelong Income 

Source: Yale Insights On:

Read On

Third-grade students with their teacher in a Washington, D.C., classroom. Photo: Bill O’Leary/The Washington Post via Getty Images.

If a family’s annual income is among the lowest 20% in the country, what are the odds that their child’s earnings will rank among the highest 20%? The answer depends, at least in part, on where they live. 

Researchers have found that regional differences contribute to whether a person will achieve prosperity later in life. A child born into a family in the bottom quintile of the income distribution in Utah has a 14% chance of reaching the top 20%; in Tennessee, the number is only 7%. A new paper by Barbara Biasi, an assistant professor of economics at Yale SOM, shows that closing the gap in education spending between rich and poor school districts could make a substantial difference in economic mobility for poor children. 

Read the study: “School Finance Equalization Increases Intergenerational Mobility: Evidence from a Simulated-Instruments Approach”

Biasi—a first-generation college student herself—says there’s no doubt that improvements in education matter to a person’s success later in life. “There’s a lot of evidence that different aspects of public schools have a massive effect on students—not just in terms of education, but also in terms of health and earnings,” she says. 

Spending on education can vary dramatically from district to district within a state, since a large portion of school funding comes from local taxes. Wealthier towns, generally, have bigger per-student school budgets. Over the last few decades, a number of states have made efforts to equalize spending across districts, with varying levels of success. 

Biasi’s study examined 13 school finance reform policies that were passed in 20 U.S. states between 1986 and 2004. She assessed how much each reform effort equalized per-student spending between high- and low-income districts. She then followed the students affected by each reform effort. She found that in those states where reform efforts led to greater equalization, the degree of intergenerational income mobility of students in the lowest quintile increased. 

According to Biasi’s study, “A one-standard deviation reduction in [inequality of school funding] leads to a 5.6 percentile increase in mobility for children with parental income in the 10th percentile, a 5.2 percentile increase for children from the 25th percentile, and a 3.5 percentile increase for children from the 90th percentile.” 

Biasi analyzed the differences between various states’ reform efforts and the effects on student cohorts that passed through school just before and just after reform efforts, as well as other factors such as changes in housing prices, incomes, and overall levels of education funding to confirm that the effects she found truly came from the equalization in education spending.

“These findings confirm the importance of equalization in school resources across richer and poorer districts for equality of children’s economic opportunities,” she writes.

Biasi’s work bolsters previous research on the particular importance of early-childhood education. She found that equalization of school resources had the largest effect on intergenerational mobility if the reform took place while the students were in elementary school rather than middle school or high school.  

“My findings provide another piece of evidence that how we distribute resources across children matters a great deal to their success later in life.”

Biasi also considered whether equalization is even more beneficial for districts with high income inequality and income segregation. In an area with greater income inequality between school districts, she points out, poor students will be at a greater disadvantage, even if the average spending is the same as in an area with less income equality. She tested the effects of equalization of school resources in areas with above-average and below-average income equality and found that equalization has a larger effect in areas with high income inequality. Specifically, she found a 6.2, 5.8, and 4.4 percentile increase in mobility for children with parents in the 10th, 25th, and 90th percentile, respectively, compared to a 4.6, 4.2, and 2.4 percentile increases in areas with low income inequality.

Similarly, greater income segregation may magnify the effects of unequal school spending, since low-income students are concentrated in areas with lower spending. Biasi examined the results of equalization in areas with above-average and below-average income segregation and found a slightly larger increase in mobility in the former group compared with the latter. 

What is the mechanism by which equalization increases mobility? One way may be by paying for more teachers. Biasi found that reform increased the teacher-student ratio by 11%  in low-income districts. Equalization also appeared to increase the probability that a pupil would attend college; in contrast to the overall results, when the reform was most powerful in early education, the effect on college enrollment was higher if the reform took place while the student was in high school. “Intuitively, however, high school is the moment of a student’s career that immediately precedes college,” she writes; “this might explain why equalization in school resources at this particular point in time appears to be important for college access.”

Biasi emphasizes that school funding is only one of many factors that can affect intergenerational mobility, but it is one that can be directly affected by a change in policy.  

“The results shed some light on the long-term outcomes of providing adequate funding for education,” she says. “While reforms probably cannot close all the differences in mobility across school districts, it’s useful to know they can have an impact: My findings provide another piece of evidence that how we distribute resources across children matters a great deal to their success later in life.”