Based on research by Dean Peter Rodriguez, Jonathan P. Doh, Klaus Uhlenbruck, Jamie Collins, Lorraine Eden and Stanislav Shekshnia

• Firms often underestimate corruption’s ill effects on both business and government.
• Corruption can be pervasive, arbitrary – or both.
• Businesses need an arsenal of strategies to fight corruption.

“Why hire a lawyer,” a longstanding Kenyan jokes goes, “when you can buy a judge?”

The same question can be asked in countries from Africa to Asia and from Europe to the Americas, where government corruption so taints life that citizens can feel there’s little to do but turn to grim humor. But government corruption also brews trouble for foreign firms that operate in these countries. Curiously, these firms often underestimate its effects or just ignore them. Scholars typically do too.

Rice Business dean Peter Rodriguez and a team of coauthors decided to take a closer look at this dynamic, assessing what the direct and indirect costs of corruption really are for multinational firms, and proposing strategies they might use to deal with it.

The findings are timely. Foreign direct investment has leaped in recent years, most dramatically in big emerging markets such as China, Brazil, Mexico, Indonesia and Poland. Yet corporate officers, management researchers and even government officials tend to be lock-jawed on the subject. By its very nature, after all, corruption creates a code of “don’t ask; don’t tell.”

The definition the scholars used in their research was simple: the abuse or misuse of governmental power for private or personal gain. Yet the flavor of corruption actually varies from country to country. In some places it is predictable, in some it is arbitrary, and in some a mixture of both.

Predictable corruption pervades the very tissue of well-structured, stable governments, and in a way is easier for foreign firms to manage. At least they can expect the services paid for. Under arbitrary systems, by contrast, such as post-Communist Russia, there’s no way to weigh costs and expectations. Officials may demand bribes, but promised services still will not be delivered. In either case, costs rise further because firms can’t rely on institutions such as courts to enforce contracts.

The direct cost of both types of corruption is clear: money handed out for bribes and kickbacks. But firms that work with corrupt regimes also quietly squander vast resources wrangling red tape and two-stepping with organized crime to buy protection.

Then there are the indirect costs, such as unproductive behavior and lost talent. Firms often hemorrhage huge sums investing in lobbying, influence and currying favor. In some Chinese provinces, for example, foreign companies are openly required to offer “profit-sharing” with local government. In Russia, the Canadian International Development Agency spent $130 million to nurture Canadian businesses there – all for naught after Canadian companies reported their projects repeatedly were “stolen out from under them because of government corruption,” Rodriguez writes. Not only did the Canadians lose: so did the Russian communities that could have benefited from new business and institutions.

What’s a foreign firm to do? One possibility: avoid the mess altogether. That’s what Procter & Gamble did in Nigeria, where it shuttered a Pampers plant rather than bribe customs.

Firms also can alter the way they enter a corrupt country’s market. In Eastern European and former Soviet economies, for instance, the higher the corruption level, the more likely it is a global international firm will invest through a joint venture, with local partners, rather than a wholly owned subsidiary.

Another approach: rigorous internal codes. Honeywell, for example, unequivocally forbids bribes and supplies employees with small cards bearing ethically driven questions they have to ask themselves in ambiguous situations. Employees thought to be high risk for graft get tapped for more training, and all workers can call a toll-free ethics advice line run by a third-party security firm.

In one case, at least, this virtue was its own reward. Honeywell sat out of the bidding on a hefty airport contract in Asia rather than pay a bribe as the price of entry. When a federal investigation revealed that 11 companies had paid it, Honeywell got the contract in the end.

Firms can also reach out to communities where they hope to do business. Hope Group donated textbooks to 17 million students in China with the aim of brightening their reputation. The results of this strategy tend to be mixed, though, since gifts to communities or institutions don’t much impress rapacious officials out for themselves.

International agreements and norms are additional weapons. The Organization of American States, the authors note, has coaxed more than 25 countries to sign the first multilateral treaty to criminalize bribing foreign officials. And, in Kenya, one of the more promising examples of the global approach, it is now slightly harder to buy a judge than it was a decade ago. In 2007, after a wave of political bloodshed, a coalition government launched a huge judicial reform funded by Kenyans, donations from Germany and the United Nations, plus $120 million from the World Bank.

Success has ebbed and flowed, but data-based decision making, better wages for judges and a struggle against corruption culture are among the current gains.

In truth, Rodriguez and his coauthors acknowledge, no one anti-corruption strategy is a panacea. But just as international firms use multiple business strategies, the authors argue, firms should try a mix of antidotes to corruption. Considering the damage it does to foreign firms and host societies both, corruption is too toxic a brew for a healthy business to swallow.

Peter Rodriguez is a Professor of Strategic Management and the Dean of the Jones Graduate School of Business at Rice University.

To learn more, please see: Doh, J. P., Rodriguez, P., Uhlenbruck, K., Collins, J., and Eden, L (2003). Coping with corruption in foreign markets. Academy of Management Executives, 17(3), 114-127.

Based on research Hajo Adam (former Rice Business professor) and Aiwa Shirako

• A negotiator’s cultural background affects the impact of certain emotional displays. 
• Perceived stereotypes inform how negotiators respond to shows of emotion. 
• When a participant shows emotion during negotiation, consider his or her cultural background — and also consider your own.

Want an edge in negotiating? Depending on your background, it can help to get angry.
Even on a good day, cross-cultural communication is tricky. The vagaries of negotiating make it more so. Like most behaviors, negotiators’ actions are heavily influenced by their cultural background. But their counterparts’ reactions to that behavior, research shows, varies strikingly. Depending on which stereotypes are in play, emotions that suggest weakness in one negotiator can work in favor of a negotiator from a different cultural group.

According to Hajo Adam, a former assistant professor at Rice Business, anger is one such emotion. For certain cultures, Adam found, losing one’s cool can score a strategic advantage. In a research collaboration with Aiwa Shirako, a People Analyst at Google, Adam found that when negotiators from East Asia show anger during business talks, Westerners perceive it as toughness. Outbursts that might inspire contempt or distrust from other groups seem to spark respect and a wish to cooperate when they come from East Asians.

The researchers advanced two related hypotheses. First, when East Asian negotiators expressed anger in cross-cultural negotiations, it could prompt cooperation and the sense that they were tougher negotiators than their counterparts from a different background. Second, for this effect to occur, the negotiating counterpart needed to believe a stereotype that East Asians were in general less expressive.

To test these theories, the researchers focused on two cultural groups: East Asians and European Americans. Using subjects from Amazon’s Mechanical Turk website and college campuses, the team set up a series of scenarios that included computer-mediated and face-to-face negotiations.

The first experiment tested if East Asian culture was stereotyped to be less expressive, and European American culture, by comparison, was stereotyped to be more so. Recruiting 70 people raised in the United States, the researchers asked them to answer a questionnaire gauging if people from certain cultural groups were likely to be emotionally expressive and likely to express anger and frustration. The participants, 82 percent of whom had European roots, were asked about East Asians, European Americans, and Hispanics. The results bore out the stereotype that East Asians were less expressive.

In their next four experiments, the researchers used new participant samples to measure how such stereotypes played out in negotiations. In the first experiment, they gathered participants who were from the United States, 79.6 percent of whom had European American roots, to give information about themselves such as name, age, gender, hair color and ethnicity. Each participant then received similar information about a supposed negotiating partner. Instructed to take on the role of a project manager looking to hire an IT company, each participant was randomly matched with a partner for a supposed online negotiation. In reality, however, they were negotiating with a “simulated counterpart.” The participants were asked to make an offer and wait for a reaction. After some time, their counterpart would then send an angry note back.

The results: The negotiators faced with angry East Asian counterparts were more likely to cooperate than negotiators faced with angry European American negotiators.

For the second experiment, 120 new participants were recruited in a longer version of the first scenario. Instead of being told they were negotiating with another person, they were told to read the scenario and imagine how they would react. As in the first study, participants received background information about their counterpart. They were then connected by phone with an angry-sounding counterpart.

Once again, the angry East Asian negotiators prompted greater cooperation than the European Americans. Calm East Asian negotiators, meanwhile, got no better cooperation than calm European Americans.

In a third, double-blind experiment, the researchers organized 288 university students into same-sex dyads, assigning each person one of two roles as negotiators on a class project. Based on a payoff table, the students were told to win as many points as possible, with incentive pay for getting a good deal.

An East Asian negotiator who expressed anger elicited significantly more cooperation compared to an angry European American, the study showed. The angry East Asians were also perceived as tougher and more threatening when angry.

Finally, in their final experiment, the researchers asked 110 new participants to complete two separate studies, a stereotype assessment and a negotiation task. This time, the researchers varied the cultural background of the negotiator supposedly expressing anger. Once again, East Asian negotiators who showed ire outperformed angry European American negotiators — but only when the counterpart held the stereotype of East Asians being emotionally unexpressive and European Americans being emotionally expressive.

The practical takeaway? Certain groups indeed can use emotional displays such as anger to advantage. At the same time, earlier research by Adam shows that responses to emotional displays can vary drastically depending on the counterparts’ cultural backgrounds.

To navigate these straits, Adam’s team suggests that negotiators consider not only their own backgrounds — but also those of their counterparts. Without understanding the power of stereotype on both sides, negotiators can end up hoist on their own petard.

Hajo Adam is a former assistant professor of management in the Jones Graduate School of Business at Rice University. 

To learn more, please see: Adam, H. & Shirako, A. (2013). Not all anger is created equal: The impact of the expresser's culture on the social effects of anger in negotiations. Journal of Applied Psychology, 98(5), 785-98.

Based on research by Leaetta M. Hough, Frederick L. Oswald and Jisoo Ock

• For 20 years, organizational and HR researchers have studied how the “Big Five” personality traits shape and predict employee behavior.
• With new advances in big data, analysis and computing, it’s now possible to track more complex patterns in large organizational data sets.
• Researchers need this big data technology to keep up with the changing workplace.

The basic tools of major league baseball have changed little over the years: You still need speed, strength, a bat and a ball. Yet something enormous changed for the Boston Red Sox between 1918 and 2004, when they won their first and their second World Series. A 21st century innovation — logging data on things such as slugging and on-based percentages — allowed managers to hire and deploy players for a winning team. The data launched a new field, sabermetrics, now nicknamed Moneyball.

This data-driven approach, it turns out, can be as successful running a major city as it was a baseball team. Former mayor Michael Bloomberg pioneered the use of huge data sets to meet the logistical challenges of running New York City.

Big Data can up the games of other businesses too, argue Rice University professor Frederick Oswald and his former graduate student Jisoo Ock in their recent research. Thanks to computing advances, HR analytics are changing from gut instinct into reliable predictions based in data. But these tools aren’t advancing fast enough in the area of hiring and managing workers. The Rice scholars argue that it’s time for old assumptions to change with the times, too.

For generations, HR analysts have used what’s known as the “Big Five” model to predict how personalities affect work outcomes such as technical performance and turnover. The model is premised on the idea that personality drives five types of behaviors — conscientious work, agreeableness with others, emotional calmness, sociability and openness to ideas and experiences.

Although the model still works, it’s evolving along with the science of studying personality, the scholars say. Organizations are changing too. Take the example of WeWork, a company that facilitates shared workspaces. To function, WeWork and similar spaces rely on “community,” which depends in turn on compatible personalities. Suddenly, managers want to know even more about including traits such as honesty, values, even humor.

At the same time, it’s unrealistic for firms to measure every employee quirk. So what’s the alternative?

The scholars call for newer models that consider refined personality traits and types of work at the same time. Honesty, for example, consists of traits including fairness, humility and sincerity.

Similarly, jobs can be divided into types, such as technical, manufacturing and service-based. Considering both personality and workplaces with this kind of detail can make research more accurate — and more useful.

Whether it’s computing, building work teams, or understanding how people perform, Big Data has already changed the game. To stay competitive, researchers, analysts and anyone who manages employees need to keep an eye on the ball — constantly tracking the latest insights on people, the workplace and the whole field of employment.

Frederick Oswald is a professor of psychology and management at Rice University. 

To learn more, please see: Hough, L. M., Oswald, F. L., & Ock, J. (2015). Beyond the Big Five: New directions for personality research and practice in organizations. Annual Review of Organizational Psychology and Organizational Behavior, 2, 183-209.

Based on research David Eagleman (former professor at Rice University)

• Scientists often avoid describing their work directly to the public.
• Researchers have a responsibility to get their message to the community in clear, accessible language.
• Healthy societies and good science have a symbiotic relationship.

Scientists, as a tribe, avoid describing their work to the public. Blurting impressions on Snapchat or summing up an experiment in 140 characters doesn’t gain the respect of their peers. On the other hand, spending an hour explaining a concept to a reporter often means hearing one’s words the next day on TV — dumbed down, reduced to a phrase or plain wrong.

Meanwhile, science itself is incredibly competitive. Why should scientists scribble op-eds when they have grant proposals to write?

Because it’s their duty, argues David Eagleman, a neuroscientist and writer at Stanford University and a former member of the cognitive sciences faculty at Rice University. Whether they are physicists, biologists or economists, Eagleman says, scientists need to share their knowledge in a way the public can understand. In a 2013 journal article, he presented a list of reasons, each in some way reinforcing one principle: Good science and healthy societies both need each other.

Most obviously, disseminating scientific ideas is good business. “Thank your funders,” Eagleman tells scientists. While past research shows that governments earn healthy returns when they invest in science, taxpayers need to know what their dollars are doing. It’s not enough for PubMed to offer federally-funded research papers online; scientific research is a product, and it needs to be presented in a way that reaches voters in their everyday lives. “Would you invest billions,” Eagleman asks, “in an industry that doesn’t share its accomplishments, questions and goals?”

When scientists do share their findings, citizens can be their advocates. Think of the citizens who defended vaccines during decades of allegations that vaccines were linked to autism. Parents who knew medical history and carefully followed current research continued to vaccinate their children until the anti-vaccine article that launched the scare was unveiled as a fraud.

Mainstreaming science also keeps the public realistic. It’s no crime to settle in with a glass of Malbec and watch a CSI where impossible biological analyses solve the case in 50 minutes. It’s only a problem when viewers don’t realize that in real life, that couldn’t happen. But such knowledge is only possible if good science is as accessible as good TV. So a researcher who takes the trouble to talk to a journalist, and complains if the end product is wrong, is helping to build a well-informed public.

Beyond supplying data, researchers also prompt critical thinking — too often treated as an odd habit unneeded outside the academy. Without decision-making skills grounded in science, however, police hire handwriting experts to try to spot sex offenders and the FBI hires mentalists to remotely see the contents of enemy bunkers. Beyond wasting taxpayer money, the absence of critical thinking in these decisions gives charlatans unearned power over the public’s lives.

In fact, the standards for making public policy are less rigorous than those for mixing the average petri dish. If more scientists had spoken up, for instance, perhaps the county commission in Pinellas, Florida wouldn't have banned fluoride from the water supply. Instead, the commission based its vote on decidedly unscientific beliefs, such as the notion that fluoridation was an eugenics scheme or a plan to dope the community into submission.

Eagleman argues that social policy overall should be based on the scientific method. “Instead of letting legislation ride on the winds of intuition,” he writes, “let’s make our legislation evidence-based.” This doesn’t mean it will always be perfect: scientific findings themselves often are flawed. What the scientific method would do is refine what we feel intuitively — and offer a framework for adapting quickly to facts as they arise.

In the meantime, Eagleman argues, it’s the responsibility of scientists to share what they know. The urgency has become greater in the past decade, as traditional news outlets lose funding for their own watchdog work. Online fact-checking groups such as Snopes.com pick up some of the slack, correcting false assertions by media and political candidates. But they can’t take the place of scientists. In addition to giving voters nuanced information about how the world works, scientists model how to be humble, critical and open in the face of new knowledge.

That’s easier said than done, as presidential candidate Adlai Stevenson observed back in 1956. “Senator, you have the vote of every thinking person!” a supporter shouted to him at a rally. “That’s not enough, Madam,” Stevenson called back. “We need a majority.”

David Eagleman is a neuroscientist at Stanford University and a former member of the cognitive sciences faculty at Rice University.

To learn more, please see: Eagleman, D.M., (2013). Why Public Dissemination of Science Matters: A Manifesto. The Journal of Neuroscience, 33(30),  12147-12149. 

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EPISODE 1

The Strangely Immovable Economics Of Live Performance

A conversation with Dean Peter Rodriguez on his research into what live performance reveals about our economic future.

EPISODE 2

The Surprising Science Of Scandal

Professor Anastasiya Zavyalova, a scholar of scandals, reveals startling truths about public-facing scandals, from NCAA to the Catholic Church.

EPISODE 3

Inside The Magic Of Work Epiphanies

A conversation with former Professor Erik Dane about epiphanies at work and in life: how they happen and what they tell us about the nature of problem-solving.

EPISODE 4

Live Long And Prosper– What America’s Newcomers Know About Living Longer & Saving Money

Rice Business Wisdom Editor Claudia Kolker explores some surprising ways Americans can benefit from the skills and habits of people new to the U.S.

EPISODE 5

Unmarketing: A Guide To Not Buying Anything

A conversation with Professor Utpal Dholakia, a marketing expert who encourages people to buy and consume prudently to maximize pleasure.

EPISODE 6

The Cantankerous Community Meal

A discussion featuring Professor Doug Schuler examining the challenges in social sector collaborations to address food insecurity.

EPISODE 7

Is Texas Still Full Of Wildcatters?

A discussion featuring Gaby Rowe, Marc Nathan and Lawson Gow exploring the question of whether and how Texas stacks up for starting businesses, taking big risks, and forging new industries. Session will touch on Houston as an innovation hub.

TRAILERS

Get a sneak peek of The Index with this trailer.

Based on research Utpal Dholakia, Leona Tam, Sunyee Yoon and Nancy Wang

• Most Americans don’t save enough money for their goals.
• Researchers can now predict who will be successful or unsuccessful at accumulating long-term savings.
• Successful savers incorporate regular incremental savings techniques into their daily routines, as if they are going to the gym.

Saving enough money is key to a comfortable, stress-free life. Yet much as we want a good education for our children or leisurely golden years for ourselves, most Americans don’t save enough for either. The average savings rate in the United States has been less than five percent, and a majority of Americans report trouble saving on a regular basis. Oddly, neither income nor financial knowledge have much to do with better savings habits. Yet some people are good savers and others are not.

What accounts for the difference?

Utpal Dholakia, a professor at Rice Business, along with his co-authors Leona Tam, Sunyee Yoon and Nancy Wong, think they’ve found the answer. In a series of recent studies, they isolated one measurable behavioral trait that accurately predicted an individual’s propensity to save money.

This trait, which they dubbed one's Personal Savings Orientation (PSO), is an individual’s ability to embed a range of savings behaviors — some automatic and routine, some intentional — into daily life. Among these habits: routinely placing a chunk of each paycheck into a savings account, or making frugal choices in petty day-to-day expenditures.

Subjects who scored high on the team’s assessment scale wove more of these behaviors into their daily routines and accumulated sizable savings over time. Subjects who scored low, even if they were financially literate, did not.

Crucial to accurately gauging an individual's PSO was a sound assessment tool. To make sure their measure was robust, the researchers conducted seven experiments to test its efficacy. Then they conducted two more experiments: the first to identify the precise role that PSO plays in translating financial knowledge into accumulated savings, and the second to test if it was possible to help people with low PSO scores raise them.

Various studies have analyzed savings behavior. However, most focus on efforts to achieve specific goals, such as paying for a wedding or funding college. This study was different: It treated savings behavior not as a one-off project, but as an ongoing state of mind that guides an individual's actions consistently over time. In fact, Dholakia and his colleagues likened it to maintaining a healthy lifestyle, much like going to the gym.

It’s an apt analogy. The ability to save, the team found, resembles a muscle that needs constant exercise. The PSO indicator indicates individuals who have this muscle, and work it out with regular, incremental savings behaviors as part of their daily routines. Significantly, this measured approach to saving worked better to produce long-term savings than just saving for targeted objectives. Meanwhile, contrary to popular belief, financial literacy alone had little impact on savings results, especially for the subjects with low PSO scores.

But those with low PSO scores shouldn’t despair. Specific interventions, the researchers found, can beef up the savings muscle. Most important: taking steps to build regular incremental saving practices. Exercised regularly, these routines will produce positive results — even for low PSO types. Saving behaviors, in other words, can be built into habit.

When it comes to savings, it's a marathon, not a sprint. Build up those muscles, Dholakia's team proposes, and jog, slowly but steadily, every day.

Utpal Dholakia is a professor of marketing at Jones Graduate School of Business at Rice University.

To learn more, please see: Dholakia, U., Tam, L., Yoon, S., & Wong, N. (2016). The ant and the grasshopper: Understanding personal saving orientation of consumers. Journal of Consumer Research, 43(1), 134-155.

Based on research Gustavo Grullon, James P. Weston, Jason Fink and Kristin E. Fink

• A higher proportion of younger firms and a dramatic increase in firm listings caused wild fluctuations in stock prices during the Internet boom.
• This might not have represented a decrease in market quality.
• Lower investment costs for young firms could represent an efficient mechanism for capital allocation, risk sharing and social welfare.

The 1990s were exciting years for people investing in stocks. Geeks and innovators in West Coast dorm rooms and garages constantly introduced new technology to the market. East Coast traders, investors and soon everyone plugged into finance took note, as the Internet became a household commodity.

While the high-tech industry boomed, the stock market saw a huge spike in volatility. But most researchers now agree that the spike was not caused by inflated market prices. Rather, firm-specific risk, or idiosyncratic volatility, increased. In other words, a vast number of companies, introducing a range of products and services while promising future growth and returns, simply made for less certain investments.

But what, specifically, drove this market-wide fluctuation during the boom remains open to debate. Gustavo Grullon and James P. Weston, professors at Rice Business, and a team of collaborators examined this issue.

Some researchers have linked the greater volatility to changes in fundamental characteristics of public firms, such as a firm’s size or a high rate of capital expenditures relative to tangible assets.

The researchers found that systemic changes in firm fundamentals indeed contributed to one of the largest spikes in idiosyncratic volatility in U.S. history. At the same time, they argue, these changes do not speak to a longer-term trend.

Other researchers have argued that firm-specific risk rose due to the irrational behavior of traders changing “sentiment.” Testing for sentiment as a driver, Grullon, Weston and their collaborators found that investor sentiment incontestably correlated with idiosyncratic volatility.

When compared to a firm’s age, however, investor sentiment either lost its statistical significance or related negatively to idiosyncratic risk. After considering a range of alternative arguments in their analysis, the researchers weren’t completely satisfied. Perhaps, they speculated, the spike in idiosyncratic volatility was due to a market-wide decline in firm maturity and the large increase in initial public offerings. After all, the ratio of equity market capitalization represented by young firms peaked in the late 1990s. And a large number of young firms dependent on future cash flow can influence idiosyncratic risk across markets.

By evaluating over 94 percent of the total market capitalization in the United States between the years 1926 and 2006, Grullon and Weston tested idiosyncratic risk. Controlling for characteristics related to a firm’s age, they found little evidence of an abnormal spike in idiosyncratic volatility during the Internet boom.

Instead, they found, firm characteristics such as age, as well as fundamentals such as size, profit margins and tangible assets, gave way to greater uncertainty about future profitability. It was this dynamic, the researchers concluded, that drove the rise in market-wide idiosyncratic risk. And it might not have been a bad thing.

In general, American capital markets have shown an increasing willingness to buy firm equity claims at earlier stages in an enterprise’s life cycle. If a shift in supply results in a higher proportion of younger firms, this might represent a decline in the cost of equity capital for young firms. Lower costs for investing in young firms could represent an efficient mechanism for capital allocation, risk sharing and social welfare.

Gustavo Grullon is a Jesse H. Jones Professor of Finance

James P. Weston is the Harmon Whittington Professor of finance at Jones Graduate School of Business at Rice University

To learn more, please see: Fink, J., Fink, K. E., Grullon, G., & Weston, J. P. (2010). What drove the increase in idiosyncratic volatility during the Internet boom? Journal of Financial and Quantitative Analysis, 45(5), 1253-1278.

Based on research Andrea Mattozzi and Antonio Merlo (former professor and Dean at Rice University)

• The public tends to think elected politicians don’t represent the best and brightest of all possible candidates.
• Political parties often select mediocre candidates because of dueling forces known as the discouragement and competition effects.
• Majoritarian electoral systems may encourage parties to nominate more competent candidates.

Politics has been called “show business for ugly people.” It may also be the natural calling of the mediocre and the indifferently prepared, as democracies often find themselves being run by people with less than stellar educations or with little valuable experience. Italy, for example, has a significant number of legislators who don’t even boast a high school degree, while former U.K. Prime Minister John Major was an insurance clerk before beginning his political career. Such examples are plentiful.

Comparing degrees may not accurately capture candidates’ merits. But it is one source of widespread suspicions that elected officials are not quite the cream of the crop. Politicians, critics in many countries complain, are instead members of a “mediocracy.” The truth hurts. Research shows that political parties tend to recruit electoral candidates of average ability rather than their higher-caliber peers, measured by signifiers such as educational attainment.

According to a study co-authored by Antonio Merlo, former chair of the economics department at Rice University, and Andrea Mattozzi of the European University Institute, two phenomena — a mediocre pool of candidates and mediocre elected officials — may reinforce each other.

Research shows that political parties choose less-qualified candidates in order to spark widespread involvement in party politics. They’re trying to avoid what the authors call the “discouragement effect”: when highly qualified members of a competitive organization discourage less competent members from contributing. By seeking a fairly homogeneous group of average politicians, political parties encourage healthy competition within the organization, strengthening the group’s participation and collective political force.

But the discouragement effect doesn’t act alone. It’s part of a trade-off with another dynamic called the “competition effect,” in which recruiting the best-qualified candidates boosts a party’s chances of winning an election. When political parties believe more in the competition effect, they recruit the best candidates. When they worry more about the discouragement effect, they choose candidates who are mediocre.

To show these two effects in the candidate-selection process, the authors designed a theoretical model that mimicked the candidate selection and election process. In the model, two parties selected electoral candidates based on observed effort, distributed across a broad spectrum. The candidate that exerted the most political effort in the general election emerged as the winner. Political ability for each candidate was measured by the cost in effort associated with political activity. In other words, the less effort politicians put into their work for the same outcomes, the more ability they possessed. The model highlighted the trade-off between the discouragement and competition effects, with the trade-off between party service and electoral success mostly being a product of the party’s primary incentive for candidates' nomination.

Interestingly, the model also suggested that a mediocracy functions differently in majoritarian election systems. Majoritarian systems, such as Britain’s First Past the Post system for House of Commons elections, tend to be competitive due to their winner-take-all natures. In these systems, parties are encouraged to nominate more qualified candidates. But in proportional systems, political parties are more likely to nominate mediocre candidates due to the less competitive nature of the elections.

In the United States, most primaries use a proportional electoral model, suggesting that political parties may be incentivized to choose mediocre candidates. At the same time, the presidential election uses a majoritarian, winner-take-all system, and has produced objectively accomplished presidents like Barack Obama, a Harvard Law School graduate and the first black president of the Harvard Law Review, as well as former President George H.W. Bush. It’s important to remember, however, that the theory of mediocracy doesn’t apply only to presidential candidates, but to state level and congressional candidates as well. So if American voters are dissatisfied with their choices come November and looking to cast blame, they can now look beyond their own party honchos. They can blame the system as a whole.

Antonio Merlo is the former George A. Peterkin Professor and Dean of the School of Social Sciences at Rice University.

To learn more, please see: Mattozzi, A., & Merlo, A. (2015). Mediocracy. Journal of Public Economics, 130, 32-44.

Based on research Alexander W. Butler and Umit G. Gurun

• When local firms spend big on advertising, they influence media coverage.
• For firms with headquarters near local papers, this increased coverage boosts stock market valuations.
• Local media give local investors disproportionately positive but not necessarily accurate information about the value of locally headquartered firms.

The school of business at Rice University was founded largely thanks to the largesse of entrepreneur Jesse H. Jones, owner of the Houston Chronicle through the first half of the 20^th century. Like other power brokers before him, Jones understood the media’s muscle. While the vehicles for delivering news have multiplied almost unimaginably since Jones’ day, newspapers still hold significant sway. Venture capitalists scour for facts to hone a competitive edge. Wall Street analysts pore over numbers for the perfect strategic investment. PR pros release statements in hopes of sweetening company coverage.

It’s no surprise, then, that the way media chooses to present information actively influences firms and investors. Less obvious, however, is the way firms influence reporting. Alexander W. Butler, a finance professor at Rice Business, and his colleague Umit Gurun quantified this influence by studying the supply-and-demand driven mechanics behind reporting on companies.

Using a database of news reported by Dow Jones Newswire, The Wall Street Journal and eight major local newspapers as well as a financial dictionary, the researchers measured what they called “media slant” ⁠— that is, story presentation ⁠— by counting the number of negative financial words in firm-specific news stories. They then tested whether local and national media delivered more favorable stories about local firms; the researchers hypothesized this might be the case, since the firms’ employees were likely part of their readership. The researchers then tested if local and national media had the monetary wherewithal to support investigative journalism. Finally, they tested whether firms advertising in local and national media caused favorable media slant.

The researchers found no strong evidence that readers preferred upbeat stories about local firms, nor that media tailored stories about those firms to try to please readers. They also found no evidence media budgets directly affected production of strong journalism.

But Butler and Gurun did find that local firms advertising in local papers enjoyed more positive coverage, or what they termed hype. Local firms’ ad spending, the authors contended, affects media slant because advertising generates the major chunk of media revenue. The conflict of interest is obvious: Consciously and even unconsciously, the media turns from watchdog to cheerleader simply because of the source of its lifeblood.

Butler and Gurun made this connection through what’s called a natural experiment: studying a phenomenon occurring in real life. Their findings: Local media is particularly susceptible to the soft power of local advertising.

Remember a world without Craigslist? The free website first entered the market in October 2003 in two pilot cities, Pittsburgh and St. Louis. Almost overnight, newspaper classified ads became a thing of the past. No longer could papers rely on non-corporate advertising to pay their bills. The ripple effects were broad. In markets where Craigslist had entered, Butler and Gurun found, the tone of newspaper articles about local firms changed measurably, and became abnormally positive compared to similar coverage in other markets at the same time.

As corporate advertisers increasingly became a lifeline for newspapers, Butler and Gurun found, the resulting hype translated into higher stock market valuation for firms with headquarters close to the local papers. This especially held true for firms that issued little information and for firms with high arbitrage costs. Butler's and Gurun’s research also shed light on how market participants invest. Local media, they found, give investors a disproportionately positive ⁠— though not necessarily accurate ⁠— view of local firms’ valuation. The results help explain what’s called home bias, investors’ tendency to put more money into companies close to home.

The takeaway? Whoever finances news organizations helps shape the stories they tell. And stories drive business: not simply public perception of those businesses, but the actual choices made by consumers and investors. Butler's and Gurun’s research uncovers with new precision exactly how much news content varies depending on the characteristics of the advertisers that keeps that news provider alive. One of the cardinal rules for reporters, Butler and Gurun show, is equally germane for investors prospecting for firms.

Consider the source.

Alexander W. Butler is a professor of finance at Jones Graduate School of Business at Rice University.

To learn more, see: Gurun, U. G., & Butler, A. W. (2012). Don't believe the hype: Local media slant, local advertising, and firm value. Journal of Finance, 67(2), 561-598.

Based on research by Stephen A. Zeff

• The debate about whether accounting should be based on principles or rules should focus on auditors rather than on standard-setting institutions.
• Interpreting the phrase “present fairly” just to mean fulfilling Generally Accepted Accounting Principles, or GAAP, can lead in misleading accounting.
• Letting auditors themselves evaluate fair presentation, independent of GAAP, would allow them to judge accounting practice by principles rather than by checking off boxes stating rules.

Is good accounting based on principles or on rules? It’s an ongoing debate within the industry, with most skirmishes taking place over the standards set by the Financial Accounting Standards Board. But Stephen A. Zeff, an accounting professor at Rice Business, argues it makes more sense to focus on external auditors. In a 2007 historical/opinion paper, Zeff proposes altering the current language describing their duties.

Currently, auditors assessing a company’s financial position must opine whether the firm’s financial statements “present fairly…in conformity with generally accepted accounting principles,” or GAAP. The problem, Zeff argues, is that there are often several options to choose from among those included in GAAP. Under certain circumstances, those choices or the prescribed GAAP procedure itself can create misleading financial statements.

Instead, Zeff calls for a requirement that auditors provide separate opinions, first on whether the information in the financial statements is presented fairly, and second, whether all accounting choices are in accordance with GAAP. He contends this would foster professional judgment in the accounting profession and lead to a greater reliance on principles rather than rules. Zeff’s proposal is by no means without precedent in the United States. In his article, he carefully outlines the history of the phrase “present fairly": from its introduction by an American Institute of Accountants’ special committee in 1934, to its widespread adoption by 95 percent of auditors by 1937, to its 1939 linking with GAAP. Zeff also points out that from 1946 to 1962, auditing firm Arthur Andersen & Co. actually provided dual opinions in their audits of financial statements, decoupling their opinion “present fairly” from their opinion on whether the company’s financial statements complied with GAAP.

Zeff outlines three variations on how the dual opinion could work today. First, a “fairness” opinion would evaluate the company’s choice to use a non-GAAP accounting choice, in cases where a company and auditor believe a GAAP method is unacceptable. There has been a history of such practice already, and, as Zeff points out, “Somehow, corporate financial reporting was not thrown into chaos because of these announced departures from GAAP measures.”

Second, the auditor would offer an opinion on a company’s choice of among many GAAP methods, assessing whether the company’s pick was appropriate.

And third, the audit report would include a “fairness” opinion on whether a company’s non-GAAP accounting method over a GAAP method was in fact superior. Zeff concedes this last option would cause the most difficulty, because it represents the auditor recommending that the company depart from GAAP in order to present financial information fairly. But, he suggests, this is also an example of how an auditor would build a reputation for professionalism.

In recent years, Zeff argues, complaints over diminished meaning in financial reporting have spiked. At the same time, so have expectations for financial reporting. Separating the auditor’s opinion into two portions, Zeff proposes, would provide shareholders and the market with truly useful information.

Stephen A. Zeff is the Keith Anderson Professor of Accounting​ at Jones Graduate School of Business at Rice University.

To learn more, please see: Zeff, S. A. (2007). The primacy of “present fairly” in the auditor's report. Accounting Perspectives, 6(1), 1-20.