Comments on: Toyota at the Crossroads http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/ Economics of organizations, strategy, entrepreneurship, innovation, and more Sat, 17 May 2008 01:05:45 +0000 http://wordpress.org/?v=MU By: Peter Klein http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12941 Peter Klein Tue, 20 Feb 2007 23:16:38 +0000 http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12941 Yes, that's right. I wrote "level of asset specificity" but was thinking "nature of asset specificity," meaning not only the value of noncontractible specific investments used in production, but also the degree to which particular investments are noncontractible. (I.e., complete contracts over investment levels are held to be literally impossible, while legal enforcement of agreements to distribute the surplus ex post is taken as costless.) You are of course right that parties can choose not to *invest* in a particular specific asset, but the degree of specificity of the available resources is taken as fixed. Yes, that’s right. I wrote “level of asset specificity” but was thinking “nature of asset specificity,” meaning not only the value of noncontractible specific investments used in production, but also the degree to which particular investments are noncontractible. (I.e., complete contracts over investment levels are held to be literally impossible, while legal enforcement of agreements to distribute the surplus ex post is taken as costless.) You are of course right that parties can choose not to *invest* in a particular specific asset, but the degree of specificity of the available resources is taken as fixed.

]]> By: spostrel http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12940 spostrel Tue, 20 Feb 2007 22:52:27 +0000 http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12940 TCE and Grossman-Hart don't exactly take asset specificity as given. They say, among other things, that the threat of holdup on noncontractible rents might deter asset specificity. Then they argue that governance structures should be chosen to reduce holdup risks and stimulate efficient levels of asset specificity. So asset specific investment levels are endogenous to governance. What is taken as exogenous in these theories is the *efficiency parameter* of asset specificity. It's assumed that more specificity adds to productivity in a technologically fixed way. Maybe that relationship can be affected somehow. For example, in my Islands paper in OS, I argue that improving manufacturing capabilitiy is a substitute for having designers learn about the details of manufacturing constraints. If that learning would have been idiosyncratic, then the choice to invest in manufacturing capability lowers the payoff to asset specificity. I bet there are other ways this could happen as well. TCE and Grossman-Hart don’t exactly take asset specificity as given. They say, among other things, that the threat of holdup on noncontractible rents might deter asset specificity. Then they argue that governance structures should be chosen to reduce holdup risks and stimulate efficient levels of asset specificity. So asset specific investment levels are endogenous to governance.

What is taken as exogenous in these theories is the *efficiency parameter* of asset specificity. It’s assumed that more specificity adds to productivity in a technologically fixed way.

Maybe that relationship can be affected somehow. For example, in my Islands paper in OS, I argue that improving manufacturing capabilitiy is a substitute for having designers learn about the details of manufacturing constraints. If that learning would have been idiosyncratic, then the choice to invest in manufacturing capability lowers the payoff to asset specificity. I bet there are other ways this could happen as well.

]]> By: Peter Klein http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12932 Peter Klein Tue, 20 Feb 2007 06:26:28 +0000 http://organizationsandmarkets.com/2007/02/20/toyota-at-the-crossroads/#comment-12932 Steve, you are surely right that there is room for endogenizing key parameters in many managerial theories and models. It is curious that we typically take the informational environment as given, because this issue has been around since the asymmetric-information models came out in the 1970s. After all, Akerlof's "Market for Lemons" can be read not as a description of a kind of market failure, but as a theory of institutional arrangements that mitigate adverse selection (warranties, inspections, reputation, etc.). How, in other words, can the uninformed party become (more) informed? Another example would be the standard TCE and property-rights models of boundaries in which the level of asset specificity is taken as given. A more complete model would recognize that asset specificity and governance may be chosen simultaneously. Holmstrom and Milgrom (1994) appear to be on the right track here. Regarding agency theory, the <a href="http://web.missouri.edu/~kleinp/papers/Foss-Foss-Klein-OS-24august2006-revised.pdf" rel="nofollow">paper by Nicolai, Kirsten, and me</a> coming out in Org Studies on "original" versus "derived" judgment describes one approach to endogenizing the roles of principal and agent. None of this directly addresses your question of what managers can do, however. . . . Steve, you are surely right that there is room for endogenizing key parameters in many managerial theories and models. It is curious that we typically take the informational environment as given, because this issue has been around since the asymmetric-information models came out in the 1970s. After all, Akerlof’s “Market for Lemons” can be read not as a description of a kind of market failure, but as a theory of institutional arrangements that mitigate adverse selection (warranties, inspections, reputation, etc.). How, in other words, can the uninformed party become (more) informed?

Another example would be the standard TCE and property-rights models of boundaries in which the level of asset specificity is taken as given. A more complete model would recognize that asset specificity and governance may be chosen simultaneously. Holmstrom and Milgrom (1994) appear to be on the right track here.

Regarding agency theory, the paper by Nicolai, Kirsten, and me coming out in Org Studies on “original” versus “derived” judgment describes one approach to endogenizing the roles of principal and agent.

None of this directly addresses your question of what managers can do, however. . . .

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