A century-old economic theory of conspicuous consumption says ‘if your neighbour is richer than you, you try and keep up by buying things your neighbour can see,’ University of Alberta professor Barry Scholnick says. ‘The problem is, it leads you into debt because you can’t afford to pay for it.’Deborah Baic/The Globe and Mail
The Globe's monthly roundup of research from business schools.
Forget about keeping up with the Kardashians. It's the Joneses next door that we should be worried about.
A new study by economist and professor Barry Scholnick of the University of Alberta's business school in Edmonton puts some hard numbers on the social impacts of income inequality by breaking down what happens to the neighbourhood when someone wins it big in the lottery.
Dr. Scholnick, a long-time researcher into consumer bankruptcy, co-authored the study Does Inequality Cause Financial Distress? with Sumit Agarwal of the National University of Singapore and Vyacheslav Mikhed of the Federal Reserve Bank of Philadelphia.
The authors used data supplied by a Canadian lottery to track the winning ticket holders and measure the fallout of that luck on their closest neighbours.
What they found was for every $1,000 increase in the lottery prize, there is a 2.4-per-cent rise in bankruptcies among those living nearby.
"So, if your neighbour wins a large amount, you are more likely to go bankrupt than if your neighbour wins a smaller amount," says Dr. Scholnick.
The study also found evidence that people's visible assets – the money they spend on items everyone can see, such as a house, car or pleasure boat – are also linked to a neighbour's winnings, according to the study.
The size of lottery prizes increases the value of visible assets, but not invisible assets such as cash and pensions.
The finding supports a century-old economic theory of conspicuous consumption.
"If your neighbour is richer than you, you try and keep up by buying things your neighbour can see. The problem is, it leads you into debt because you can't afford to pay for it," says Dr. Scholnick.
The professor says the study is not intended as a condemnation of lotteries. Rather, the randomness of a raffle offers an avenue into understanding the social impacts of money that can't be reproduced scientifically.
"For us, we've had many, many years of knowing about this idea of keeping up with the Joneses. Many people have talked about it, but it's been really hard to find rigorous statistical evidence around it," says Dr. Scholnick.
"Our paper does that, possibly for the first time, using this idea of the lottery."
The paper has been submitted for peer review, but has not been formally accepted by an academic publication. It was published by the Philadelphia Fed this past February.
The (destabilizing) power of three
Anyone who's spent time in a playground with a child (or with a dog in a local dog park) knows all too well how fast a peaceful play date can unravel when a party of two suddenly becomes three.
The business world is no different, according to a study by international business expert Anthony Goerzen of Queen's University's Smith School of Business in Kingston.
Dr. Goerzen and co-authors Alex Mohr (University of Kent in Britain) and Chengang Wang (University of Bradford in Britain) examine the dynamics of international joint ventures, defined as a partnership involving a minimum of three firms.
The study is accepted for publication in the International Business Review and comes as joint ventures are on the rise globally, with companies pushed to find better, faster and cheaper solutions but finding it increasingly difficult to have all the requisite expertise under one roof.
"As a result, firms reach out to other firms in an effort to move more quickly into new product markets, new geographic territories and new technologies," says Dr. Goerzen.
At the same time, the research finds international joint ventures are distinctly less stable than those involving two partners.
The study found evidence of disruptive subgroups, or cliques, forming within the union – often segregated along nationalities. The greater the imbalance between partners, the greater the risk of the venture's collapse.
How bad can it get? In an example cited in the paper, the former general manager of an international venture between a German cleaning equipment manufacturer and three Chinese firms said nothing could get done because the trio of Chinese partners "ganged up" on the lone German side to block important initiatives.
Even more critical to the success of a venture is the compatibility of organizational culture, notes Dr. Goerzen.
Whatever the differences, firms involved in a multiparty alliance will find greater harmony together if they share similar values and basic goals from the outset.
The lesson for managers is to pick your partners carefully, "as they have an impact on partnership survival," says Dr. Goerzen.
That same advice goes when considering the effects of firms entering or leaving an existing union, he added, "as these changes may lead to shifts in these dimensions."
Does location influence executive compensation?
Ashrafee Hossain's interest in Canada's small and medium-sized enterprises (SMEs) dates to his days as a PhD student in Montreal when he read a paper on the geography of executive compensation.
"I got curious about the rural firms and thought about examining the executive compensation of those firms. As I gave further thought to the subject, I realized that big firms always get what they want and who they want as they have money and power. SMEs are always at the short end of the stick," says Dr. Hossain, now assistant professor of finance at Memorial University's faculty of business administration in St. John's.
To address that issue, he and co-author Harjeet Bhabra at Concordia University in Montreal chose to focus their recent analysis on rural versus urban SMEs, and how location of the business made a difference to executive salaries and compensation packages.
Rural firms are identified in the study as those whose headquarters are located at least 100 kilometres away from the country's five major urban centres – Calgary, Toronto, Montreal, Ottawa and Vancouver.
Among the key findings, the researchers found, once they adjusted for cost of living, there was no statistically significant difference between total compensation of rural and urban firms.
In addition, rural firms pay 13 per cent more incentive-based equity pay to their executives compared to their matched urban counterparts.
More critically, the study indicates that offering a higher proportion of incentive-based equity compensation is better for the company.
"That will make the management work to enhance the stock price which will benefit both the shareholders and themselves. If the management has too much guaranteed cash compensation, why should they give a damn?" asks Dr. Hossain.
Nevertheless, the study ultimately determines that attracting top talent is still difficult for smaller firms and, on average, they end up paying about 71 per cent of their compensation to these top level executives in cash. (For rural companies, it is 64 per cent of the total compensation and for urban it is 77 per cent.)
"This is just the reality," says Dr. Hossain.
The paper has been accepted for publication in the Journal of Management and Governance.
Story ideas related to business school research in Canada can be sent to Darah Hansen at darahhansen@yahoo.ca.