Archive for January, 2008

Erin Anderson (1955-2007)

| Peter Klein |

Erin Anderson, John H. Loudon Chaired Professor of International Management at INSEAD and one of the pioneers of empirical research in transaction cost economics, died of an inoperable brain tumor this past November. Her papers “Integration of the Sales Force: An Empirical Examination” (Rand Journal of Economics, 1984, with David Schmittlein), “The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis” (Marketing Science, 1985), and “The Multinational Corporation’s Degree of Control Over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation” (JLEO, 1988, with Hubert Gatignon) were extremely influential in the transaction-cost literature. They also showed, importantly, how TCE can be applied not only to backwards integration into component procurement, but also to forwards integration into marketing and distribution. She became one of the leading specialists in management and marketing on vertical integration and entry into foreign markets. Her chapter (with Gatignon) in the Handbook of New Institutional Economics, “Firms and the Creation of New Markets” (draft version here) provides an excellent overview of this work.

Erin was a warm, friendly, and helpful colleague and mentor as well as a fine scholar. Read the tributes at this INSEAD memorial page. I saw her last in April 2006 when she presented her paper “How Internal Transaction Costs Drive Compensation of Managers and Salespeople in Business-to-Business Field Sales” here at CORI. I never imagined it would be our last visit.

29 January 2008 at 10:47 pm 2 comments

Best Book Catalog Cover I Saw Today

| Peter Klein |

law_image11.jpgElgar’s 2008 Law catalog has a terrific image on the cover. What better way to capture the essence of lawyering, at least transactional lawyering?

Here’s a fun game: If you were to design covers for the Economics, Management, Sociology, or Political Science catalogs, what would they look like?

29 January 2008 at 12:51 pm 6 comments

This Week’s Sign of the Apocalypse: Naming-Rights Edition

| Peter Klein |

You want your name associated with a university but can’t afford to fund a building, classroom, or endowed professorship. Not to worry, there are other options:

It’s an offer the University of Colorado couldn’t flush away: A Boulder venture capitalist paid $25,000 for the naming rights to a bathroom in the Boulder campus’ ATLAS building.

And so it is that the second-floor men’s bathroom in the high-tech hub now has Brad Feld’s name on it and a plaque with some words of wisdom from the donor: “The best ideas often come at inconvenient times. Don’t ever close your mind to them.” . . .

“I just wanted a plaque outside of the men’s room to inspire people as they walk in to do their business,” Feld said.

Perhaps this should be our next continuing series.

26 January 2008 at 4:35 pm 2 comments

DeLong on Introspection

| Peter Klein |

Brad DeLong sounds almost Misesian in this call for economics PhD students to study economic history:

[Mainstream] Economics is the hyper-positivist of social science disciplines: believing that everything of interest can be reduced to law-like theoretical and empirical propositions modeled after classical mechanics; that what cannot be reliably, repeatedly, quantitatively, and empirically demonstrated does not really exist as knowledge; that the only good social science is a deductive, analytical, model-based, general, experimental science.

But this misses a lot. Because we are people like those whom we study, we have psychological access to our subjects’ internal decision-making processes and motivations at a level that we cannot obtain from market price-quantity data. There is lots of interest that happens once and only once. Natural experiments are rare, and so if we restrict ourselves to positivist tools alone much is underidentified. The individuals’ preferences — the “tastes” part of “tastes and technologies” are not primitive but are themselves the result of long and complex historical, sociological, psychological, and — yes — economic processes. You need thickly-described case studies and anecdotes looking out from people’s insides before you can tell if your statistical results mean what you assert they mean.

Mises argues in Theory and History (1957) that the basic economic categories of means and ends, of preference, contraint, and choice, cannot be understood in purely positivist terms: “Being himself a valuing and acting ego, every man knows the meaning of valuing and acting. He is aware that he is not neutral with regard to the various states of his environment, that he prefers certain states to others, and that he consciously tries, provided the conditions for such interference on his part are given, to substitute a state that he likes better for one he likes less.” In other words, we understand economic activity in a causal, realistic sense, a sense denied to us in our study of the natural world. Moreover, like Brad, Mises argued that the historian must use not only the tools of deductive theory, but a deep understanding or Verstehen, to grasp the meaning of particular historical events. (more…)

25 January 2008 at 4:29 pm 11 comments

Law of Unintended Consequences

| Steve Phelan |

Nice post by Alex Tabarrok on the law of unintended consequences. He concludes by saying:

Does the law of unintended consequences mean that the government should never try to regulate complex systems? No, of course not, but it does mean that regulators should be humble (no trying to remake man and society) and the hurdle for regulation should be high.

24 January 2008 at 11:38 am Leave a comment

Shane Interview in Business Week

| Peter Klein |

Scott Shane is interviewed in today’s Business Week on his new book, The Illusions of Entrepreneurship. The book is a treasure-trove of empirical data on startups, much of which is familiar to specialists but completely unknown in the business press and in popular culture (e.g., that industry explains most of the variation in failure rates). See also this guest post by Scott on Guy Kawasaki’s blog for more on the basic thesis.

Of course, when Scott writes here about the value of entrepreneurship to society defines entrepreneurship narrowly as busines startups, not some broader notion of creativity, innovation, alertness, or (to ride one of this blog’s favorite hobby-horses) judgment.

24 January 2008 at 10:18 am 4 comments

Data Sharing, When It Might Really Matter

| Peter Klein |

Social scientists aren’t the only ones reluctant to share raw data. Medical researchers are equally touchy about it, even when granting other people access to the data could lead to real breakthroughs. Biostatistician Andrew Vickers writes in yesterday’s Times about his experiences trying to replicate or extend cancer studies:

Not long ago, I asked a respected cancer researcher if he could send me raw data from a trial he had recently published. He refused. Sharing data would make the study team members “uncomfortable,” he said, as I might use this to “cast doubt” on their results. . . .

[W]e wrote to [another research team] and asked whether they would share their data. They refused on the grounds that they might consider a similar analysis at some point in the future. But years have passed, no such analyses have been forthcoming and few patients are benefiting from what could be a very effective drug. . . .

When a colleague and I wanted to analyze the data from a completed breast cancer trial, merely getting permission to speak to the study’s organizing committee required a one-hour phone call with the scientist in charge of the agenda. Only after another one-hour call with the committee itself were we allowed to submit a formal proposal — to which we received no response. . . .

Researchers give all kinds of reasons for refusing to share — concerns about patient confidentiality, appropriate research methods, and so on — but, Vickers concludes, “the real issue here has more to do with status and career than with any loftier considerations. Scientists don’t want to be scooped by their own data, or have someone else challenge their conclusions with a new analysis.”

Thanks to Research on Innovation blog for the lead.

23 January 2008 at 5:41 pm 1 comment

Ken Lay: Not Such a Bad CEO After All?

| Peter Klein |

Jim Brickley combs through the mess of Enron trial materials to examine the behavior and performance of Missouri’s own Ken Lay. His findings may surprise you:

Internal documents released through the Enron litigation allow for a more detailed examination of the activities of top executives than is typically possible. This clinical study of Enron’s Ken Lay highlights the difference between popular opinion on the role and knowledge of CEOs with that suggested by economic theory and evidence. In contrast to popular opinion, the evidence is consistent with the following three hypotheses: 1) Lay performed a role at Enron that is consistent with existing economic theory and evidence, 2) he performed this role with reasonable diligence, and 3) while he was relatively well informed about Enron at a high level, it is unlikely that he would have had detailed information on many of Enron’s transactions — including deals with Fastow’s partnerships. News analysts assert that a positive feature of Lay’s legacy is that CEOs are now spending more time monitoring the details of financial reports and internal controls. This study suggests that the opportunity costs of this change in CEO behavior are higher than these analysts suggest.

On a related note, here is an interview with Gene Fama (via Don Boudreaux) covering principal-agent issues and CEO compensation, as well as efficient-markets theory.

22 January 2008 at 11:19 pm 1 comment

“Let’s Write a Paper”

| Nicolai Foss |

I have noticed that an increasing number of colleagues build up and afterwards desperately try to manage increasingly large portfolios of paper projects. It is very common to have paper portfolios that encompass more than 20 ongoing projects. At any rate, that’s about the size of my own current portfolio.

I have also noticed that a lot of these paper ideas don’t seem to ever come to be written, or, at best exist in a fragmentary form.  I can relate many anecdotes (some from personal experience!) relating to substantial regret over set-up costs (aka pissing your would-be co-author off). It is possible that this may increasingly become a management problem, certainly on the level of the individual scholar, but perhaps also on the level of university managers (mainly dept. heads).

The question is: Is this (personally and socially) wasteful?  The basic problem is that in order to end up with a suitable amount of published papers a certain amount of exploration is necessary.  Co-authoring papers is a Hayekian discovery process. It is pretty hard, perhaps particularly for younger, unexperienced colleagues, to make reasoned decisions on how many papers one should initiate and with whom (given the costs of experimentation, i.e., set-up costs, the risk of ruining your reputation, etc.).  Reputation mechanisms work imperfectly. Big, but lazy, guys may exploit this, hoping for the rookie to do the job. Problems of procastination and melioration may complicate the decision problem. Etc. 

From another point of view,  however, not much has really changed. Whereas scholars in the past may have spent much time discussing research issues over the lunch table, etc., the publication pressure that most of us are subject to nowadays means that many discussions that would previously have simply ended over the lunch table are now turned into paper ideas.  If that is the case, the process appears much less wasteful — and, importantly, in need of less intenvention by well-intentioned, but (naturally!) misguided university bureaucrats.

22 January 2008 at 6:21 am 4 comments

ECHO

| Peter Klein |

Check out ECHO (Exploring and Collecting History Online), a portal to several thousand websites dealing with the history of science, technology, and industry.

21 January 2008 at 12:01 pm 1 comment

Schools of Thought in Behavioral Economics

| Peter Klein |

Gary Lynne sent me John Tomer’s paper from the June 2007 Journal of Socio-Economics, “What is Behavioral Economics?” Tomer summarizes the various strands of behavioral economics and scores each according to “narrowness,” “rigidity,” “intolerance,” “mechanicalness,” “separateness,” and “individualism.” Coverage includes the Carnegie tradition, Katona’s Michigan school, modern experimental economics, Akerlof’s behavioral macro, and more. Tomer defines the field more broadly than I would — he includes evolutionary economics à la Nelson and Winter, for example — but the commentary is insightful.

20 January 2008 at 10:30 pm 1 comment

Thank You, David!

| Nicolai Foss |

Many thanks to David Hoopes for guest blogging at O&M. David has contributed some excellent blog posts which are among the most viewed ones on the site (particularly this one). We hope David will continue to visit O&M in the future and post comments. Thanks, David, for allowing us to benefit from your fertile mind.

19 January 2008 at 4:31 am Leave a comment

“The Age of Temporary Advantage”

| Nicolai Foss ]

Rich D’Aveni, Gianbattista Dagnino and Ken Smith have just disseminated a call for papers for a special issue of the Strategic Management Journal on the above subject. The purpose of the special issue, they explain, is to “develop theory and empirical evidence about whether and why competitive advantages are becoming less sustainable, and how organizations can successfully compete using a series of temporary or dynamic competitive advantages. The primary goal is to ask: What would the field of strategy look like if the sustainability of competitive advantage was very rare or nonexistent?” (more…)

18 January 2008 at 2:14 pm 2 comments

Kitchen Hierarchy

| Peter Klein |

Before Kitchen Confidential made him a celebrity, Anthony Bourdain was a real chef, working upscale New York kitchens at places like the Supper Club and Sullivan’s. Bourdain’s style is not to everyone’s taste, but he knows how to manage a restaurant crew. A chef, after all, is not primarily an artist, but a manager, facing the same set of organizational challenges — delegation, incentives, monitoring — as any administrator.

I mention this because I recently stumbled upon an interview with Bourdain in the July 2002 Harvard Business Review. Despite several attempts by interviewer Gardiner Morse to get Bourdain to endorse creativity, spontaneity, and empowerment in the kitchen, Bourdain remains an unreconstructed devotee of Escoffier’s “brigade system,” a sort of culinary Taylorism in which each member of the cooking staff has a fixed place in the production chain, a very narrow job description, and an obligation to obey his chef de partie (section leader) and the head chef without question. (more…)

18 January 2008 at 1:57 am 6 comments

Brain Flows

| Steve Phelan |

Further to my comments on the best and brightest entering the finance industry, David Wessell at the WSJ reports that 15% of male Harvard graduates from 1990 work in the finance industry compared with only 5% of 1970 graduates. Furthermore, those Harvard grads in the finance industry were earning 195% of the salary of those in other industries. The article later goes on to state that “some of the brainpower drawn to Wall Street would have been more productively employed elsewhere in the economy.” The question is whether all this is a free market outcome or is some sort of distortion misallocating resources?

17 January 2008 at 11:45 am Leave a comment

Legal Entrepreneurship

| Steve Phelan |

 I just had lunch with the general counsel of an internet retailer, which is headquartered here in Las Vegas. He was bemoaning the fact that the biggest headache in his job is patent infringments… (more…)

15 January 2008 at 6:51 pm 1 comment

Reflections on LLSV

| Peter Klein |

I meant to blog on the newest LLSV paper (actually LLS, in this case) but never got around to it. LLSV, you’ll recall, inaugurated a stream of empirical research on the financial and economic effects of legal systems (focusing on the differences between common- and civil-law countries). The newest paper clarifies the argument and reflects on ten years of research, discussion, and debate on the role of legal origins.

Fortunately, Daniel Sokol has written some comments on the Conglomerate blog (one of my regular reads, by the way — keep up the good work, guys!). Daniel notes, wisely:

I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record. A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.

15 January 2008 at 2:25 pm Leave a comment

Podcast: Munger on Coase on the Firm

| Peter Klein |

The latest podcastin Russ Roberts’s EconTalk series features Duke’s Mike Munger on Coase and the nature of the firm. 

Nicolai and I are big proponents of the Coasian framework, though it is important to realize that a lot of work has been done in this area since the 1970s (let alone 1937). See here and here for commentary.

15 January 2008 at 12:59 pm Leave a comment

Personnel Economics in a Nutshell

| Peter Klein |

12 January 2008 at 3:26 pm 4 comments

Combining Transaction Cost Economics and the Property Rights Approach

| Peter Klein |

The transaction cost framework associated with Ben Klein and Oliver Williamson and the property-rights approach of Grossman, Hart, and Moore have a complicated relationship, as Bob Gibbons has explained. Clearly, property-rights theory is not simply a formalization of TCE, as is sometimes believed (see Williamson, Whinston, and Whinston again on the differences). One key difference, emphasized by Williamson and by Gibbons, is that the PRT focuses on the alignment of incentives ex ante, assuming efficient bargaining ex post, while TCE emphasizes ex post hazards.

A recent paper by Patrick Schmitz, “Information Gathering, Transaction Costs, and the Property Rights Approach” (AER, March 2006) tries to reconcile the two perspectives by creating a GHM-style incomplete-contracting model in which parties can obtain private information about their ex post benefit, resulting in inefficient rent-seeking over the realized gains from trade. Under certain circumstances, the PRT conclusions are reversed — i.e., the party with the most important relationship-specific investment should not necessarily own the other party’s investment, as the PRT implies. Worth a read.

11 January 2008 at 11:10 pm Leave a comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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