More on ACAC

19 May 2011 at 10:44 am 2 comments

| Peter Klein |

About a decade ago I served a term as a Senior Economist with the Council of Economic Advisers. The Junior Economist assigned to work with me was a young Harvard PhD student named Dan Elfenbein. Dan turned out to be not only the brawn, but the brains of the partnership as well. (He may have had me in the looks department too.) Dan has gone on to do great things at Washington University and I was delighted to see him receive the ACAC Best Paper Award yesterday for his joint work with Anne Marie Knott, “No Exit: Failure to Exit under Uncertainty.” Here’s the abstract:

Delayed exit is a substantial economic problem. Studies indicate if VCs exited ventures optimally, returns would triple, and if corporations divested underperforming business units, shareholder wealth would increase 13.6%. A prevalent explanation for delayed exit is behavioral biases associated with escalated commitment. In general however exit will exhibit inertia even absent bias. This arises both from decision maker efforts to avoid Type I error while discovering the long run prospects of an endeavor (passive learning) and from the option value of exit. Solutions to exit delays differ depending upon which source predominates, yet empirical tests to date have not disentangled the relative importance of these sources. We characterize exit delay in the population of U.S. banks between 1984 and 1997, and examine its causes. We find that a substantial proportion of exit occurs beyond “rational” benchmarks that incorporate option value. While the bulk of this delay appears to represent efforts to minimize Type I error, there is also evidence of the behavioral biases associated with escalated commitment.

As noted by Bill Bogner at the awards seminar, this makes Dan the only two-time winner of this important award.

Also at ACAC: A fascinating address by Joel Baum about the intellectual history of two strands of literature, one on competitive advantage and one on network advantage. It turns out these strands share a common intellectual heritage, one I’ll have more to say about later. (Hint: the University of Vienna plays a critical role.) Rebecca Henderson also gave an excellent talk about the role played by relational contracts within firms (from a joint research project with Bob Gibbons, the leading authority on relational contracting). Relational contracts are often seen as more flexible and adaptive than formal contracts but, as Rebecca pointed out, it is difficult for managers to implement strategic changes when they cannot commit to explicit rewards and punishments — hence relational contracting may impede the adoption of superior work practices (such as the Toyota Production System). Look for a forthcoming Gibbons-Henderson paper in Organization Science spelling this out.

Entry filed under: Ephemera. Tags: .

ACAC 2011 Klein Even Bigger

2 Comments Add your own

  • 1. RussCoff  |  20 May 2011 at 4:56 pm

    “It was like being in a room full of teenagers who had just discovered sex”

    Enough said…

  • 2. David Hoopes  |  23 May 2011 at 11:22 am

    It’s good to see Anne Marie getting some praise. Her work is always excellent (innovative and insightful).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authors

Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts

Guests

Former Guests | posts

Networking

Recent Posts

Categories

Feeds

Our Recent Books

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).

Follow

Get every new post delivered to your Inbox.

Join 219 other followers