Abstracts


Published: February 29, 2008

Luigi Zingales, Marianne Bertrand and George Wu
Images by Beth Rooney

Workers Make Better Whistleblowers

Rank-and-file employees are more likely to detect—and report—corporate fraud than officials charged with that duty at the Securities and Exchange Commission, according to research coauthored by Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance. He studied 230 cases of corporate fraud reported between 1996 and 2004 at companies with more than $750 million in assets. “The most surprising monitors are the employees (19 percent) and the media (15 percent),” the researchers wrote. During the 9-year period, only 6 percent of the fraud was revealed by the SEC and 14 percent by auditors.

But the researchers identified a paradox. Whistleblowers get no monetary or career rewards; in fact, employees often were ostracized or lost their jobs. The researchers recommended companies take a “market approach” to detection: Pay the whistleblower. “We find that monetary incentives for detection in frauds against the government influence detection without increasing frivolous suits,” they wrote. A story in the Economist last summer said the approach was “in the best Chicago tradition….not least because it would save money—after all, whistleblowers would get paid only when a company goes awry; regulators are paid handsomely anyway.” The research also was covered by the London Times.—P.H.

Bertrand Examines Family Values at Work

From Asia to Latin America, the family- owned firm is the dominant organization in developing countries. But did it emerge as an efficient response to market forces, or do strong family values inefficiently push businesses toward family control? Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics, presents preliminary cross-country evidence that culture may primarily determine economic outcomes in “The Role of Family in Family Firms.”

Among the existing theories is the idea that family firms take a long-term approach to management. But business decisions should be based on maximizing profit, not on leaving good jobs for the owners’ children, Bertrand said in a story on Exduco.net last summer.

In measuring the strength of family ties across cultures, researchers used data from a pair of questions asked in the World Values Survey from 1981 to 2001—whether one has a duty to respect parents automatically or whether parents must earn it, and whether or not parents had a duty to sacrifice their own well-being for the sake of their children.
“The results indicate that countries where family is regarded as more important have lower levels of per capita GDP, smaller firms, a higher fraction of self-employment, fewer publicly traded firms on average, and rely less on external financing,” the story said.—P.H.

Do You Negotiate Well? Better Think Again

Even skilled negotiators aren’t getting the great deal they think they’re getting, according to George Wu, professor of behavioral science. Most people—no matter which side of the bargaining table they’re on—underestimate the size of the pie they’re fighting over, and as a result, don’t realize how far the other side will go. Wu coauthored a study of Chicago Booth students who bargained for 45 minutes over the price of motorcycle headlamps. In a series of experiments, both buyers and sellers walked away from negotiations convinced that they had pushed their counterparts to their limit, when their opponents in fact were willing to give considerably more. The Los Angeles Times reported, “The results were consistent, even with graduate business students who had spent at least a decade in the workforce and had plenty of experience negotiating over houses, cars, and jobs.”—P.H.

Last Updated 5/14/09