Chain of Command

How chain stores influenced small businesses during COVID

Sign on a window that says, "Sorry we're closed due to coronavirus."

Since the pandemic began, local shops, restaurants, and other small businesses have struggled with how best to respond to the ever-changing crisis.

Haas researchers have found that when it came to daily closures, big chains set the tone: In the pandemic’s first few weeks, local businesses not affiliated with a chain were more likely to close their doors if competing chain outlets in the same ZIP code shut theirs.

The study, published in Management Science, focused on service-oriented businesses, such as retail shops, restaurants, movie theaters, and gyms, and excluded essential industries, such as grocery stores and gas stations.

The researchers—Assistant Professors Mathijs de Vaan and Abhishek Nagaraj; Associate Professor Sameer Srivastava, the Ewald T. Grether Chair in Business Administration and Public Policy; and PhD student Saqib Mumtaz— used anonymized cellphone-tracking data to determine whether 230,403 local businesses in the same ZIP codes as 319 national chain establishments were open or closed each day between March 1, 2020, just before local governments began issuing stay-at-home orders, and April 15, 2020.

Nationwide, if a chain store closed one day, a competing community business in the same ZIP code was, on average, 3.5% more likely to close the next day. That may not sound like a lot, but that’s just the daily level. “If you accumulate 3.5% across days and establishments and places, it adds up to be a fairly consequential effect in a town that may have hundreds of businesses,” Srivastava says.

While the focus was on closures, the researchers say the lessons are applicable to more current questions, such as whether to impose mask or vaccine mandates or let employees work from home.

Under the Influence

Strategic corporate donations can sway nonprofits and public policy

Illustration of a hand of a person wearing a business suit with finger puppets on all five fingers. The puppets are calling for some sort of action, denoting corporate influence.

In 2003, the Coca-Cola Foundation announced a $1 million donation to the American Association of Pediatric Dentistry, supposedly to improve child dental health. Shortly after receiving the philanthropic gift, the kids’ dental group changed its stance on sugary beverages, no longer calling them a “significant factor” in causing cavities but instead saying the scientific evidence was “not clear.”

Coincidence? According to new Berkeley Haas research, back-door corporate influence peddling through nonprofit donations is both common and effective.

In work for the Quarterly Journal of Economics, Associate Professor Matilde Bombardini; Professor Francesco Trebbi, the B. T. Rocca Jr. Chair in International Trade; and others provide the first systematic evidence that nonprofits change their stances in response to corporate donations, and government agencies change their rules alongside them.

Comparing data for rules posted by the federal government since 2003 with donations filed with the Internal Revenue Service, they found nonprofits are 76% more likely to comment on a proposed rule in the year after receiving a donation from a corporation that commented on the same rule. Using natural language processing, they found that the comment by the nonprofit was significantly closer to the corporation’s language after receiving a donation—and, even more alarmingly, that the language the government used in changing its proposed rule also became more similar.

“They are distorting the information policy makers receive,” says Bombardini. Nonprofits are often seen as speaking up for citizens or the environment, so “if the message from the nonprofit and the firm are the same, policy makers might weight that position more heavily.” To counteract that distortion, the researchers suggest that nonprofits commenting on a rule be required to disclose any donations from corporations potentially affected by that rule.

‘A giant of a person’: Economist John Morgan dies at 53

Professor John Morgan, an economist who found elegant new ways to analyze the world through the lens of game theory, and whose popular classes and sage mentorship made a deep impression on his students, passed away Oct. 6 at age 53. He died peacefully at his Walnut Creek home.

Headshot of Professor John Morgan
Professor John Morgan

During his nearly two decades at Berkeley Haas, Morgan left his mark through his prolific and wide-ranging research, his unconventional teaching that drew on strategy games he invented, and his generous leadership. He had been struggling with a painful autoimmune disease that put him on medical leave, but he continued with his research and had planned to resume teaching in the spring.

“It’s impossible to over-express what a force John was in this school, and it didn’t take long for anyone who met him to realize that his small physical stature was a disguise for the giant of a person he was,” said Prof. Steve Tadelis, a close colleague in the Economic Analysis & Policy Group. “We have great researchers, we have great teachers, and we have people who give freely of themselves. But I cannot think of a single person who embodies all three of these at the extreme levels that John did.”

It’s impossible to over-express what a force John was in this school… —Prof. Steve Tadelis


Morgan was the Oliver E. and Dolores W. Williamson Chair of the Economics of Organizations; co-director of the Fisher Information Technology Center; founding director of the Experimental Social Sciences Laboratory (XLab); a member of the California Management Review editorial board; and faculty director and tireless advocate for Berkeley Executive Education. In 2013, he was the inaugural winner of the Williamson Award, given to faculty who embody the school’s four Defining Leadership Principles. He also won the Cheit Award for Excellence in Teaching in 2006.

Professor John Morgan writing on a whiteboard.
Morgan teaching at the whiteboard in 2011. (Photo: Jim Block)

Pennsylvania native

Born on November 11, 1967, in Wilkes-Barre, Pa., Morgan was raised in Ashley, Pa. He met his future wife, Heather Evans, when they were teenagers working at the Osterhout Free Library in Wilkes-Barre. They went to different high schools but both attended the University of Pennsylvania, where Morgan graduated summa cum laude in economics from the Wharton School in 1989. The couple was married in 1991, and celebrated their 30th anniversary in August.

Morgan earned a PhD in economics from Pennsylvania State University in 1996 and landed an assistant professorship in economics and public affairs at Princeton University. Following stints as a visiting professor at Penn and New York University, and a visiting fellow at Nuffield College, University of Oxford, he joined Berkeley Haas in 2002. During his career at Berkeley, he also spent time as a visiting fellow, Trinity College, and an eternal fellow, Judge Business School, both at the University of Cambridge, U.K.

His doctoral thesis was an early example of his elegant reasoning, colleagues said. “Financing Public Goods by Means of Lottery” showed why, despite their reputation as regressive, lotteries are a very effective method of raising funds for public benefit: Unlike taxes, they are voluntary, and those who are paying have the chance to get some of the benefit distributed back to them.

Academic derring-do

Among the areas Morgan delved into were pricing and competition in online markets, auctions, expertise, reputations, and voting. He looked at why prices can vary so widely on the internet when it’s so easy to shop around; showed that people aren’t very good at accounting for hidden fees like shipping costs; and even had a paper on the economics of psych-outs, or why showing off can make competitive sense, despite being frowned upon.

No matter the topic, Morgan had an exceptional ability to dispassionately analyze problems, colleagues said. And while his brilliance with economic models stood out, he also loved experimental work, co-founding the Haas Xlab to allow researchers to see if their theories held up in practice.

“I wished we could bottle John, and give every economist a dose of his clear thinking,” said Prof. David Levine, chair of the Economic Analysis & Policy Group, who had been working with Morgan to return to the classroom in the spring. “He thought about ethics. He took the perspectives of other people. He was smarter than me—in fact, he was smarter than just about everyone.”

According to Tadelis, Morgan’s “rate of publication was second to none” before his illness took a toll. Levine was among several colleagues who commented on Morgan’s academic derring-do, which stood out even at an elite institution. “Sometimes his brilliance was intimidating—for example, the time he had two different articles in the same issue of the preeminent economics journal, the American Economic Review,” Levine said.

Prof. Ernesto Dal Bó, a political economist, often discussed voting theories with Morgan. “I enjoyed a front-row seat as he wrote really clever models investigating the informational and welfare properties of important voting institutions,” Dal Bó said. “John’s mathematical models of voting often delivered surprise, and always delivered significant truth and beauty. He was a uniquely gifted researcher who made those around him think much harder, while cheering us up with his wit.”

Mentor and father figure

Those qualities also made an impression on the doctoral students who sought him out for his attentive mentorship and unique approach to life and work.

“Conversing with him was like being on an adventure. He would throw himself at intellectual challenges and follow them wherever they went, and he was willing to challenge convention and be controversial on certain topics.” said Bo Cowgill, PhD 15, now an assistant professor at Columbia University. “On top of that he was hilarious—he could bring down the house with his mixture of humor and insights and game theory and economics.”

He was devoted to his students, a number of whom became good friends and repeated co-authors after they graduated.

“He would generously give his time to PhD students. He put in the hard work to make them better—and they did quite well on the job market,” Cowgill said. “Yet he also cared about things outside of academic success and climbing the career ladder. He would encourage students to take time for their mental health and their lives outside of their careers. He was like a father figure, or a mentor for questions about life.”

Morgan sometimes offered his own money as prizes for students who won his strategy games.

“Survivor” at Haas

Morgan taught strategy, leadership, microeconomics and policy, and his long-running game theory class was one of the most popular at Haas. He blasted rock music to welcome students to class and energize them for competition in his signature strategy games, which he eventually incorporated into a semester-long game based on the reality TV show Survivor. He said his goal was to teach students to be “outward thinkers,” by which he meant they would need to be able to relate to others to succeed in business.

“You don’t really learn how to empathize by having some professor tell you about the need to empathize. It’s like reading a self-help book. It doesn’t work. You actually have to do it,” he said.

He received awards from the National Science Foundation, and was selected as a visiting scholar at the Hoover Institution and the International Monetary Fund. He consulted on auctions and dynamic pricing for Google, was a research scientist at Yahoo!, and served as a consultant to the Federal Trade Commission.

“We will dearly miss John’s sharp wit, brilliant intellect, and personal warmth,” said Dean Ann Harrison. “He was greatly beloved by colleagues and students alike.”

Devoted family man

John Morgan wearing a Red Sox shirt
Morgan was a passionate fan of the Boston Red Sox.

Yet Morgan had another side, as a grounded and devoted husband to Heather, an enthusiastic father to his son. He also pursued many non-academic interests. “John was a brilliant, loving, quirky, wonderful man who never had just hobbies; they always became obsessions,” said Heather Morgan. He had a deep and wide-ranging knowledge of history, which he loved to share. He also loved golf, travel, and hiking, as well as fountain pen collecting, photography, drawing, watercolor, and painting miniatures for strategy board games and Dungeons & Dragons. (For many years, he ran a weekly D&D game for his son and friends.) He was also an enormous fan of the Boston Red Sox, and he shared a love of the Oakland A’s and fantasy sports with his son.

In addition to his wife and son, Aidan, Morgan is survived by his mother, Diana Williams Morgan, of Wilkes-Barre, Pa.; father, Roy J. Morgan, Zephyrhills, Fl.; brother, David W. Morgan (Julie), Longwood, Fl.; aunt, Maxine Williams, Ashley, Pa.; nieces and nephews, and brothers and sisters-in-law. Plans for a memorial are still being discussed. Donations in John’s memory may be made to the American Autoimmune Related Diseases Association (AARDA) or The Humane Society of the United States.





Study shows how corporations influence policy through nonprofit donations

Photo: View of the U.S. Capitol. (Credit: Matt Anderson for iStock/Getty)

In 2003, the Coca-Cola Foundation announced a $1 million donation to the American Association of Pediatric Dentistry, supposedly to “improve child dental health.” Shortly after receiving the gift, the children’s dental group changed its stance on sugary beverages, no longer calling them a “significant factor” in causing cavities, but instead saying the scientific evidence was “not clear.”

Coincidence? A study co-authored by Berkeley Haas researchers provides the first convincing evidence that not only do nonprofits change their stances in response to corporate donations, but that government agencies change their rules alongside them.

“If it had no impact, why would corporations do it?” said study co-author Matilde Bombardini, associate professor of Business and Public Policy at the Haas School of Business. “The bigger question has been whether you have evidence showing that impact.”

Published in the Quarterly Journal of Economics, the paper shows that corporate influence peddling through nonprofit donations is effective in influencing policy. The authors include Francesco Trebbi of Berkeley Haas, Marianne Bertrand of Chicago Booth, Raymond Fisman of Boston University, and Brad Hackinen of Western University Ivey School of Business (Canada).

Influencing rules and regulations

The thousands of government rules and regulations governing corporate behavior may seem obscure at times, but they have direct impact on people’s lives, Bombardini says. “They cover the environment, highways, aviation, health—issues that are very, very close to consumers and workers.”

As policies are hashed out, nonprofits often play an important role, balancing corporate interests by speaking on behalf of citizens and the environment. But what happens when they start speaking on behalf of their corporate donors instead? The researchers scraped data for hundreds of thousands of rules, proposed rules, and comments posted by the federal government since 2003 and compared those rules with detailed data on corporate foundations grants filed with the Internal Revenue Service.

Similarities in language

They found a direct correlation between donations and the likelihood that nonprofits spoke up about a rule: A nonprofit was 76% more likely to comment on a proposed rule in the year after it received a donation from a corporation commenting on the same rule. And frequency wasn’t the only thing connected to money. The researchers used natural language processing to compare comments from the donor companies and the nonprofits, and found that after a nonprofit received a donation, the language it used in its comments was significantly closer to the language used by the company.

In addition, the language the government used in describing how and why the rule changed also became more similar to the corporate line—implying that regulators weighted the comments by the nonprofit more heavily in their deliberation process. “At a minimum, regulators are paying more attention to what the firm has to say, and devoting more time towards discussing the same kinds of issues the firm was discussing in their letters,” said Bombardini.

Adding transparency

While it certainly appears that companies are “buying” favorable comments to help their case, the researchers allow that it’s possible they are just funding nonprofits that already agree with them, allowing the nonprofits more resources for public advocacy. That distinction hardly matters in the outcome, however. “Either way, they are distorting the information policy makers receive,” said Bombardini. “If officials are looking for signals from different players in society, and the message from the nonprofit and the firm are the same, they might weight that position more heavily, not realizing that the two are linked.”

In order to counteract that distortion, the researchers propose a simple rule requiring all nonprofits to disclose any donations they receive from corporations that could be potentially affected by a rule on which they are commenting. Such a guideline wouldn’t necessarily lead regulators to discount the nonprofits’ points of view, but it might cause them to take it with a grain of salt, properly weighting its value. “We’re not saying all of these donations are nefarious—there might be a good reason why a nonprofit adopts a certain view,” said Bombardini. “We are advocating to make it all more transparent, so the public and the agencies know where the funding is coming from.”

Small businesses follow big chains’ lead on pandemic closures, research finds

Closed due to coronavirus
Photo: Gwengoat for Getty Images

From the earliest days of the coronavirus pandemic, local shops, restaurants, and other small business have struggled with how best to respond to the ever-changing crisis.

A new Berkeley Haas study found that when it came to closures, the big chains set the tone: In the first few weeks of the pandemic, local businesses not affiliated with a chain were more likely to close their doors if competing chain outlets in the same ZIP code shut theirs.

The study, based on cell-phone location data and published in the journal Management Science, sheds light on how businesses influence each other through “social learning.”

And while the focus was on business closures, “the key lessons are applicable to some of the questions businesses are grappling with now,” such as whether to impose mask or vaccine mandates or let employees work from home, said co-author Mathijs de Vaan, an assistant professor of management at Berkeley Haas.

The researchers, who included Berkeley Haas professors Sameer Srivastava and Abhishek Nagaraj along with PhD student Saqib Mumtaz, used anonymized cell-phone tracking data to determine whether local and chain establishments were open or closed each day between March 1, 2020— just before local governments began issuing stay-at-home orders—and April 15, 2020.

“Many of these directives were ambiguous or not enforced, leaving business owners with latitude to interpret the guidance as they see fit,” the authors noted.

Business owners had to make unprecedented closure decisions not knowing how their customers and employees would react. The situation was so uncertain that going into the experiment, the team couldn’t predict whether the closure of a chain store would cause an independent business nearby to do the same or remain open for competitive reasons.

“If I’m a small business owner, it’s not so straightforward what I should do,” de Vaan said. “If the big guy stays closed, maybe I can make more money. Conversely, maybe the big guy is better equipped to know” the right response.

The researchers analyzed daily visits to 230,403 local businesses that were in the same industries and ZIP codes as chain outlets affiliated with 319 large national brands. They focused on service-oriented outfits such as retail shops, restaurants, movie theaters, and gyms, and excluded industries deemed essential, such as grocery stores and gas stations.

The team tried to control for other local variables that could cause establishments to close, such as shelter-in-place orders, local infection rates, or demographics. “Interestingly, we found the decisions of these branded chains were uncorrelated with the local Covid conditions,” de Vaan said.

In a typical example, the researchers looked at fitness centers in two neighboring ZIP codes in Collin County, Texas, on March 25, 2020. One ZIP code had an Orangetheory chain gym that was closed, while the other had an Anytime Fitness chain location that was open. They found that all six local gyms in the same ZIP code as the closed Orangetheory were closed, while three out of five local establishments in the same ZIP code as the Anytime Fitness were also open.

Looking at all industries and locations nationwide, they estimated that if a chain store closed one day, a competing community business in the same ZIP code was, on average, 3.5% more likely to close the next day. That may not sound like a lot, but that’s just the daily level. “If you accumulate 3.5% across days and establishments and places, it adds up to be a fairly consequential effect in a town that may have hundreds of businesses,” Srivastava said.

The researchers concluded that, “if you don’t have clear-cut information, you are going to look at people around you,” de Vaan said.

Given that local governments are unlikely to mandate vaccines, “it creates an arena for social influence to pop up,” de Vaan said. If a large company required vaccinations, small competitors have to decide whether following suit would cause them to gain or lose customers and employees. Based on their findings, de Vaan predicts that small businesses would be more inclined to follow suit, but cautions that they didn’t study that question.

“Perhaps most importantly,” the authors concluded, “this paper shows that when government directives and health guidelines are ambiguous, firms will look for other information to guide their decision making. Obviously, such ambiguity may have been intentional if local governments believe that firms are well positioned to make these important decisions. But if one assumes that this is not the case, policy makers and local governments should consider the consequences of a lack of clarity and precision in their directives.”


Power-hungry cryptominers push up electricity costs for locals

Photo illustration of a hand holding a bitcoin in front of a power plant
Photo: STRF/STAR MAX/IPx via AP Images

When cryptominers come to town, local residents and small businesses pay a price in surging electricity rates.   

A new Berkeley Haas working paper estimates that the power demands of cryptocurrency mining operations in upstate New York push up annual electric bills by about $165 million for small businesses and $79 million for individuals—with little or no local economic benefit.

“Small businesses operate on very thin margins, so I don’t think they’d be happy paying for the energy that cryptominers are using,” said Asst. Prof. Matteo Benetton, who co-authored the paper with Assoc. Prof. Adair Morse and Asst. Prof. Giovanni Compiani, now at the University of Chicago’s Booth School of Business. “And the profits do not stay local: Bitcoin mining profits can be moved from upstate New York to Italy or Colombia or China in a second.”

While cryptomining has been criticized for its outsized environmental impact, the paper is the first to quantify its negative economic impacts on local communities. Massive cryptomining server farms employ just a few people yet guzzle electricity by the megawatt. That’s because “proof-of-work” cryptocurrencies, such as Bitcoin and Ethereum, require brute computational power to solve the complex math problems required to verify transactions on a blockchain. 

Bitcoin mining alone was estimated to consume 0.5% of global electricity in 2017. From Mongolia to Montana to Washington, cryptominers have flocked to northern locales where it’s easier to keep servers cool. They’re also lured by cheap, abundant power supplies—sometimes with discounts on electricity. 

Impacts upstate

The researchers analyzed upstate New York, where Niagara Falls has fueled inexpensive hydropower and rural communities like Plattsburgh have borne an outsized impact from cryptomining operations that moved into former industrial sites. By looking at surges in Bitcoin prices and electricity demand curves, the researchers estimated that mining pushes up monthly electric bills about $8 for individuals, and $12 for small businesses. 

“That adds up to $250 million just for upstate New York for a year, and if you think of scaling that up for the U.S., we estimated it’s about $1 billion per year—many times that globally,” said Compiani. “These are warehouses full of computers and they only require one or two IT people to run the whole operation, so it’s unlikely that it  brings jobs or stimulates the economy.”

They did find that local governments were able to capture some increased tax revenue—most likely in the form of real estate taxes—amounting to about $40 million per year. That may be why some localities have offered discounted power, Compiani said. However, the increased tax revenue only offsets about 15% of the increased costs to locals.

Chinese price constraints 

The researchers also looked at China, where electricity prices are constrained by the government rather than fluctuating with demand. While the data available was less detailed, they found evidence that mining operations seemed to crowd out other potential industries that may have employed more people, slightly depressing local economies. There is also anecdotal evidence that the increased power demands with constrained prices has led to supply shortages, rationing, and blackouts. 

Implications for data centers

While the paper focused only on the impacts from cryptomining, the researchers noted that large data centers—which are proliferating from the growing processing demands of cloud computing, AI, natural language processing, and quantum computing—may generate many of the same impacts for local communities. 

Read the full paper: “When cryptomining comes to town: High electricity-use spillovers to the local economy.”

New paper highlights manipulation in 5G patent licensing

The value of competing 5G technology standards shouldn’t be judged by number of patents alone, according to new research by David Teece.

Cellular communications tower for mobile phone and video data transmission
Photo credit: Bill Oxford for iStock/Getty Images

Whether its mobile phones or autonomous cars or telemedicine, 5G is a game-changer, enabling cellular connections up to 100 times faster than 4G. Unfortunately, not all 5G implementations are alike: 5G technology portfolios are easily manipulated by patent holders, and determining which set of technologies and standards are most viable is not always straightforward.

That’s according to Berkeley Haas Prof. David Teece, who examined the problem of 5G patents in a new article for California Management Review titled, “Technological Leadership and 5G Patent Portfolios: Guiding Strategic Policy and Licensing Decisions.” Teece, the Thomas W. Tusher Professor in Global Business and director of the Tusher Initiative of Intangible Assets, highlights the flaws of the patent licensing system and the use of patent counts as an indicator of a technology’s value.

Patent licensing systems

When 5G developers patent their technology, they work with standard development organizations (SDOs) that in turn work with the 3rd Generation Partnership Project (3GPP) to make sure that the patents are commercially viable and meet the standardized elements for foundational technologies. Once the patent is licensed, 3GPP and these developers gain their profits from patent licensing fees and royalty payments which are determined by the fair, reasonable, and nondiscriminatory (FRAND) criteria.

Teece observed that under this licensing system, policing unlicensed use of patent data is often complex and difficult. That means that while these patents may be protected legally, they may not be protected practically. Moreover, just because a license is available does not mean royalties will be paid: The SDOs that patent-developers work with only provide the FRAND framework, but do not assist in developing an official licensing program. Teece suggests that patent owners must be willing to develop a licensing program that users must sign up for, and courts must be willing to charge patent infringers. These two actions may help prevent unlicensed users from getting away with not paying royalities.

Manipulation of patent counts

Prof. David Teece
Prof. David Teece

Another problem lies in the way that many companies determine which patents to license. It is tempting to look at the number of patents generated as an indicator of their quality, but quantity does not equal quality. “Patent counts are misleading proxies for technological contribution and leadership,” says Teece. “When well-respected media outlets like the Wall Street Journal and the Financial Times trumpet the patent rankings of companies and countries as proxies for patent value and technological leadership, with minimal if any qualification, it reinforces widespread ignorance about the utility of patent statistics.”

Patent counts can be deceiving and because they are likely biased, he says. For example, one country could hold the most patents, but others may be running the development and deployment services for 5G technology. On another note, the line between patents described as essential and patents simply declared as essential can be ambiguous. This makes patent counting inaccurate and invalid.

More importantly, Teece found that “the patent process is strategically manipulated by some countries and some companies.” For example, as China races to match the success of Western economies, it now owns about 36% of essential 5G patents. They may be partly due to China’s government subsidizing many of the patenting processes, however. Companies also have this same motivation for obtaining license control. In the past, higher patent counts were due to certain companies’ efforts to gain leverage in license negotiations.

With patent counts being easily manipulated, Teece described five key metrics used to understand patent data. Family counts and the number of technical contributions to standard bodies are found to be easy to manipulate and are not meaningful indicators of technological value, he says. On the other hand, forward-citation counts, the number of independent claims, and geographic coverage are difficult to manipulate, but are still not perfect in judging the value of a patent.  For example, forward-citation counts do not always reflect commercial significance.

After understanding how patent data is analyzed, Teece lays out methods to for properly assessing leadership in 5G technology. These include performing a patent-by-patent analysis of leading patents, looking at comparable licenses (with running royalty licenses as the most reliable indicator of royalty rates), and utilizing aggregate market-observed choice data to calculate the profit impact of patented technologies.

“Manipulation happens all too often,” Teece says. Though some of the alternative methods to determine technological value may be costly, these steps can help make vast improvements to the future of wireless technology development and use, he argues

Teece’s article was published in the Spring 2021 issue of California Management Review, a journal that publishes academic work that engages scholars and contribute to the practice of management.



Study finds the cost of partisanship among federal workers

The Robert F. Kennedy Department of Justice Building in Washington, D.C.
The Robert F. Kennedy Department of Justice Building in Washington, D.C. (AP Photo/NewsBase)

When Donald Trump became president in 2017, federal employees who lean Democratic found themselves working for an administration they didn’t agree with. The same thing happened eight years earlier to Republican bureaucrats when Barack Obama took office.

Guo Xu
Asst. Prof. Guo Xu

Most civil servants carry on no matter who occupies the Oval Office, but this inevitable political mismatch does take a toll on productivity: A new study has found that cost overruns in federal contracts increase by about 8% when the worker overseeing them is misaligned with the president’s party.

The study is the first analysis of how partisanship affects hundreds of thousands of government workers at the individual level. Authored by Guo Xu, an assistant professor at Berkeley Haas, with Jorg L. Spenkuch and Edoardo Teso of Northwestern Kellogg, it was made possible by combining personnel records obtained through Freedom of Information Act requests with voter registration records. The researchers also analyzed data from an employee survey to get a sense of workers’ feelings about their jobs.

“We do see evidence for reduced performance due to not being aligned with your leader,” Xu said. “Some people might be quick to think there is some sort of ‘deep state’ slowing things down, but we see the same thing from the Republican side as the Democrat side. Based on our evidence, it looks like misaligned civil servants just become less motivated overall.”

We do see evidence for reduced performance due to not being aligned with your leader

First look at ideology among civil servants

The study, published as a National Bureau of Economic Research working paper, is filled with insights on the federal bureaucracy. From Office of Personnel Management records that included the names, ages, education, occupation, job location, and pay for nearly 3 million federal employees from 1997 to 2019, the researchers were able to match 1.26 million people with their voter registration records. That gave them detailed information on about 45% of federal workers over four presidential administrations: Bill Clinton, George W. Bush, Obama, and Trump.

“This allowed us to look inside the black box of who works for the federal government,” said Xu.

It was no surprise that at the highest levels of government, presidents use their discretionary appointments to align the bureaucracy with the mission of the White House. The analysis found that under a Democratic president, the chances that an appointee is a fellow Democrat increase by over 150%; Republican presidents’ chances of appointing Republican increase over 500% relative to a Democrat.

However, political appointees make up just 0.23% of the federal workforce. For the vast majority of civil servants, the researchers found no apparent partisan cycles. About 2% to 6% of employees leave each year, with no increases around the end of a presidents’ term, and no significant differences between workers from the major parties. (An exception was the Environmental Protection Agency (EPA) after Trump was elected, when departures tripled. Interestingly, it wasn’t just Democrats who were quitting—about the same number of Republicans left during the transition).

Insulated from political cycles

Xu, who has extensively studied the civil service in India and found much more political churn at all levels, says it’s notable that the roughly 2 million federal employees in the U.S. are largely insulated from political cycles.

“We don’t see a mass exodus from the government of people who aren’t aligned with the mission of the president,” he said. “In that aspect, this is exactly the classic idea of what constitutes a well-functioning bureaucracy, where you have career civil servants, continuity and political insulation, so that these experts are given the space to focus on implementing things.”

It was also no surprise that the researchers confirmed that Democrats outnumber Republicans or Independents in the federal workforce, as has long been public perception. Democrats made up about half of the workforce during the 1997-2019 data period (compared with about 41% of the U.S. population). Meanwhile, registered Republicans dropped from 32% to 26% during the period, with an increase in Independents making up the difference. The most heavily Democratic departments are the EPA, Department of Education, and the State Department, where about 70% of employees are registered to the party, while the most conservative departments are Agriculture and Transportation.

Dems have more education, more seniority

The analysis also found that Democrats even more heavily represented in the ranks of upper management jobs, topping out at 63% of senior executives, the level just below presidential appointees. However, this discrepancy is driven largely by the fact that Democrats tend to enter the civil service with higher rates of college and graduate degrees, and tend to stay in government careers longer, relative to Republicans. Even in comparable jobs at the same pay level, Democrats have higher education on average than Republicans.

“These facts are at least suggestive of a higher proclivity for public service among Democrats,” the researchers wrote.

Misalignment and contract overruns

Because federal bureaucrats are largely insulated from political turnover, it’s difficult to measure how partisanship affects their work. Xu and his colleagues looked for workers who had comparable performance measures and outcomes, and found them among procurement officers, who select and monitor federal contracts for services, construction projects, and more. These contracts amount to over 9% of the federal budget.

The researchers were able to match the party affiliation for 7,200 officers who administered over 700,000 contracts across 132 departments and agencies during the period. Comparing among similar contracts, they found an 8% increase in cost overruns among contractors who were registered as Democrats under a Republican president, and vice versa. That was true even when they compared procurement officers within the same department in the same year.

“We didn’t see any change in how people were choosing contractors or the types of contracts, so the decline in performance occurred while they were overseeing the contract,” he said. “These overruns really do seem to be due to a decline in morale, which we corroborate through data from employee surveys.”

In addition to offering the first detailed look at political ideology in the federal workforce, the paper underscores the potential costs of mission misalignment in any organization. “Given that mission-driven organizations are also on the rise in the private sector, misalignment can have a significant impact,” Xu said.

Read the full NBER paper: Ideology and Performance in Public Organizations

Polling Truth

Just how accurate are election polls?

Four people voting.

Public confidence in election polls plummeted after Donald Trump beat Hillary Clinton in 2016 despite trailing her in the polls. Even so, horse race-style coverage of the latest polls continues to dominate election news cycles.

A recent Berkeley Haas study suggests that election poll accuracy hasn’t actually declined. Rather, it was never as accurate as pollsters claimed.

Most election polls report a 95% confidence interval. Yet an analysis of polls from 11 election cycles dating back to 2008 found that the outcome lands within the poll’s result just 60% of the time. And that’s for polls just one week before an election—accuracy drops even more further out.

A 95% confidence interval means that if the same sampling procedure were followed 100 times, 95 of those samples would reflect the true voter population. These statistical “sampling errors,” however, do not include errors and unknowns, such as surveying the wrong set of people.

“There are many reasons why an actual outcome and poll could differ, and the way pollsters compute confidence intervals doesn’t take those issues into account,” says Prof. Don Moore, who conducted the analysis with Aditya Kotak, BA 20 (computer science and statistics).

“Perhaps the way we interpret polls as a whole needs to be adjusted to account for this uncertainty,” Kotak says.

In order to be 95% accurate, pollsters need to greatly increase the margins of error they report.


Accuracy of Polls Graph
Most polls ask, “If the election were held today,…” yet accuracy declines the further from an election the poll was conducted.

Nilmini Gunaratne Rubin, MBA 99
Co-Founder, Fix the System; Founding Member, Leadership Now Project

Nilmini Gunaratne Rubin MBA 99

Having enjoyed a 20-year career in Washington, D.C., most of it on Capitol Hill, Nilmini Gunaratne Rubin thought she knew how the political system worked—until two years ago. “I got nervous about things happening with the media, racial rhetoric, and voting rights,” she says. “I worried about how fragile our unwritten, cultural norms can be when people don’t want to comply with them.”

So Rubin, whose previous work had been in the foreign policy sphere, pivoted her career toward election integrity and democratic reform in the U.S. She co-founded Fix the System and became a founding member of the Leadership Now Project.

Fix the System is a cross-partisan coalition of grassroots, business, and national organizations, and Rubin helped them develop strategies to promote election integrity, voter rights, and fair redistricting. “We brought Democrats, Republicans, and Independents together on all of the work,” Rubin says, “so we were able to engage some different people.”

The Leadership Now Project, which she joined with other women MBAs, calls on business professionals to strategically invest and participate in democracy reform. Rubin drove engagement efforts. “It’s an important signal to people who might want to push against the rule of law to show that the business community is opposed to that,” she says.

The 2020 election was a stress test for democracy and exposed weaknesses, Rubin says. Going forward, her organizations will work on fixing laws and advancing cultural changes in the name of reform. “We need to pay more attention to the health of our democracy,” she says.

National Treasures

Haas economists manage nation’s finances

Three Berkeley Haas economists are continuing the school’s long tradition of public service in Washington, D.C.: Assoc. Dean and Prof. Catherine Wolfram and Assoc. Prof. Adair Morse have joined Prof. Emeritus Janet Yellen, who serves as secretary of the U.S. Department of the Treasury.

Prof. Emeritus Janet Yellen Secretary of the U.S. Department of the Treasury
Prof. Emeritus Janet Yellen
Secretary of the U.S. Department of the Treasury

Yellen, the first woman to lead the Federal Reserve, is now the first woman to serve as treasury secretary. She’s also the first person to have served in the nation’s three top economic roles, since she also chaired the President’s Council of Economic Advisers during the Clinton administration. Haas economist and Distinguished Prof. Laura D’Andrea Tyson was the first woman to chair the Council of Economic Advisers.

Yellen is credited with shepherding the country out of the Great Recession when she led the Fed from 2014 to 2018 and will now serve as President Biden’s lead economic advisor as he confronts the fallout from the coronavirus pandemic. She will also be instrumental in helping Biden reduce income inequality and initiate an economic recovery package focused on manufacturing and clean-energy jobs.

“Economics isn’t just something you find in a textbook,” Yellen wrote on Twitter after being sworn in. “It can be a potent tool to right past wrongs and improve people’s lives.”

Prof. Catherine Wolfram Deputy Assistant Secretary for Climate and Energy Economics
Prof. Catherine Wolfram
Deputy Assistant Secretary for Climate and Energy Economics

Yellen has also increased the department’s focus on fighting climate change. Wolfram, the Cora Jane Flood Professor of Business Administration, started March 1 in the position of deputy assistant secretary for climate and energy economics in the Office of Economic Policy. She is a world-renowned expert who has published extensively on climate and energy economics and led randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

“It’s fantastic that the Biden administration is paying so much attention to climate change,” says Wolfram. “It’s one thing to sit in your office and write about what policy makers should and shouldn’t do, but I’m really excited to be a part of those efforts.”

Assoc. Prof. Adair Morse Deputy Assistant Secretary of Capital Access
Assoc. Prof. Adair Morse
Deputy Assistant Secretary of Capital Access

Morse, the Soloman P. Lee Chair in Business Ethics and a member of the Haas Finance Group, began in February as deputy assistant secretary of capital access in the Office of Domestic Finance, which develops policies and guidance for Treasury Department activities in the areas of financial institutions, federal debt finance, financial regulation, and capital markets.

Morse had spent much of the pandemic helping small businesses. She and Tyson developed an innovative loan program that uses public capital to attract private lenders and provide low-interest credit to the most vulnerable small businesses. It became the foundation of the state’s California Rebuilding Fund and a program in Berkeley.

“I’m thrilled to have the opportunity to serve in the Biden Administration and to join the team at Treasury, serving the people of this great country,” says Morse.

Report: Californians pay up to triple what it costs to provide electricity

Power lines stretch across the landscape toward Mission Peak in Fremont, CA.
Power lines stretch across the landscape toward Mission Peak in Fremont, CA. (Photo: Zeiss4Me for iStock/Getty Images)

Californians not only pay some of the highest electricity rates in the country, but they pay two-to-three-times more for power than it costs to provide, according to a report released today by researchers at the Energy Institute at Haas and the non-profit think tank Next 10.

These uncommonly high rates result from utilities passing on a myriad of fixed costs to consumers—everything from generation, transmission, and distribution to wildfire mitigation, subsidies for rooftop solar and low-income customers, and energy efficiency programs.

The result is an increasingly inequitable pricing structure that must be reformed as California transitions to clean electricity, the report argues.

“What Californians pay is much higher than the true marginal cost of using electricity,” said Prof. Meredith Fowlie, faculty director for the Energy Institute at Haas, in a press release. She authored the study with Prof. Severin Borenstein of Berkeley Haas and Assoc. Prof. James Sallee of the Department of Agricultural and Resource Economics. “This puts an unnecessary cost burden on low- and middle-income households as we transition to using clean electricity.”

Uncommonly high rates

Data from Designing Electricity Rates for An Equitable Energy Transition reveal that the state’s three largest investor-owned utilities (IOUs) charge residential electricity customers much higher prices than are paid in most of the country. In the least expensive area, Southern California Edison (SCE), residential prices per kilowatt-hour are about 45% higher than the national average. Prices for Pacific Gas & Electric (PG&E) are about 80% higher, and prices in the San Diego Gas & Electric (SDG&E) territory are roughly double the national average.

This is because the the utilities bundle their fixed costs—including subsidies for houses with rooftop solar and increasingly expensive wildfire mitigation—into kilowatt-hour prices paid by consumers. Up to 77% of what consumers pay goes toward these fixed costs, which don’t change if they use more or less power.

Inequities are growing: As wealthier households transition to rooftop solar and buy less power from the grid, these fixed costs are distributed through a smaller volume of kilowatt-hours delivered by the utilities. That raises the costs even more for the remaining, lower-income customers, researchers said.

“Lower- and middle-income households are bearing a far greater cost burden for the state’s power system than seems fair,”  Borenstein said. “We’re proposing solutions that would recover system costs through sales or income taxes, or an income-based fixed charge, which would pay for long-term capital costs while ensuring all those who use the system—and specifically, wealthier households—contribute equitably.”

Lower- and middle-income households are bearing a far greater cost burden for the state’s power system than seems fair. —Severin Borenstein

The report comes as an increasing number of Californians are struggling to pay their utility bills. About eight million residents currently owe money to investor-owned utilities, according to a recent presentation by the California Public Utility Commission. Rates are projected to rise again due to wildfire-related costs.

“There’s no question that we need to power buildings and transportation with California’s abundant clean electricity. The climate and health benefits will be enormous,” said F. Noel Perry, founder of Next 10, an independent, nonpartisan, nonprofit that commissioned the report. “The question is, how can we change the inequitable and unsustainable way we currently pay for electricity?”

Among the report’s findings and recommendations:

  • Prices consumers pay are two-to-three times the cost of providing the electricity. About 66% to 77% of the costs that investor-owned utilities recover from ratepayers are associated with fixed costs of operation that do not change when a customer increases or decreases consumption.
  • Lower- and middle-income households bear a greater burden. These households are increasingly responsible for covering high fixed costs as relatively wealthier households install rooftop solar and total consumption from the grid declines. That leaves lower-income earners to pay an increased share of the fixed costs.
  • A more equitable model would recover fixed costs from sales or income taxes, or an income-based fixed charge.
    • Raising revenue from sales or income taxes would ensure that higher-income households pay a higher share of the costs.
    • Moving utilities to an income-based fixed charge would allow recovery of long-term capital costs, while ensuring all those who use the system contribute to it and also keeping costs affordable. In this model, wealthier households would pay a higher monthly fee in line with their income. The report examines a variety of implementation options for this model.

“We believe policymakers could consider pursuing an income-based fixed charge based on three criteria: Set prices as close to cost as possible; recover the full system cost; and distribute the burden of cost recovery fairly,” said Sallee.

Borenstein will present the report’s findings to the Public Utilities Commission on Wednesday at its special meeting on electricity rates and costs.

Read the full release and report.

Buyer beware: Massive experiment shows why ticket sellers hit you with last-second fees

A StubHub office in New York City
A view of a StubHub office in New York City City (Photo by: John Nacion/STAR MAX/IPx 2020 10/21/20)

There’s a reason that online ticket sellers hit you with those extra fees after you’ve picked your seats and are ready to click “buy.”

Pure profit.

A massive field experiment by Berkeley Haas Prof. Steven Tadelis with the online ticket marketplace StubHub concluded that so-called “drip pricing”—whereby additional fees are only disclosed when customers are ready to confirm their purchases—resulted in people spending about 21% more. It’s a particularly effective strategy for online sales, which in the past two years has overtaken brick-and-mortar shopping.

“Websites that incorporate ‘hidden fees’ that are only revealed at checkout are making more money than they would if they chose to honestly display all fees upfront,” Tadelis said.

Websites that incorporate ‘hidden fees’ that are only revealed at checkout are making more money than they would if they chose to honestly display all fees upfront.

Drip pricing in action

The study, co-authored by Tadelis and forthcoming in Marketing Science, set out to better understand how “drip pricing” affects both the quantity and types of ticket purchases through a large-scale, real-world randomized experiment. Co-authors are Sarah Moshary of the University of Chicago; Kane Sweeney, former head of data science for StubHub and now of health-tech startup Mindstrong; and Thomas Blake, an economist and data scientist now with Amazon.

“Economic theory has pretty clear predictions on how hiding mandatory fees makes consumers buy more, and prior work hinted at the kind of behavioral biases that we were likely to see,” Tadelis said. “However, few studies had examined this question at such a scale.”

Prior to the fall of 2015, when the experiment began, StubHub had displayed all-inclusive prices when a user first arrived on the site looking for tickets. This upfront-fee pricing strategy included all required fees, which generally amounted to 15% of the ticket price plus shipping and handling.

For the experiment, StubHub randomly assigned half of all U.S. users, who count in the millions, to an experimental back-end—or hidden—fee structure where buyers saw only the ticket list price as they shopped, and extra fees were only displayed on the checkout page. The other half of StubHub users continued to see the all-inclusive prices. This setup allowed Tadelis and his colleagues to compare the choices made by the two groups, such as purchases and clicks towards checkout.

Overall, the StubHub users who weren’t shown fees until checkout spent about 21% more on tickets and were 14% more likely to complete a purchase compared with those who saw all-inclusive prices from the start.

Among all those who made purchases, customers in the hidden-fee group bought tickets that were about 5% more expensive than those in the up-front fee group, buying more tickets on average for seats located closer to the field or the event stage. Choosing these higher-priced seats accounted for about a quarter of the 21% spending increase by the hidden-fee group.

Misinformed buyers

These results implied that the hidden-fee buyers were misinformed about the total purchase price. To explore this idea, the researchers examined how users clicked around StubHub. The hidden-fee buyers were much more likely to click on tickets on the initial website landing page—their click rate was about 19% higher than those who saw the full price. However, their purchases dropped off much more steeply when the fees were sprung on them at checkout: They were about 45% less likely to make a purchase than those who saw the full price up front. Hidden-fee users were then more likely to go back and search other ticket listings.

Shortly after the experiment, StubHub changed the price structure across the whole site to use back-end fees, hiding them until the checkout page. Because the site differs from traditional retailers in that it’s a two-sided marketplace, with sellers who are individual users, the researchers wanted to know how the sellers responded to the price structure change. They found that the ticket sellers began listing more higher-quality tickets located closer to the event stages, consistent with buyers purchasing more expensive tickets. They also saw that sellers were more likely to set ticket prices at round numbers—which have been shown to be more appealing to consumers—when they knew that buyers wouldn’t see the taxes and fees until the last stage of purchase.

These days, extra fees are pretty standard in the ticket sales industry, and presumably, many users expect them. So, the researchers separated out the more experienced StubHub users to see whether the sales boost from hidden-fees declines when people know they’re coming. Indeed, they found that buyers with at least ten previous site visits spent less than the newbies in the hidden-fee group. Even so, the veteran shoppers still spent 15% more with hidden-fee pricing relative to the StubHub veterans who saw the full price up front. This suggests, Tadelis said, that the boost to sellers from drip pricing may be even bigger for infrequent consumer purchases, such as cars or homes.

“There is no reason to expect new visitors to a site to have correct beliefs about fees, and once they have their sights on an item, letting go of it becomes hard—as scores of studies in behavioral economics have shown,” Tadelis said. “People end up making purchases that in hindsight they would not have made.”

People end up making purchases that in hindsight they would not have made

The findings raise questions for whether consumers have a right to full price disclosure up front. He noted that some governments have considered regulating this behavior to increase transparency—Canada, for example, has banned the use of drip pricing for ticket sales. Tadelis noted that In June of 2019, the Canadian Competition Bureau fined Ticketmaster $4 million—plus another $500,000 for the government’s investigation costs—for the ticket seller’s practice of using back-end fees that mislead consumers, according to Canadian consumer protection law.

“I can’t think of a good reason to allow this practice in any country as the harm to consumers is clear from our study,” Tadelis said.

I can’t think of a good reason to allow this practice in any country as the harm to consumers is clear from our study.

Prof. Janet Yellen, trailblazing former Fed chair, is Biden’s Treasury pick

Updated Nov. 30

Berkeley Haas Professor Emeritus Janet Yellen, the first woman to have led the Federal Reserve, is expected to take on another trailblazing role as President-elect Joseph Biden’s Treasury secretary.

Yellen, who taught economics to thousands of undergraduate and graduate students during her 26 years as an active Berkeley Haas faculty member, would be the first woman to lead the Treasury Department. If confirmed, she will be the new president’s lead economic advisor as he confronts the fallout from the coronavirus pandemic and lockdown.

“As a brilliant economist with great personal humility and empathy for the people behind the statistics, Janet Yellen embodies the best of Haas and UC Berkeley,” said Dean Ann Harrison. “We are proud and excited to hear the news that she will be the new president’s top economic advisor at this very difficult time for the country. She also carries on a proud tradition of Berkeley women in economic leadership roles. Our country will be in excellent hands.”

[Janet Yellen] carries on a proud tradition of Berkeley women in economic leadership roles. —Dean Ann Harrison

Yellen is one of several female UC Berkeley economics professors to have shattered the glass ceiling in the male-dominated field, at the highest ranks of government. Former Berkeley Haas Dean Laura Tyson, distinguished professor of the graduate school, was the first woman to chair the President’s Council of Economic Advisers (CEA) and the National Economic Council, both during the Clinton administration. Tyson led the effort to nominate Yellen to her first high-level government position on the Federal Reserve Board of Governors. Berkeley Economics Professor Christina Romer also chaired the CEA for four years in the Obama administration. (Berkeley economics PhD alumna Lisa Cook, a professor at Michigan State University, has been named to Biden’s Federal Reserve transition team.)

Time Magazine cover, January 2014

Yellen was appointed by former President Barack Obama in 2014 to chair the Fed’s Board of Governors, serving in what has been called the world’s most powerful economic job until 2018. She was praised for achieving “near perfection” during her tenure, steering the central bank with steadfast pragmatism in a slow series of interest rate increases. Unemployment fell from 6.7% to 4.1%, inflation stayed low, and the economy built up a head of steam. Her policies are credited with helping to drive unemployment to its lowest level in 50 years before the coronavirus hit.

With the pandemic now raging, Yellen—who, since leaving the Fed, has been in residence as a distinguished fellow at the Brookings Institution and has worked on California Gov. Gavin Newsom’s Task Force on Jobs and Competitiveness—will be walking back into a situation that’s very different from what she left just two years ago. Prof. Jim Wilcox, who knew Yellen as a faculty member and also served as a senior economist with the Federal Reserve and the President’s Council of Economic Advisors, said she will have some important advantages.

“First, the new administration could hardly find someone who’s had more experience in Washington policy-making over the past couple of decades. She’s been around, and she’s earned the respect of folks widely in policy circles, not to mention academic circles and financial markets, which will help a lot,” Wilcox said. “One of the advantages the new administration has is we now have a lot more data on what works and what doesn’t, and I have no doubt she’s been thinking long and hard about this ever since we learned to spell COVID. What you’re likely to see is a much sharper, more finely honed set of policies.”

I have no doubt she’s been thinking long and hard about this ever since we learned to spell COVID. What you’re likely to see is a much sharper, more finely honed set of policies. —Prof. Jim Wilcox

Tyson, who was actively involved in recruiting Yellen and her husband, Prof. Emeritus George Akerlof, to Berkeley and has remained a close colleague and friend, recently worked with Yellen and Berkeley Haas Assoc. Prof. Adair Morse to develop an innovative small business loan program, the California Rebuilding Fund, launched last week. “One of her goals as Treasury Secretary will be to increase federal funding for small businesses that have been hit disproportionately hard by the pandemic,” Tyson said.

Yellen served as the Fed’s vice chair from 2010 to 2014, in the wake of the financial crisis, and was president and chief executive officer of the Federal Reserve Bank in San Francisco from 2004 to 2010. She chaired the President’s Council of Economic Advisers from 1997 to 1999 during the Clinton administration. She will become the first person to have served as Fed chair, chair of the Council of Economic Advisors, and Treasury Secretary, if confirmed.

Born in Brooklyn in 1946, Yellen studied economics at Brown University and earned her PhD at Yale University. She studied with economist Joseph Stiglitz, who later shared the 2001 Nobel Prize in economics with Yellen’s husband, Akerlof, and Michael Spence of Stanford University. 

After starting her academic career as an assistant professor at Harvard University and a brief early stint as a Federal Reserve economist, Yellen joined the Berkeley Haas faculty in 1980, also holding an appointment in the economics department from 1999 to 2003. For the next 26 years, she taught thousands of MBA and undergraduate students in the required macroeconomics course, as well as graduate courses in economics and trade. Her academic research focuses on unemployment and labor markets, monetary and fiscal policies, and international trade. Beloved by her students, she earned the school’s highest teaching honor, the Earl F. Cheit Award for Excellence in Teaching, in 1985 and 1988. She now holds the title of Eugene E. and Catherine M. Trefethen Professor Emeritus of Business Administration. She was named as a Distinguished Fellow by the American Economic Association in 2012.

Prof. Janet Yellen teaching at Berkeley Haas, year unknown. (Photo: Bruce Cook)

Berkeley Haas Finance Prof. Ulrike Malmendier said it was Akerlof, and to a lesser extent Yellen, who recruited her to Berkeley in 2012, taking the time to convince her that it was the best place for her. “They both started out as purist researchers who asked unusual questions, and she has never lost the researcher’s mind of curiosity,” said Malmendier, who won the prestigious Fischer Black Prize for her behavioral economics research in 2013. “They are also a wonderfully sweet and loving couple, who always take the time to ask about what you’re working on, in a world where not everyone is that way.”

Malmendier said Yellen’s manner and resilience stood out in the male-dominated field. “Some people become more brusque to move ahead, but she never let herself be molded. She kept caring about what she wants to care about, as a brilliant woman who can combine research and policy at the highest level.” Yellen’s style is reminiscent of how Socrates is described, Malmendier said. “Rather than always assert her position, she just keeps asking questions, with a humble persistence. And eventually you realize maybe you weren’t right.”

Malmendier said one of her neighbors recently noticed Yellen perusing the produce aisle at North Berkeley’s Monterey Market. When she approached her and said, “You’re Janet Yellen! What are you doing here?,” Yellen smiled and replied “Well, I would never miss the tomato season at Monterey Market.”

Former Berkeley Haas Dean Rich Lyons, who is now chief innovation and entrepreneurship officer for UC Berkeley, said Yellen embodies the culture that he codified at Haas. “It is hard for me to think of a better exemplar of the Haas School’s four defining leadership principles than Janet Yellen. Confidence without attitude? To a T. Question the status quo? She is constantly seeking better ways. Beyond yourself? If you know her, you know this is her. Students always? A more honest thinker would be hard to find.”

Executive MBA students meet with Janet Yellen and Laura Tyson during a Washington, D.C. immersion week in 2015.

Related stories:

Janet Yellen Fact Sheet

Janet Yellen leaves the Fed after achieving “near perfection”

Ranking puts Prof. Teece as top-cited scholar in business; Prof. Levine #10 in economics

Prof. David Teece

Prof. David J. Teece was ranked as the world’s most-cited scholar in the field of business and management in an analysis of author citations across all the sciences published by the journal PLOS Biology.

Prof. Ross Levine is the 10th most-cited author out of 33,500 researchers in the field of economics, according to the analysis.

The author database assessed scientists’ career-long impact by counting the number of citations of their work from 1960 through 2019. Starting from a pool of eight million scientists who have published at least five papers in their careers, the article ranked the top 2% of authors across 174 fields.

Teece, the Thomas W. Tusher Professor in Global Business and faculty director of the Tusher Center for The Management of Intellectual Capital, came in No. 1 among more than 36,000 authors publishing in the field of business and management. The database counted 37,700 citations of his work, excluding self-citations.

Teece is an expert on industrial organization, technological change, and innovation, particularly as it relates to antitrust, competition, and intellectual property. According to Google Scholar, which is based on a broader measure of citations, his work has been cited almost 170,000 times in all.

Ross Levine
Prof. Ross Levine

Levine is the Willis H. Booth Chair in Banking and Finance at Berkeley Haas, and an expert on how finance and regulation shapes the economy. The database counted 31,000 citations of his work. Based on Google Scholar, his work has been cited almost 160,000 times in all. Levine was also ranked as the 12th most-cited economist in the world by the website IDEAS, which is the largest online database of economics research.

Berkeley and Haas have long been economics powerhouses, supplying economists to state and federal governments as well as central banks around the world.

The PLOS Biology database, “Updated science-wide author databases of standardized citation indicators,” was created by John Ioannidis of Stanford University, Kevin Boyack if SciTech Strategies, and Jeroen Baas of Elsevier Research Intelligence.

Small business failures in Europe would have doubled without pandemic relief, analysis finds

A lone diner takes his lunch on the terrace of a restaurant in Paris on June 15, 2020, as the country was just beginning to ease its strict coronavirus lockdown. (AP Photo/Francois Mori, File)

An analysis of 17 countries in Europe and Asia found that the COVID-19 crisis hit small- and medium-sized businesses hard: In the absence of government support, the 2020 bankruptcy rate would have almost doubled to 18% on average, with even higher rates in the hardest hit sectors and countries, researchers found.

Government interventions in most countries has cushioned some of the blow, and despite the severity of the shock, the banking sector showed resiliency. Banks did not appear to be significantly impacted by the rise in loan defaults, according to a recent National Bureau of Economic Research working paper co-authored by Prof. Pierre-Olivier Gourinchas of UC Berkeley’s Haas School of Business and Berkeley Economics.

“On the whole, the pandemic has been devastating for small businesses,” said Gourinchas, faculty director for the Clausen Center for International Business and Policy. “However, the resiliency of the banking sector is a ‘relative good news’ in a world of bad news.”

On the whole, the pandemic has been devastating for small businesses. However, the resiliency of the banking sector is a ‘relative good news’ in a world of bad news. —Pierre-Olivier Gourinchas

The analysis underscores how critical government support has been buffering the full impact of the COVID-19 pandemic. In addition to the severe impacts on individual health, the pandemic has severely disrupted economic systems around the globe. Small businesses, which often lack the liquidity to survive for several months of depressed demand, are particularly at risk of going bankrupt.

Gourinchas wanted to examine the pandemic’s impact on the financial health of small-and medium-sized enterprises (SMEs). With co-authors Ṣebnem Kalemli-Özcan of the University of Maryland and the International Monetary Fund, Veronika Penciakova of the Federal Reserve of Maryland, and former UC Berkeley doctoral student Nick Sander, now at the Bank of Canada, he analyzed the rate of small business failures across countries during the pandemic and estimated how different government interventions would have affected these failure rates.

“We became concerned that SMEs could fall through the cracks because they typically have few liquid assets, limited access to bank credit, and don’t have big equity buffers,” Gourinchas said. “If they failed in large numbers, then it would make the recovery that much harder.”

Modeling the pandemic’s impact

The researchers created a model of a business’s cash flow and liquidity following the demand and supply shocks during the eight-week period beginning in March when countries were in a period of lockdown. They applied their model using data on 15 European countries,* plus Japan and Korea, selected for good available data coverage on business characteristics such as revenue, total wages, and number of employees (from the ORBIS global dataset).

Across the countries in their sample, the bankruptcy rate rose to 18% during the COVID crisis, up from an average rate of 9% before the pandemic, the researchers found. Sectors with more customer-facing interactions, such as the food services or entertainment industries, were hurt the most. Likewise, countries with more of their economy tied to these sectors fared worse. For example, bankruptcy rates increased by 13 percentage points in Italy, but only by 5 percentage points in the Czech Republic. Following numerous government interventions, the actual increase in 2020 bankruptcies is expected to be much smaller.

The impact of failing small businesses could have had fallout implications for the banking sector, as the incidence of default, or non-performing loans, increased. The researchers estimated that non-performing loans increased across countries from a low of 2 percentage points in Belgium up to a high of 10 percentage points in Italy. The COVID crisis also had the potential to reduce banks’ ratio of capital to assets. Known as the CET1 capital ratio, the European Union benchmarks an adverse financial situation as when a bank’s CET1 ratio declines by 4 percentage points. The researchers estimated that the COVID economic crisis reduced the CET1 ratio from about 14.7 percentage points to about 13.9 percentage points, indicating that the impact on the financial sector did not approach crisis levels.

“Banks in many countries have become much more resilient in the aftermath of the 2008 financial crisis. International regulation required that they build much stronger buffers, precisely so that they could be able to withstand shocks of that nature,” Gourinchas said. “Well, the real test came in, and so far, the banking sector is not collapsing.”

Analyzing different interventions

Our paper suggests that the right kind of policy may need to be quite generous upfront, and then reclaim some of the subsidies later when the dust settles. —Pierre-Olivier Gourinchas

Many countries attempted to ease the negative effects on small businesses by providing temporary assistance, such as interest-free loans, tax deferrals, or loan guaranties. The researchers modeled how several different government policies would have affected the SME bankruptcy rate.

First, they modeled a scenario where a government targeted financial support specifically to at-risk firms that would have survived if not for the crisis. They estimated that, at a cost of 0.5% of GDP, the bankruptcy rate would have been similar to the pre-COVID rate—essentially erasing the effect of the pandemic. This would have increased total private-sector employment by 3% relative to a scenario without government assistance.

However, the researchers noted that while targeting only the businesses who needed assistance to survive would be effective, it’s difficult—if not impossible—to do in practice, as it requires much more detailed information than governments typically possess.

They next considered a scenario where governments waived firms’ monthly debt payments, which 25 of the 37 OECD countries actually implemented. They estimated that waiving financial debt expenses would have cost only about 0.3% of GDP, but would have provided only minor benefits—reducing the bankruptcy rate by 0.5 percentage points and increasing private-sector employment by 0.2%. They found that, despite the government assistance, the decline in firms’ cash flow exceeded the benefits of financial relief.

The third approach they analyzed was direct subsidies to firms: For example, the governments of France and Germany gave lump-sum transfers to small businesses. The researchers looked at the effects of a subsidy equal to a business’s pre-COVID wage bill over an eight-week span. They estimated that a direct subsidy would be quite costly—totaling about 1.8% of a country’s GDP. However, this approach would bring significant benefits: the bankruptcy rate would have declined by 5.6 percentage points, and saved jobs representing 3% of private-sector employment. In other words, direct subsidies would have reaped similar benefits to targeting only at-risk businesses, though at about three times the cost. Of course, giving all businesses support means that many businesses that would not need assistance would get it anyway: The researchers estimated that over 80% of a direct subsidy would be given to firms that would have survived without it.

“Governments face a trade-off between how targeted their support is and how costly it is,” Gourinchas said. He noted that less-targeted programs, while more expensive, might be the best that governments can do in the current state of uncertainty.

“Our paper suggests that the right kind of policy may need to be quite generous upfront, and then reclaim some of the subsidies later when the dust settles.”


*The European countries included in the study were Belgium, Czech Republic, Finland, France, Germany, Greece, Hungary, Italy, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, and the United Kingdom.

How Woodrow Wilson’s racist policies eroded the Black civil service

Woodrow Wilson being sworn in to office on March 4, 1913
In this March 4, 1913 file photo, Woodrow Wilson takes the oath of office in Washington, D.C. for his first term of the presidency. (AP Photo/File)

Before the election of President Woodrow Wilson, Black Americans worked at all levels of the federal government. But when Wilson assumed office in 1913, he mandated that the federal workforce be segregated by race—leading to the reduction of Black civil service workers’ income, increasing the significant income gap between Black and white workers, and eroding some of the gains Black people had made following Reconstruction.

That’s the finding of a recent National Bureau of Economic Research working paper by Berkeley Haas Asst. Prof. Guo Xu and Berkeley Law Asst. Prof. Abhay Aneja, PhD 19, who examined how Wilson’s far-reaching segregation policy affected Black workers relative to white workers during the same era.

“The segregation of the federal civil service is a dark chapter in the history of the American government that has been relatively understudied,” Xu says. “Persistent racial inequality remains a major challenge in this country, and we felt it was important to provide systematic quantitative evidence on the economic costs of such episodes of state-sanctioned discrimination.”

The segregation of the federal civil service is a dark chapter in the history of the American government that has been relatively understudied. —Guo Xu

Surprise segregation order

Though Black voters had historically supported the Republican Party, Wilson, a Democrat, gained the support of many Black voters—including W.E.B. Dubois, Booker T. Washington, and Monroe Trotter—due to his campaign promise of equal treatment. His racial segregation order “came swiftly and suddenly, taking Black Americans by surprise,” the researchers wrote. Wilson imposed segregation in his Cabinet departments, and appointed Southern Democrats, who were likely in favor of segregationist policies, to lead them.

The researchers point out that unlike the purported “separate but equal” policies of the Jim Crow era, Wilson’s order was overtly discriminatory. “Wilson’s segregation directive was designed to limit the access of Black civil servants to white-collar positions via both demotions and the failure to hire qualified Black candidates,” they wrote.

Segregation was implemented first at the Post Office, which was home to over 60% of federal jobs at the time and employed many Black workers, and next at the Treasury Department, which had the second largest number of Black workers. To examine how Wilson’s segregation mandate affected them, the researchers relied on several historical data sources. First, they digitized the 1907–1921 U.S. Official Registers, which list every person who worked for the federal government. They also used personnel records from the U.S. Postal Service, and linked them to the 1910 U.S. Census.

Segregation increased the salary gap

On average, Black workers held lower-paying jobs than white workers prior to the segregation mandate. Across all departments and jobs, black civil servants earned on average 37% less than white civil servants in 1911, driven largely by the fact that they were disproportionately represented in lower paid and menial jobs.

To isolate the effect of the segregation policy, the researchers needed to look at people in comparable positions. They did this by matching Black workers to similar white workers in the same department with similar levels of experience and pay before Wilson’s term in 1991. Comparing these equally situated black and white civil servants after the implementation of the segregation policy, they found that the Black-white earnings gap in the civil service increased by about 7 percentage points between 1913 and 1921–a big effect that increased the existing earnings gap by almost 20%.

“We were struck by how damaging the policy was on the careers of Black civil servants, even after Wilson left office,” Xu says.

We were struck by how damaging the policy was on the careers of Black civil servants, even after Wilson left office…If such effects last beyond generations, it could crucially matter for the design of policies that are aimed at closing the painfully persistent racial inequities we observe today. —Guo Xu

The negative effects were largest in departments that strictly enforced the segregation order, such as the Post Office and the Treasury.  The Agriculture Department, which initially resisted the segregation order, saw smaller effects

The researchers found evidence that Black workers were more likely to be demoted and were more likely to enter the federal workforce at lower levels following the order. For example, while Black workers had held 13.1% of the highest-ranking postmaster positions, the order led to a 7% decline.

Xu and Aneja are next working to understand whether these deleterious effects have persisted to the next generation of family members connected to the affected workers.

“If such effects last beyond generations, it could crucially matter for the design of policies that are aimed at closing the painfully persistent racial inequities we observe today,” Xu says.

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