Selected Papers

Kiousis, P.K. & McKelvey, B., “Market Power, Productivity and Organizational Knowledge in US Manufacturing 1965-1995: Do Intangible Capabilities Enhance Efficiency?”

This paper uses a theoretically driven empirical approach to study, "To what extent do organizational capabilities explain differences between firms?" In doing so, we test for the historical persistence of imperfect competition and increasing returns (estimation of markups), as well as adjust for variations in the utilization of inputs. First, we find evidence of large markups (overall, by firm size quantiles, and by industry), and large markups imply increasing returns if competition eliminates profits. In particular, medium to large firms appear to enjoy the largest markups. Second, we find that while productivity moves with the business cycle and markups move countercyclically, medium-to-large size firms appear to enjoy significantly larger markups in the post-1983 period. Third, we study the role of R&D, patenting, learning-by-doing and managerial ability in explaining differences in firm performance. We find that (i) successful small firms develop their tacit technological capabilities and are more effective at managing their R&D dollars, while (ii) successful large firms develop patenting capabilities, as well as benefit from their experience in production.

Kiousis, P.K., “The Volatility of Corporate Performance”

Over the period 1950-2002, we document a significant rise in the volatility of corporate performance beginning in 1983. This notable increase has coincided with a dramatic drop in cyclical volatility at the macroeconomic level described as the "great moderation." We provide a characterization of this divergence and find a significant decline in the persistence of corporate performance and a sharp rise in the variance of shocks in the post-1983 period. Our results suggest that studying changes in firm-level behavior may shed light on why aggregate volatility has declined, suggesting several avenues for future research. We discuss the implications of our findings for further theoretical and empirical work.

Mackey, A. & Kiousis, P.K., “Do ‘Good’ Corporations hire ‘Good’ Executives? Heterogeniety in Executive Compensation: Who You Are vs. Where You Work”

Heterogeneity in executive compensation practices persists widely both within and between industries. Two broad explanations of the heterogeneity in executive compensation can be identified: (1) differences between firms—“where   you work” and (2) differences between executives—“who you are.”  Uses a matched-longitudinal firm-executive dataset, we estimate the extent to which heterogeneity in executive compensation is due to “where you work” versus “who you are.” A novel feature of this study is that it compiles unique data on over 1110 executives from S&P 1500 firms, creating measures for compensation, career history, educational background and other biographical information. The study finds that “Where you work” is generally more important than “who you are” in determining executive compensation differentials.

Previous research has demonstrated that executive wage differentials are influenced more by firm-specific compensation policies than by intangible person effects (e.g. managerial ability). Rent-sharing between executives and shareholders may be one possible explanation for why some firms appear to systematically pay above market wages while other firms appear to systemically pay below market wages for their top executives. Whether or not the practice of rent-sharing creates value for corporations is also examined, providing insight into the extent to which executives are “overpaid”. Using a compensation bargaining model, rent sharing is related to the total quasi-rent of the firm. Results suggest that for the large majority of firms rent sharing by executives serves to maximize the value of the firm.

Kiousis, P.K., & Cooper, D., “Strategic Knowledge Protection: Endogenous R&D Spillovers in Duopoly”

A body of economics literature has presented technological spillovers as occurring at an exogenous rate rather than one under the control of the firm. As the spillover rate rises, the incentive to innovate is thought to fall and spillovers are seen as harmful for social welfare. This paper considers two forces impacting the spillover rate: forces which increase the ease of imitation and forces which increase the cost of protection. In the context of a two-stage Cournot setting, we endogenize a component of the spillover rate. Specifically, we allow firms to simultaneously invest in a level of knowledge protection in addition to choosing levels of R&D. We find that increased spillovers do not always reduce firms' incentives to innovate. In particular, raising the cost of protection increases the incentive to innovate--essentially the opposite finding of the literature when the spillover rate is exogenous. We also consider various types of heterogeneity between firms. In the case of large and small firms, for example, we find that as protection costs increase, large firms will generally reduce, while small firms will generally intensify R&D activity. In both cases, spillovers can be welfare enhancing rather than harmful. Finally, we examine different market settings. Cooperation in research not only allows participating firms to coordinate R&D levels, but also to increase the degree of spillovers amongst themselves, through complete knowledge-sharing and research synergies. This widens the range in which research joint ventures are socially beneficial.

Arikan, A., Arikan, I. & Kiousis P.K., “Technological Investment Decisions & Disruptive Technologies: Where Real Options Fall Short Search Models Come to Play”

When faced with technological opportunities over time, what is the optimal investment strategy for a firm seeking to invest in the very best technology? We discuss an alternative scenario of high uncertainty but limited flexibility than the one typically described in the real options literature, highlighting some shortcomings of traditional models. While real options modeling is quite informative in contexts where investment opportunities stem from the same technological trajectory, it falls short of guiding investment decisions regarding disruptive and/or architectural innovations. Under such circumstances, firms have little or no information about the distribution of expected returns from each investment option a priori. Moreover, they cannot revisit foregone opportunities due to intense rivalry. We propose a portfolio investment strategy for a firm seeking to invest in the very best technology. The analysis suggests that it is not optimal to spread out investments evenly over all options nor is it optimal to fully invest in options presented early on. Instead, the optimal strategy is for the investing firm to invest fully (all of its endowment) in the relatively best option after a threshold based on the number of observed options.

Dinopoulos, E., Gungoraidinoglu, A., Kiousis, P.K., “Knowledge Proection & Schumpeterian Growth: The Role of Patent-using & Secrecy-using R&D Strategies”

This paper builds a dynamic general equilibrium model where patenting is an endogenous choice and the discovery of higher-quality products is governed by sequential stochastic R&D contests. Firms strategically choose between two mechanisms for protecting their innovation: either applying for a patent and securing monopoly profits for a period of T > 0 or engaging in secrecy which deters challengers from discovering the next higher quality product. Thus, the measure of industries in the economy are partitioned into two sectors: patent-using industries and secrecy-using industries. Explicitly modeling these public and private mechanisms for protecting knowledge enables us to shed light on the effects of patent policies on long-run economic growth. Notably, we find that the long-run Schumpeterian growth rate depends ambiguously on (i)the rate of population growth and (ii)the strength and duration of patent protection. On the one hand, stronger patent policies decrease the per-capita consumption expenditure and increase the relative wage of specialized labor, the long-run rate of innovation and growth. On the other, stronger patent policies also increase the fraction of industries using patent protection and decrease the size of the secrecy-using sector tending to dampen long-run growth.

Kiousis, P.K., “Measuring Knowledge Spillovers in the Semiconductor Industry: Learning-by-Doing vs. R&D”

This empirical paper focuses on measuring knowledge spillovers in the semiconductor industry. Empirical research on within-industry knowledge spillovers has typically centered on the production process or learning-by-doing spillovers and ignored the efficiencies gained from higher magnitudes of product-oriented R&D expenditure. This paper presents a methodology for analyzing industry-wide knowledge spillovers by encompassing both (1)product technology, as measured by cumulative product-oriented R&D expenditures; as well as (2)process technology, as measured by cumulative shipments. The methodology is applied to a panel of firm-level quarterly data from a segment of the international semiconductor industry. First, the empirical results indicate that the inclusion of cumulative R&D expenditures reduces the explanatory power of cumulative shipments (a common proxy for learning-by-doing) as a driver of cost reductions. Second, I find statistically significant spillovers for measures of national and international R&D spillovers but not for learning-by-doing spillovers, suggesting that product technology is more likely to spill-over than process technology.

Kiousis, P.K., “Unraveling the Puzzle: Methodological Issues in Human Capital and Productivity Measurement Revisited”

This empirical paper unravels the sources of economic growth--raw labor, human capital, physical capital, and total factor productivity--using data from US manufacturing industries between 1958-1992. Total factor productivity growth rates are calculated using Harberger's "Two Deflator Method" of growth accounting, finding that this approach, using a sparse set of inputs, yields comparable results to other approaches when looking at broad averages across several years. The year-to-year TFP numbers, however, for a select group of industries exhibit differences from our benchmark. Such sectors are discussed in the context of other empirical evidence which support the findings. The results indicate that the structure of productivity growth has changed in recent years. Using a diagram similar to a Lorenz curve, the top four wealthiest industries in terms of value added are shown to account for 100% of TFP growth in US manufacturing, lying in contrast to the 1960s and 1970s. This suggests that the number of industries with declining TFP growth has increased over time. The paper also finds that knowledge embodied in physical capital has become a more important as a source of industry growth over the last few decades.

Mackey, T., Kiousis P.K. & Barney, J., “Is the Industry Effect Constant over Time?”

This paper presents a time-series analysis of industry effects on the variance in accounting profitability (ROA). The size of the industry effects is estimated for each year between 1983 and 2000. These effects range from 15% to 32% of the variance in ROA explained by industry. Three hypotheses about why the size of the industry effect varies as it does are examined: the impact of changes in the business cycle, the average level of diversification in the economy, and the average level of industry concentration in the economy. The hypothesized business cycle effect receives no support. The effect of diversification on the industry effect is positive and significant. However, the effect of industry concentration on the size of the industry effect is also positive and significant, and explains virtually all the variance in the size of the industry effect. The long-run equilibrium ratio of the size of the industry effect to the average level of industry concentration in an industry is also estimated. Implications are drawn about the role of institutional changes over time in the field of strategic management and the expected returns associated with investing in strategies that increase industry concentration in different settings.

Mackey, A., McKelvey, B. & Kiousis, P.K., “Can the CEO Churning Problem be Fixed? Lessons from Complexity Science, Jack Welch & AIDS”

CEO dismissals increased dramatically in the 1990’s. Observers point to failing top management, dysfunctional Boards, and a changing economy, to name a few. After reviewing the literature attempting to explain the tremendous rise in CEO dismissals, we argue that it reflects a period of transition in the U.S. economy. Firms have struggled to respond to fundamental changes in the economy that have increased competition and economic uncertainty. Building from Ashby’s Law of Requisite Variety, we suggest that responding to the current environment requires “creating requisite complexity” inside firms. To do this we take lessons from complexity science and Jack Welch. We present twelve actions that collectively, like the AIDS cocktail, act to foster requisite complexity inside firms and consequently, requisite complexity and efficacious adaptation.

Kiousis, P.K., “Is Labor Market Turnover Bad for Economic Growth?”

Human capital is essential for economic growth. In this paper, I build on the work of Stokey (1991) (in which individuals choose their length of education and their productivity depends on the educational level of individuals and of society) to construct a model in which learning takes place on the job rather than in school.  Moreover, individuals may change jobs many times throughout their lives.  Productivity in model depends on an individual's level of human capital and on the social stock of knowledge. This external effect is the source of growth. Individuals have an incentive to switch jobs to benefit from an increase in the social stock of knowledge available at the time of their switching decision.  In each new job, an initial period of slow human capital accumulation exists while the individual is learning the nuances of that new job. Over time, an individual's human capital stock increases.  However, it will increase slowly if the individual moves jobs too quickly, and the social stock of knowledge (which is the sum of the individual stocks) will remain constant or increase very slowly. Individual choice depends on the evolution of the social stock of knowledge which in turn is the sum of all individual choices. The learning and productivity dynamics are therefore determined endogenously at equilibrium and can be complicated.

Literature Review/Course Primer

This review paper discusses an alternative method for strategy researchers seeking to bridge theory with empirics. It offers a means of integrating the industry structure and resource based literature in strategic management. The paper argues that the Dixit-Stiglitz model of monopolistic competition with firm heterogeneity provides a fruitful framework for studying issues important to the strategy researcher, both theoretically and empirically. Such a setup facilitates demarcating between two types of unobservable capabilities: those which increase the perceived quality of a product and those which increase the productive efficiency of a firm. It also a natural setting for analyzing the conditions under which firms should pursue a cost or differentiation strategy. This approach suggests that above-average firm capabilities drive performance differences even in seemingly ‘unattractive’ markets. Specifically, firms with above-average capabilities may exhibit increased profitability--even in markets where goods are highly substitutable. Thus, in contrast to the more traditional view in strategic management, locating in such a market may not be against the best interest of the firms: firms with above-average capabilities not only earn higher profits but are larger and charge a lower price than those who do not. This conclusion is consistent with strategy research regarding the relationship between firm size and profitability. Using the tools of this theoretical setup and its empirical application in productivity analysis, the paper ultimately describe a more refined empirical approach for decomposing the sources of performance differentials, suggesting new avenues for empirical work in strategic management.