Mapping Opportunity: A New Take on Intergenerational Mobility

By Justin Walker

The American Dream has meant different things for different people. But in many cases, it stands for a sense of potential positive intergenerational mobility, said Associate Professor of Economics Zachary Ward, PhD.

“Intergenerational mobility answers whether it matters if you have rich or poor parents for your lifetime outcomes,” Ward said.

Historically, research in this area has found that societies with relatively high mobility are societies where it does not matter if your parents are rich or poor, he said. This is the story that is told of the United States during the 19th and early 20th centuries, sometimes dubbed the golden era of mobility. However, Ward had issues with the way these studies were structured.

“It was always interesting to me the way people put data together and tried to estimate this,” Ward said. “They are doing it in specific ways that were very unsatisfactory to me.”

The most frustrating aspect of prior datasets for Ward was that they often focused on specific populations—mainly white individuals. He felt it was a massive omission to only study the social mobility of white people, especially when equality of opportunity was not that high for all groups within the U.S. for many years.

Ward set out to establish a more encompassing dataset that would cover mobility trends in the U.S. with greater accuracy. Using publicly available and digitized census data from 1850 to 1940, Ward created algorithms to generate family trees, similar to genealogy websites Ancestry.com or Family Search.

“You end up with a dataset that has millions upon millions of family trees for individuals,” Ward said. “You can observe the parent’s occupation and then, 30 or 40 years later, what occupation their child held. This is how you estimate whether it matters if you have a rich father or a poor father in a consistent way over a longer time horizon.”

Ward’s research in American Economic Review shows that over the course of 200 years, intergenerational mobility improved, meaning it mattered less and less if your parents were born rich or poor. However, Ward said, the U.S. still faces many barriers to upward mobility in various places and groups.

Location plays a significant factor in mobility today, Ward said. In rural areas and more impoverished neighborhoods, children tend to have lower incomes as adults, even when considering the parents’ income. Other factors include race and gender.

“There are a lot of things that matter,” Ward said. “There are a lot of other things that could potentially limit the child from achieving their full potential.”

Ward believes this line of research aims to uncover the factors that impact mobility and thus can improve the outcomes for future generations.

“We need to ask, ‘What are those barriers?’” he said. “‘How can we alleviate those things?’ I think that’s going to be a fruitful area of research  for the future.”

With this research, Ward hopes studies on mobility will be more encompassing to understand the situation better. From there, researchers and policymakers might identify what policies to enact to improve mobility across the board. But that can only be done with the correct dataset, he said.

“The point of my paper is that if you are trying to figure out where our places of opportunity are—as well as the places with much less opportunity—you need to measure it correctly,” he said.

Navigating the Fog

By Justin Walker

Trade policy uncertainty can have far-reaching effects on businesses, influencing everything from supply chains to investment decisions. In a world where trade policies are constantly shifting, understanding how this uncertainty impacts firms’ innovation investment is critical, said Daniel Chen, PhD, the Randall W. and Sandra Ferguson Endowed Professor of Information Systems.

“Most of the academic literature talks about uncertainty, but they don’t look specifically at the firm-specific level of uncertainty,” Chen said. “Part of the reason why prior research did not look at this is because of the difficulty to measure or quantify it.”

Chen’s research changed that. Alongside Nan Hu of Singapore Management University, Peng Liang of the University of Science and Technology of China, and Morgan Swink of Texas Christian University, Chen authored the research article “Understanding the Impact of Trade Policy Effect Uncertainty on Firm-Level Innovation Investment,” published in Journal of Operations Management. The study sheds light on the challenges businesses face in an ever-changing global trade landscape by examining how trade policy uncertainty affects companies’ investment decisions in new ideas and technologies.

What is trade policy uncertainty? The team defined it as an uncertainty regarding what the rules for trading goods and services internationally will be, Chen said. This can make companies hesitant to spend money on developing products or improving existing ones—significantly impacting a company’s ability to stay competitive and grow. The ongoing trade war between the United States and China is a perfect example of trade policy uncertainty, Chen said.

“It is difficult to predict how long this trade war is going to last,” Chen said. “How many companies, industries and countries are going to be involved? But what is less understood is what will happen to my business.”

Using artificial intelligence and large language models to analyze data from various companies, the team studied how trade policy uncertainty impacted how much money firms put into innovation. They found companies tend to spend less on innovation when trade policy uncertainty is high. This means they might create fewer new products or fail to improve their current ones as much as they would if they felt more confident about trade policies.

Markets play a significant role in this as well, Chen said.

“If you are a company where most of your sales are coming from domestic markets, there will be some impact in terms of supplier costs,” he said. “But if your major market is international, then there is going to be a huge impact on you.”

The team also looked at other factors that might influence how trade policy uncertainty affects innovation investment, such as the company’s size, how competitive their industry is and if they have different investment options.

“If you are a state-owned company, the impact of trade policy uncertainty might be less,” Chen said. “At that point, most of your resources are from the state, so you feel it less.”

Competitiveness also played a role, he said. Companies likely can’t afford to wait on innovation if the market’s competition is highly intense. Regardless of trade policy uncertainty, companies will likely make some amount of investment in innovation.

This study has important implications for policymakers and business leaders who want to encourage innovation and growth, Chen said. It suggests stable and predictable trade policies could help companies feel more confident about investing in new ideas and technologies, ultimately benefiting everyone.

Adopting Change

By Becca Broaddus Griffin

For many parents, welcoming a child is celebrated at work. Excited conversations about name selections, pastel-colored baby showers and family leave plans flow through the halls. But for parents of adopted children, this isn’t always the case.

Perceived adoption stigma happens when families built through adoption are seen as the “second best option to build a family” in society, according to Associate Professor of Management Kaylee Hackney, PhD. This can manifest in a variety of ways in the workplace—often as microaggressions like implying adoptive parents aren’t “real parents,” or throwing a baby shower for someone who is pregnant, but not for someone adopting a child. In many cases, it’s unintentional, but it affects the adoptive parents negatively.

In a recent article published in Human Relations, “Welcome to Parenthood!? An Examination of the Far-Reaching Effects of Perceived Adoption Stigma in the Workplace,” Hackney, along with her co-authors, examined how perceived adoption stigma negatively impacted a variety of work and family outcomes for working adoptive parents.

Hackney’s co-authors included two fellow Hankamer School of Business Department of Management faculty members: Matt Quade, PhD, the Kimberly and Aaron P. Graft Professor in Christian Leadership in Business and director of Christian Leadership and Ethics, and Dawn Carlson, PhD, the H.R. Gibson Chair of Organizational Development and director of the McBride Center for International Business. Ryan P. Hanlon and Gary R. Thurgood were also co-authors of the article.

The study, using data collected from more than 500 adoptive couples with at least one of the parents working full-time, found that when an employee perceived adoption stigma at work, work-family conflict arose. Perceived adoption stigma acted as a social stressor that affected job satisfaction and opened the door to depression for the working adoptive parent.

Beyond the workplace, the effects of perceived adoption stigma impacted the adoptive parents’ home life, too. It negatively affected family satisfaction and even parent-child bonding—not only for the employee but for their spouse, as well.

“I think it is important to note this stigma impacts the work domain and the family domain, and furthermore, something as relational as parent-child bonding,” Carlson said. “The impact, in this situation, on the relationship of both parents with the child in a negative way compels us to really consider what is going on in the organization regarding stressful experiences. Considering these work-family integrations helps us better understand the world of work so we can design policies and practices that promote human flourishing.”

For organizations, providing wide-reaching support for adoptive families can be impactful. In a related study by Quade et al., 2021, researchers asked what happens when organizations are supportive of employees who adopt a child.

The research found that organizational support for adoption had positive ramifications for the employee, their family, their attachment with their adopted child, as well as an increased organizational commitment for the employee and their spouse to the employee’s workplace.

These two papers together are two of the first papers in the management literature to consider the experience of adoptive parents in the workforce and the outcomes, both at work and at home, Quade said.

“So, while much has been said about parents’ experiences, prior to our work, researchers had yet to consider the unique experiences of adoptive parents,” he said.

Hackney believes organizational support for adoptive parents is beneficial for everyone.

“Being supportive of your adoptive parents at work is a win for the organization and the family,” Hackney said. “By knowing better, then we can  do better.”

Building Resiliency in an Age of Crisis

By Anna Mitchael

Black swan events are crisis situations no one has planned for, or even imagined. In a world where such events must be considered not just as possibilities, but inevitabilities, how can businesses prepare? How can they increase resiliency in the face of such unknowns?

In the years preceding the COVID-19 pandemic, Hope Koch, PhD, the Godfrey Sullivan Professor of Information Systems and Business Analytics, was studying digital transformation. Her observation: It was taking much longer than expected.

But then a black swan event occurred. When COVID arrived in March 2020, it brought a time-sensitive imperative—companies had to change rapidly and embrace the digital transformations they had been resisting.

Koch witnessed what she wouldn’t have imagined just weeks before.

“Most companies in the grocery industry had been struggling to adopt digital transformation for years, and now they were using digital to a great magnitude in a way that hadn’t even been imagined,” Koch said.

After working for decades with corporations, Koch knew they had emergency plans for disasters they could foresee—hurricanes, droughts and fires. Yet these plans don’t account for black swan events. She suspected the decision-making that was happening needed to be studied so these transformations could be replicable. She and a team of PhD students went to the one place they were allowed to go during COVID: grocery stores.

“A lot of the research came from our experience as customers,” Koch said. “The grocery industry was proud of how they upgraded their practices to serve people in a time of need to help citizens access food. They shared a lot of this information publicly and with the class.”

As they analyzed the data, Koch, Russ Browder, PhD ’20, and Sean Dwyer, PhD ’24, saw much of the technology used by these companies had been there all along, it was just latent. When the crisis ushered in uncertainty, it allowed employees to operate entrepreneurially and innovatively. In the middle of this turbulent time, transformation occurred and the companies emerged resilient and successful. 

By watching these changes, the team found five main strengths: Virtual access, which helps people connect to systems; Virtual collaboration, allowing people to work together; Fast decision-making with up-to-date information for quick plan adjustments; Flexible systems that adapt to changes like labor or product shortages; and Tools that support workers in making smarter choices.

Each of these capabilities was published in Strategic Entrepreneurship Journal as key findings for “Upgrading Adaption: How Digital Transformation Promotes Organizational Resilience.”

The team observed that once these capabilities were developed, they were in place for the next black swan event. For these Texas companies, that event came in February 2022 when the electrical power grid failed.

“Who would have thought a state with major oil reserves would lose power?” Koch said. “But then it did.”

Because they had learned to perform well under pressure, these food distribution companies were able to feed Texans. As the world becomes more uncertain and crises more common, Koch strives for her research to continue to address these issues.

“I hope our work will lead to preparedness on an even greater scale,” Koch said.

Blockchain Breakthrough

By Justin Walker

Contracts are key in modern business, but high transaction costs and the challenge of verifying unforeseen events can leave agreements incomplete, which can strain supply-chain relationships.

“Ideally, we want to include all the details about every contingency in a contract, and if those are violated, then we are not going to fulfill the contract,” said Qinxi Wu, PhD, assistant professor of Finance. “But the reality is, in many cases, you cannot put all the contingencies there ex-ante.”

This causes what Wu calls contractual incompleteness and can lead to severe consequences down the line. There could be suboptimal investment and a consequent loss of value, Wu said.

“That is a problem caused by the contractual incompleteness, which is called the hold-up problem,” she said.

Wu and Assistant Professor of Finance Sophia Hu, PhD, studied these issues in their paper, “Can Blockchain Technology Help Overcome Contractual Incompleteness? Evidence from State Law,” published in Management Science. Mark Chen and Joanna Wang of Georgia State University also joined the two.

Blockchain—most known as the technology behind cryptocurrencies—is used in more and more areas of the business world, Hu said. The unique feature of blockchain is that many different copies of the same record can be stored on a decentralized platform, which helps crosscheck the information.

“It is also hard to go back and change the information,” Hu said. “That is a special feature that matters to our study.”

Prior research had established that a particular application of blockchain technology called a smart contract—which could automatically track whether or not conditional terms were being met—could potentially help alleviate contractual incompleteness. However, little to no empirical work showed it would be successful.

“Previously, no one could show that because it is really hard to observe how firms actually make their decisions related to solving this problem and how they change their strategies,” Wu said.

The research team decided to observe states with existing laws concerning blockchain technology, which made it easier for firms to adopt blockchain technology—specifically smart contracts. The team also identified firms with high asset specificity, which are considered more vulnerable to contractual incompleteness. Then, they examined whether firms with high asset-specificity benefit more from the passage of a pro-blockchain law.   Using a quasi-natural experiment, the team found firms with greater asset specificity in states with pro-blockchain policies are more likely to adopt these technologies and have better market values. These firms also expanded their customer base from a geographic perspective, Wu said.

“Previously, they preferred geographically closer customers perhaps because they could get some soft information,” she said. “However, with the help of contracts based on blockchain technology, they do not need to rely on close customers. They can enlarge their pool.”

While the research shows positive outcomes to adopting blockchain technology, there are barriers to doing so. Companies need to evaluate their situation; that is, how vulnerable they are to incomplete contract issues, and identify if this is something that will help them, Hu said. Tech firms trying to build products for their clients should gauge their client’s situation and how they can customize the product based on their needs. 

Several opportunities for future research arise from this study, the team said. The laws they studied were primarily passed between 2016 and 2019, so it is still too early to observe some real effects of the adoption.

The Price is Not Right

By Ashley Rabinovitch

Andrew Detzel, PhD, argues to get asset pricing right, the cost of doing business cannot be ignored. Anyone who has ever received an employment offer letter knows that the salary stated on paper is not the amount that will show up in their bank account on payday. If they created a budget without factoring in the taxes, retirement contribution and health insurance premiums withheld from each paycheck, they would live in a state of perpetual frustration. 

In the world of finance, money managers confront a similar mismatch. Their performance is constantly being compared to benchmark models that project a fair rate of return on financial assets like stocks and bonds. Unfortunately, these models do not consider one key factor that impacts performance in the real world: transaction costs.

“In the academic space, there is a horse race to discover models that explain patterns of return better than any that currently exist,” said Detzel, associate professor of Finance and the Mayo McBride Professor. “What we are finding is many rely on incorrect assumptions.”

In collaboration with Robert Novy-Marx from the University of Rochester, NBER, and Mihail Velikov from Pennsylvania State University, Detzel recently co-authored “Model Comparison with Transaction Costs,” published in The Journal of Finance, which points to transaction costs as a missing piece in getting asset prices right.

In asset pricing, risk is always front and center.

“One of the basic premises in my field is the idea that investors who want to see higher rates of return in the long run can only do so by taking on more risk,” Detzel said.

Benchmark models predict a fair level of return given a certain level of risk. In addition to risk, they also consider factors like company size, value and profitability. What they fail to do is adequately account for the impact of transaction costs.

Put simply, a transaction cost is the cost of buying or selling an asset. It may take the form of a brokerage fee, tax or bid-ask spread—the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

Historically, most asset pricing models have failed to take transaction costs into account. Decades ago, there was good reason for this omission. In the 1970s, traders worked with punch cards, not desktop computers. It would have been prohibitively expensive and time-consuming, if not impossible, to factor transaction costs into their operations.

In 2024, these limitations no longer exist. Technology has evolved and investment practices have become more sophisticated, allowing for the possibility of factoring transaction costs into the mix.

In his recent research article,  Detzel compares models that factor in transaction costs to models that ignore them. He finds that the models that factor in transaction costs outperform other models in their ability to accurately predict and explain patterns of return.

Models that consider transaction costs present three major advantages. First, they acknowledge these costs can move asset prices substantially. When a hedge fund manager who manages $100 million places a large order, for example, the markets notice.

They also avoid penalizing money managers unfairly. When someone’s performance is judged against a benchmark model that does not factor in real-life costs, they are set up for failure.

Finally, they are more effective at determining if an asset is fairly priced. When transaction costs are omitted from the equation, it may appear that a fairly priced asset is underperforming.

“By taking transaction costs into account, we can align theory with reality,” Detzel said.