Research Roundup: The Individual Mandate’s Impact, Giving and Getting Time, and Advertising’s Effect on Stock Returns

Can a health insurance policy based on an individual mandate be more effective than a tax in expanding coverage to more Americans? How does giving time to others affect a person’s subjective sense of how much time he or she has overall? How does the complicated relationship between advertising and the value of a brand name play out in the stock market? Wharton professors Jonathan Kolstad, Cassie Mogilner and Maria Ana Vitorino, respectively, studied these questions and their impact on the business world in recent research papers.

Jonathan Kolstad, a professor in Wharton’s health care management department, and Amanda E. Kowalski, an economics professor at Yale University.

In their paper, titled “Mandate-based Health Reform and the Labor Market: Evidence from the Massachusetts Reform,” the professors examine what happened when the Bay State implemented mandate-based reform in 2006 and translate the results for a national model. From that model, they estimate a policy that puts the burden on the individual to obtain health insurance results in significantly less distortion to the labor market than a wage tax to provide universal coverage. The study is rigorous analysis that goes beyond the anecdotes and conjecture prevalent in the political debate about health care and offers a framework that could help elected leaders shape policy for generations to come, according to Kolstad and Kowalski.

“The Affordable Care Act is the biggest change in health care since Medicare and Medicaid,” Kolstad says. “The empirical goal was to have a clear and concise understanding of exactly what happened in Massachusetts. The theoretical goal was to analyze the labor market impact of … a new and different approach to policy.”

The 2006 reform in Massachusetts required employers to provide health insurance coverage to their employees or face a penalty. It also required individuals to purchase coverage or pay a penalty, and it expanded publicly subsidized care for low-income residents. The Affordable Care Act has similar requirements that would begin to take effect in 2014 if implemented. The individual mandate aspect of the legislation was the crux of the case argued before the Supreme Court.

In Massachusetts, compliance with the mandate was high. State agencies reported more than 97% of tax filers submitted the necessary form to comply with the individual mandate in 2008, and less than 2% reported any lapse in insurance coverage. But the compliance also came at a cost. The professors found that wages for employees who signed up for employer-sponsored health insurance (ESHI) were lowered by an average of $6,058 a year. That’s slightly less than the average cost of health insurance borne by the employer.

The finding led Kolstad and Kowalski to an important conclusion about the individual mandate: People place a great deal of value on health insurance and are willing to pay for it. Employees didn’t quit their jobs in droves, and employers didn’t reduce their labor force in order to pay for new health insurance. They simply passed on the cost to employees, who were willing to lose pay in order to gain health coverage.

“The employer doesn’t pay for your health care; you do,” Kolstad notes. The combination of the individual’s intrinsic value for health care and the additional nudge [created by] the penalty made people willing to take on wages that were lowered almost exactly by the cost of the insurance. It’s consistent with the fact that health insurance is valuable.”

For their main analysis, Kolstad and Kowalski relied on data from the Survey of Income and Program Participation (SIPP), a nationally representative longitudinal survey covering households in the civilian non-institutionalized population. Although the data had some limitations, it enabled the professors to construct a mathematical model to compare labor market trends in different states and estimate what would happen on a national scale.

The model creates a graph that shows the points at which labor demand would shift to accommodate the increased cost of health insurance coverage. When coverage is valued at its highest, there is zero distortion in the market. Conversely, the most distortion would come when coverage is not valued at all. When dollars are taken away through a tax levied on wages, for example, it makes it harder to see the value, Kolstad says.

“Because individuals valued ESHI, mandate-based health reform in Massachusetts resulted in significantly less distortion to the labor market than it would have otherwise,” the professors write in their conclusion. “We estimate that if the government had instead increased insurance coverage by establishing a wage tax to pay for health insurance, the distortion to the labor market would have been more than 20 times as large. Our results suggest that mandate-based reform has the potential to be a very efficient approach for expanding health insurance coverage nationally.”

The research also implies that mandate-based policy reform is advantageous because it “harvests the existing infrastructure people already have with health insurance through their employer,” Kolstad notes. “The Supreme Court ruling that the individual mandate is equivalent to a tax is an important legal milestone but it also gives governments a valuable tool for efficient public policy.”

Cassie Mogilner and her colleagues, Harvard business professor Michael J. Norton and Yale postdoctoral associate Zoe Chance, shows that by taking time to help others, we can help ourselves by creating a feeling of expanded time.

In their paper, “Giving Time Gives You Time,” soon to published in Psychological Science, the researchers conclude that “although people’s objective amount of time cannot be increased (there are only 24 hours in a day) … spending time on others increases feelings of time affluence. The impact of giving time on feelings of time affluence is driven by a boosted sense of self-efficacy — such that giving time makes people more willing to commit to future engagements despite their busy schedules.”

It is such a potentially life- and work-changing conclusion that The New York Times counted this research among “32 Innovations That Will Change Your Tomorrow,” and already a new application based on it, Good Deed Time, sends those who register a weekly reminder to do a good deed.

Mogilner and her colleagues tested their hypothesis that giving time would increase one’s subjective sense of time through a series of experiments that compare spending time on others to activities that might influence time affluence (in the present or future), such as wasting time, spending time on oneself and gaining unexpected free time.

In their first experiment, the researchers gave one group of students five minutes to write an encouraging note to a sick child, and they asked a second group to complete a “filler” task, circling every incidence of the letter “e” in a Latin text. Then they measured participants’ perception of time. Those who spent five minutes writing a letter to a sick child felt like they had more time than those who completed the “filler” task.

Since circling “e’s” is a time waster, the results are not totally surprising. But the results were even more striking and the contrasts starker in an experiment where the researchers compared the impact of giving time to another to spending time on oneself. After recruiting subjects online, the researchers e-mailed one group instructing them to spend 10 or 30 minutes on themselves (for example, getting a massage or studying) and e-mailed a second group telling them to spend 10 or 30 minutes on someone else (for example, helping a colleague or friend). Afterward, the researchers checked on participants’ perception of time and found that the amount of time didn’t matter, but that those who had helped others felt like they had more time.

“One of the first things to go when we have a super busy schedule is helping others because we focus on all that we have to do and then relaxing, but if we helped others, we would actually feel like we have more time,” Mogilner says. “The reason that this happens is that helping others makes us feel more effective, and therefore we feel like we have more time because we can do more with our time.”

In another experiment, one with potential implications on worker productivity, the researchers gave one group of students 15 minutes to help an at-risk high school student by editing an essay, and told a second group that all the essays were edited and that they could leave 15 minutes early. Afterward, the researchers asked both groups how many minutes they would spend to complete surveys for which they would be paid. Those who spent time helping high school students committed to more time than the group that got the 15-minute windfall. And when the researchers followed up, they found that the group that helped the high school students was actually more productive.

According to Mogilner, to translate this part of the research to the workplace, helping workers be more productive might involve “instituting a volunteer day or somehow rewarding people for being more helpful to co-workers.”

Ultimately, she hopes the research will help people change their behavior. Already, it’s affecting her and the other researchers. “Now I catch myself when I get stressed out and am reticent to help out; this finding reminds me to [help], and once I do I enjoy the benefits.”

Maria Ana Vitorino finds that a firm’s brand name, which can be heavily impacted by advertising, accounts for about 23% of the average company’s market value, though the figure varies widely across industries.

But the relationship between advertising expenditures and firm value is complicated, Vitorino says. While growth in advertising expenditures may be accompanied by higher stock returns in the present, this does not guarantee that increasing ad spending will boost returns and firm value in the future. Managers and investors need a clearer insight into the inner workings of these relationships. “My theoretical analysis … highlights the importance of interpreting the documented correlations between measures of marketing activities — such as advertising expenditures, firm value and stock returns — with caution,” she notes.

While previous research has established relationships between advertising and the value of a brand name, Vitorino has sought a clearer understanding of how this relationship works. The results are reported in her paper, “Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model.”

Her modeling technique looks at how variations in advertising expenditures change the stock returns and market values that would be expected, given firms’ other measurable characteristics. As a result, a firm’s advertising expenditures can be used to gain insight into its expected stock returns. The work can help managers and investors determine whether investing in a brand name is worth the cost, which includes, in addition to cash, redirecting resources, such as employee time, that might be used in other ways.

Other researchers have found that boosting sales is not the only way advertising can affect a firm’s value. Managers can also use advertising “to attract investors’ attention and thus maximize short-term stock market prices,” according to Vitorino. In addition, researchers have previously detected a “spillover effect” in which advertising increases investors’ familiarity with the firm, thereby boosting demand for the stock, improving the shares’ liquidity and growing the firm’s value. Researchers have also found a beneficial “signaling effect” in which advertising improves investors’ impressions of a firm’s financial health and viability.

Despite such general insights, advertising’s precise effects are hard to measure. “Brand equity is an intangible capital, and as such it’s hard to know exactly the impact of any activity on this type of capital,” Vitorino says. Merely establishing that growing ad expenditures correlate with high stock returns does not prove that advertising causes those gains, she notes.

Previous attempts to measure the value of brand names have used techniques like consumer surveys, the price premium one brand enjoys over competitors and the prices different brands of the same product command when the product line is sold. All of these are relatively indirect ways of gauging brand-name values, however.

Vitorino’s work zeros in on “brand equity,” or the portion of a firm’s value attributable to factors like customer loyalty, the firm’s visibility and perceptions of the firm’s quality. “Firms accumulate brand capital through advertising expenditures, and make optimal production decisions to maximize firm value,” she says.

Her study started with theories about how various advertising-related factors could affect firm value, then tested them with stock and financial data from 650 to 750 firms each year from July 1980 to June 2008. Firms were divided into various portfolios based on factors like the rate of growth in advertising expenditures.

Among the relationships in need of better understanding: advertising growth correlates with stock gains during the same period, but ad growth is typically followed by lower stock returns in the future. Vitorino’s research found, for example, that firms with a high rate of advertising growth enjoyed average annual stock returns 13.32% higher than companies with low rates of ad growth. But later on, the firms with high advertising growth returned 6.22% less than the firms with low ad growth.

While these relationships have been well documented in the past, Vitorino’s model unearths the reasons why they exist. Put simply, firms that do well from growing productivity and other factors respond by spending more on advertising. But once they become more productive, investors perceive them as less risky. That leads to lower returns. As risk rises, investors demand higher returns; as it falls, they settle for less.

Vitorino found that Wall Street does take notice of a firm’s marketing activities, and that brand value is reflected in stock prices. Advertising, therefore, can be seen as an investment rather than an expense. Over the 44 industries studied, brand equity accounted for 23% of firm value, she says, though that varied from a low of nearly zero for firms that produced commodities like steel and oil, to a high of 60% for some firms that made consumer goods such as toys, clothes and beer. Brand name, for example, was extremely valuable for firms like Procter & Gamble, Coca Cola, Ford and General Motors.

Perceptions, which can be influenced by advertising, are less important with commodities that are the same from every producer than for goods that might be better from one producer more than from others. “It makes sense, since some industries are more consumer-driven than others, and, as such, it makes more sense for them to spend money on advertising — because they get a larger return from it than other industries that are not so consumer driven,” she states.

In the real world, managers and investors can use Vitorino’s findings, together with other existing measures of brand equity, to help get a more precise estimate of a brand’s value, she says. That can help firms determine how best to deploy their resources, and it can help investors determine whether a firm’s ad strategy makes sense.

Further research along similar lines, she adds, could reveal other insights useful to managers and investors, such as the value of product innovations or the relationship between customer satisfaction and a firm’s risk.