Archive for 7 December 2006
Four Theories of the Firm
| Peter Klein |
This week in my PhD course, “Economics of Institutions and Organizations,” we discussed Bob Gibbons’s paper ”Four Formal(izable) Theories of the Firm” (JEBO, 2005; working-paper version here). Lest readers think I oppose formalization per se, let me take a moment to strongly recommend this paper, which provides an excellent summary and synthesis of several critical issues in the economic theory of the firm. (This review is also pretty good.) While the paper can be read profitably even without working through the mathematical models, Gibbons’s training in formal theory was obviously an asset in sorting out the similarities and differences among theories, harmonizing the diverse and sometimes-confusing terminology in this literature, and identifying the core assumptions of various approaches.
Gibbons distinguishes among four theories of the firm: rent seeking, property rights, incentive systems, and adaptation. Rent seeking is his label for TCE as expressed by Williamson and Klein, Crawford, and Alchian (1978). Students find the formulation of TCE in rent-seeking language, a la Tullock — “individually optimal (but socially destructive) haggling over appropriable quasi-rents” — useful and informative. Gibbons also provides an excellent discussion of the differences between TCE and the property-rights approach, showing that Grossman, Hart, and Moore’s model is not “a formalization of Williamson” (a distinction also emphasized by Williamson in his 2000 JEL piece and by Mike Whinston here and here). (more…)
Bruno Frey on Awards
| Nicolai Foss |
Bruno Frey is one of those economists who make economics fun. Like economists such as Yoram Barzel, Gary Becker, and, of course, Stephen Levitt, he has a great intuition for applying economics to new areas where nobody has hitherto thought of taking it.
Like George Akerlof, but unlike Barzel, Becker and Levitt, Frey is, however, not that satisfied with the behavioral core of mainstream economics, mainly because it tends to provide an impoverished treatment of human motivation. Thus, he is no Becker-style economic imperialist (or, at least, the charicature thereof), but on the contrary is quite attentive to relevant insights in, particularly, psychology. Whereas numerous economists have taken an interest in the cognitive dimensions of psychology research — as witness the recent explosion of interest in nanoeconomics — Frey’s interest in psychology has been more concerned with motivational issues. Thus, quite a lot of Frey’s enormous (and enormously impressive) production has been devoted to pushing the boundaries of economics by taking seriously psychology ideas on social comparison processes, intrinsic motivation, etc. His work with Margit Osterloh on the motivational foundations of knowledge sharing in organizations will be familiar to many readers of this blog.
Frey has recently started a new research program, namely research into the function of awards (see here and here). (more…)
Organizations and Markets 
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