The Pace of Modern Life
| Peter Klein |
Technological advance and economic growth are ruining modern life — people don’t write long letters anymore, they don’t spend time together at meals, they speak quickly, and nobody stops to smell the roses. So said critics starting in 1871. A new entry for our “Nothing New under the Sun” series (via Josh Gans). NB: Some of you will tag 1871 as the start of modernity, for a different reason!
ISNIE 2013
| Peter Klein |
ISNIE is holding its annual conference next week in Florence. I hope to see many O&Mers there. Eric Maskin and Samuel Bowles are keynoting, and there are special tracks or sessions to honor Elinor Ostrom (who passed away last year) and Oliver Williamson (who recently turned 80).
Do Prices Determine Vertical Integration?
| Dick Langlois |
The title of this paper, by Laura Alfaro, Paola Conconi, Harald Fadinger, and Andrew F. Newman, caught my eye. Then the abstract really caught my attention.
What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper shows that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. If true, it follows from firms’ maximizing behavior that higher prices cause firms to choose more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at higher prices, the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration.
The surprising part is not the empirical result, which is interesting. The surprising part is that the underlying theory of vertical integration in the paper is no more sophisticated than what’s in the abstract: vertical integration is always more efficient than using the market, because a lot of people like Williamson and Hart and Moore have said so. Since integration implies fixed costs, firms (in perfect competition) won’t engage in this wonderful and indisputably efficient practice unless prices are high enough to cover the fixed costs. Readers of this blog will not need me to tell them what’s wrong with this. But I like the empirical result, which is consistent with my own suspicion that tariffs provide cover for firms to engage in inefficient vertical integration. The right spin on this result may well be the Michael Jensen story: lack of competitive pressure from the product market enables managers to retain earnings, which they spend on buying divisions or integrating into things they could buy more cheaply on the market.
Advice to Journal Editors
| Peter Klein |
The Story of French, a fun and interesting history of the French language by Jean-Benoit Nadeau and Julie Barlow, offers a number of valuable insights for writers and editors. Aspiring journal editors could learn from François de Malherbe (1555–1628), described by Nadeau and Barlow as “the biggest and most brazen language snob the world has ever seen.” Despite being “a fretful fault-finder who spent his life attacking, both verbally and in writing, every mistake — or what he regarded as mistakes — he could find and anyone who made one,” Malherbe had sound editorial instincts. In particular, he valued simplicity and clarity and despised unnecessary verbiage.
As a pastime, Malherbe edited Ronsard’s poetry, removing about half the words. His future biographer, Honorat de Racan, once asked him, “Does this mean you approve of the rest?” Malherbe responded by erasing what was left on the page.
Tough, but fair. . . . Anyway, Malherbe was clearly onto something. He “preached the virtues of clarity, precision, and rigor” while denouncing “ornamentation, repetition, archaisms, regionalisms, and hyperbole.” Perhaps academic journals need a few more Malherbes.
Blind Review Blindly Reviewing itself
| Lasse Lien |
From Scott Masten we received this classic gem:
A growing interest in and concern about the adequacy and fairness of modern peer-review practices in publication and funding are apparent across a wide range of scientific disciplines. Although questions about reliability, accountability, reviewer bias, and competence have been raised, there has been very little direct research on these variables.
The present investigation was an attempt to study the peer-review process directly, in the natural setting of actual journal referee evaluations of submitted manuscripts. As test materials we selected 12 already published research articles by investigators from prestigious and highly productive American psychology departments, one article from each of 12 highly regarded and widely read American psychology journals with high rejection rates (80%) and nonblind refereeing practices.
With fictitious names and institutions substituted for the original ones (e.g., Tri-Valley Center for Human Potential), the altered manuscripts were formally resubmitted to the journals that had originally refereed and published them 18 to 32 months earlier. Of the sample of 38 editors and reviewers, only three (8%) detected the resubmissions. This result allowed nine of the 12 articles to continue through the review process to receive an actual evaluation: eight of the nine were rejected. Sixteen of the 18 referees (89%) recommended against publication and the editors concurred. The grounds for rejection were in many cases described as “serious methodological flaws.” A number of possible interpretations of these data are reviewed and evaluated.
Are these findings specific to the 80s and psychology? Care to replicate?
Steven Klepper
| Dick Langlois |
I just learned (via Rajshree Agarwal) of the passing, at a young age, of Steven Klepper. Steven was an acquaintance of many years, a stand-up guy as well as a great researcher. His work on the lifecycle of firms and the role of spinoffs is a model for how to do good empirical work in organization and technology. By coincidence, this new paper (with Russell Golman) crossed my screen only a few minutes after I learned the news.
Geographic clustering of industries is typically attributed to localized, pecuniary or non-pecuniary externalities. Recent studies across innovative industries suggest that explosive cluster growth is associated with the entry and success of spinoff firms. We develop a model to explain the patterns regarding cluster growth and spinoff formation and performance, without relying on agglomeration externalities. Clustering naturally follows from spinoffs locating near their parents. In our model, firms grow and spinoffs form through the discovery of new submarkets based on innovation. Rapid and successful innovation creates more opportunities for spinoff entry and drives a region’s growth.
Incentives Still Matter, Medical Care Edition
| Peter Klein |
Old-fashioned pay-for-performance schemes are about as fashionable these days as Taylorite hierarchy. In the academic and practitioner literatures on compensation and motivation, ideas about biases and heuristics, team motivation, trust, framing, etc., are in; work on agency costs and opportunism is out. So I was interested to see a new empirical paper on physician motivation — a randomized controlled trial set in Rwanda — with pretty conventional findings. Check it out:
Using Performance Incentives to Improve Medical Care Productivity and Health Outcomes
Paul Gertler, Christel Vermeersch
NBER Working Paper No. 19046, May 2013We nested a large-scale field experiment into the national rollout of the introduction of performance pay for medical care providers in Rwanda to study the effect of incentives for health care providers. In order to identify the effect of incentives separately from higher compensation, we held constant compensation across treatment and comparison groups – a portion of the treatment group’s compensation was based on performance whereas the compensation of the comparison group was fixed. The incentives led to a 20% increase in productivity, and significant improvements in child health. We also find evidence of a strong complementarity between performance incentives and baseline provider skill.
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