Dan Ariely’s research on “the IKEA effect” is featured in Harvard Business Review’s Breakthrough Business Ideas for 2009. Dan and his collaborators argue that customers tend to overvalue products like IKEA furniture because they have invested personal time and energy in their creation and assembly.  Managers are also not immune to the IKEA effect, Dan argues, because their judgment of projects’ value is likely to be clouded by previous investments of time and energy in those projects, making it more difficult for managers to pull the plug when things don’t work out.

Many economists argue that recessions are a good thing. How is that possible? Well, recessions give companies the excuse to lay off unproductive workers – both blue and white collar and make other tough decisions that make the firm stronger in the long term.

The logic is appealing. Importantly, this line of reasoning only applies in mild recessions. For example, the last two recessions, 1991 and 2001 each lasted only 9 months.

However, the current recession is different. It is deep. Firms have gone into survivor mode. They are slashing productive workers. They are cutting capital investment that they know is good for the firm’s future.

Duke University and CFO Magazine conducted a survey of 569 CFOs in December that tried to measure the potential long-term costs to the credit crisis and this deep recession.

We found two surprising findings.

First, firms were set to layoff 5% of their work force. If this is true, it means a staggering 7 million additional people unemployed.

Second, firms are cancelling or scaling back on productive investments because they can’t get financing.

This second item is the subject of a new research paper of mine. It speaks to the long-term cost of the credit crisis. These investments are designed to create profits and employment in the long-term. They make the firm and the economy stronger in the future. Much of the media attention is focused on the current layoffs. However, no one is talking about the jobs that will be lost in the future because firms are not investing for the future. They can’t invest because they can’t get loans — or the loan rate is unreasonably high.

Watch a video that details the main findings of our paper.

Streaming Video from Duke University

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Watch on YouTube

For more details, read on …

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The following analysis by Fuqua Marketing Professor Andres Musalem and Professor Ricardo Montoya of the University of Chile was recently published in the Chilean newspaper La Tercera.

With annual sales of 324 billion dollars, Wal-Mart is within a select group of companies that has successfully weathered the economic crisis. In Chile, the arrival of the largest retail chain in the world raises alarms among their local rivals and also among the workers of D&S, the Chilean supermarket chain just acquired by Wal-Mart. Nevertheless and beyond any controversy, consumers’ interest in Wal-Mart’s entry is built upon expectations of more competitive prices.

In this regard, the question that many would like to answer is how much prices will drop once Wal-Mart lands on Chilean soil. The arguments of those who argue that prices will actually fall are based on Wal-Mart’s increased efficiency, which might lead to lower operation costs as suggested by Máximo Bosch and Claudio Pizarro from the Retail Center at the University of Chile. Furthermore, its substantial bargaining power would help the retailer obtain lower wholesale prices when purchasing merchandise from its vendors. Part of these savings would be transferred directly to consumers through lower prices. Indeed, a study published in 2005 in the Journal of Applied Econometrics notes that Wal-Mart prices are on average between 5% and 25% cheaper than other supermarkets in the United States.

Another related argument is that Wal-Mart’s low prices might force local competitors to adjust their own prices to remain competitive. However, there are multiple studies showing that the real impact of the arrival of Wal-Mart in various U.S. markets does not generate large changes in the prices charged by its competitors. Therefore, when considering Wal-Mart’s effect on competitors, the results are in fact counterintuitive.

This evidence begs the question of why the local competition does not lower prices after Wal-Mart’s entry. Read the rest of this entry »