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Economist
Judith Chevalier goes down whatever aisles the numbers take her
The GSB professor checks out economic theories in supermarkets,
casinos, mutual-fund companies, mergers, and drug firms.
There was a time about five years ago when Graduate School of Business
professor Judith Chevalier could name every supermarket in just
about any U.S. city. She steeped herself in the prices of packaged
goods and carted around loads of data, taking notes while reading
the latest Progressive Grocer.
As an industrial organization economist, Chevalier immerses herself
in the inner workings of particular industries. And as an applied
empirical economist, she does so to see how the ideas of theoretical
economists play out in the real world. She scanned supermarket data,
for example, to see if that industry’s late-’80s wave
of leveraged buyouts—takeovers financed by borrowed funds—could
tell her anything about whether capital structure affects product
market competition, as some theorists had argued. Chevalier’s
real-world investigations showed that there is, in fact, a link:
Unleveraged chains tended to expand in those markets where rivals
were highly leveraged, and highly leveraged chains charged higher
prices.
“Theorists have to sit in offices thinking,” says Chevalier.
“I’m more interested in digging around the bowels of Regenstein
Library to see what they have on a particular industry. The game
is to be clever about finding the right environment to test the
theories.”
The 32-year-old Chevalier appears to be playing that game quite
shrewdly. In January, she received the American Economic Association’s
first Elaine Bennett Research Prize, recognizing outstanding work
by young female economists. She holds a Ph.D. in economics from
MIT, and, as an undergraduate, won Yale’s Dickerman Prize for
best senior thesis in economics. She’s now an associate editor
at several academic journals and a faculty research fellow at the
National Bureau of Economic Research. This past spring and summer,
she published new research on the mutual-fund industry, and she’s
gearing up to release papers on theories tested in the real worlds
of sports betting, publicly traded companies, pharmaceutical firms,
and, once again, supermarket chains.
Chevalier’s insights into the mutual-fund industry made recent
headlines in the financial press, which picked up on a June 1999
Journal of Finance paper by Chevalier and MIT’s Glenn
Ellison. The economists showed that mutual-fund managers with degrees
from more selective schools have systematically higher risk-adjusted
rates of return on their investments.
That study was a small but provocative offshoot of a larger May
1999 Quarterly Journal of Economics paper, which began as
a general inquiry into how workplace behavior is affected by certain
implicit understandings between employers and employees. Though
Chevalier and Ellison could have looked at employment relationships
in almost any profession, the mutual-fund industry—with its
reams of accessible personnel information and trading results—provided
the necessary objective measures both of workers’ behavior
and of their performance. In their review of the growth and growth-and-income
funds tracked by investment-information company Morningstar from
1992 through 1995, Chevalier and Ellison found that younger managers
were more likely to lose their jobs than older managers if they
performed poorly. This suggested that younger managers would have
a strong incentive to make less risky investment decisions, so Chevalier
and Ellison investigated further and found that younger managers
were indeed more risk-averse than their older counterparts, avoiding
not only extremely bad, but also extremely good investment outcomes.
“The paper is a reminder that it’s not just the pay-performance
contract that affects employee behavior,” explains Chevalier.
“In any job, there’s a set of things that if you do, you’ll
get fired, and a set of things that if you do, you’ll get promoted.
Most people know where that line is.” That line, she says,
“creates incentives that employers need to keep in mind when
they write explicit contracts.” Though, she says, as academics
“we would tend to shy away from specific recommendations, the
idea is to help economists and industry practitioners get some measures
of how organizational structure and contracts make people behave.”
Chevalier has since traded the investment houses for a different
kind of money-managing scene. Lately, she’s been on the phone
with the bookmaker at Las Vegas’s Stardust casino for an October
1999 Journal of Business report. She and Harvard’s Christopher
Avery examine asset-valuation theories in what even Chevalier considers
a rather unorthodox academic context: football betting. Though they
were eager to test the view argued by a number of finance economists
that the stock market “overreacts” to news about a company’s
prospects, the difference between stock prices and a company’s
true value proved too difficult to measure directly. Football betting
provided the economists with an analogous but more controlled setting.
Looking at five years of data, Chevalier and Avery followed the
change in point spreads in the week before a game. They found that
the point spreads moved over the course of the week to favor teams
on a hot streak. The bookmakers’ initial estimates of each
team’s prospects turned out to be closer to the actual game
outcome than the point spread that bettors settled on by the end
of the week. In fact, the economists found that betting at the closing
line against teams on a hot streak would win some 53 percent of
the time. Chevalier and Avery’s observations of point spreads
on South Las Vegas Boulevard suggest that overreaction may inflate
stock-market prices on Wall Street as well.
Other questions about how and why firms expand, acquire, and merge
have taken Chevalier into the arena of publicly traded companies.
By the year’s end, she hopes to have completed a report on
the investment policies of firms diversifying into new lines of
business. She says she takes issue with the suggestion that, following
a merger, a company will shift resources from well-performing divisions
to struggling ones. The pharmaceutical industry has become yet another
lab for Chevalier. For a project on competition, she and GSB colleague
Robert Gertner had research assistants spend the summer coding science
articles in medical journals. The articles will be used to examine
how drug companies’ advertising and pricing respond to news
about their products.
And back in the supermarket, Chevalier is analyzing consumer shopping
data collected by scanners at Dominick’s Finer Foods stores.
With GSB colleagues Peter E. Rossi, MBA’80, PhD’84, and
Anil Kashyap, she’s looking at why, for example, stores might
put seasonal items like eggnog on sale during the holidays, when
consumers are likely to buy them anyway. “It’s puzzling,”
she says. “Prices are more countercyclical than you might expect.
We don’t know much about this concretely yet. We want to know
whether competition is more fierce during these peak shopping periods
like holidays, or whether consumers are more price-sensitive when
they’re shopping a lot.”
In the past, Chevalier says, colleagues have been skeptical that
she would ever get her hands on the right numbers to test the theories
that intrigue her. But, so far, she has always surprised them, and,
at the very least, she’s always been game.—C.S.
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