Archive for October, 2011

Moral Culpability of Independent Contractors

| Peter Klein |

Anita McGahan gave two fantastic talks last week on the economics and strategy of health care, including some work on intellectual property and pharmaceutical research and a larger project on public health around the world. At lunch Anita talked about her work with Joel Baum on private military companies. As we discussed, much of the literature on privatization and contracting out takes the focal organization’s objectives as given, then studies the least costly methods of meeting those objectives. But objectives are endogenous to production costs. Predator drones lower the cost of extrajudicial killings, so we get more extrajudicial killings, ceteris paribus. If prison privatization lowers the cost of incarceration, we should expect more incarceration. And so on. For this reason, the desirability of contracting out depends on whether we want more of thing that is being contracting out, a point made eloquently by Bruce Benson.

A related question is the extent to which contractors should be legally liable, not to mention morally culpable, for the outcomes they help facilitate. Most of us reject the Nuremberg defense, but how far are we willing to go? Is Xe partly responsible for US military strategy and tactics in Iraq and Afghanistan? Do private prison operators share some of the blame for the US’s astonishingly high incarceration rate?

See below for the classic discussion of this issue.

30 October 2011 at 4:56 pm 5 comments

CFP: “Managing Wicked Problems: The Role of Multi-Stakeholder Engagements”

| Peter Klein |

O&M friend Brent Ross sends along this CFP for a track session of the 2012 Wageningen International Conference on Chain and Network Management. The session, “Managing Wicked Problems: The Role of Multi-Stakeholder Engagements for Resource and Value Creation,” is linked to a special issue of the International Food and Agribusiness Management Review. Info below the fold: (more…)

26 October 2011 at 1:19 pm Leave a comment

Can a Strong Central Government Credibly Commit Not to Intervene?

| Peter Klein |

When the subject is large financial or industrial companies, the answer is clearly no. Government promises not to rescue failing banks or large firms are cheap talk, not credible commitments. A central government strong enough to bail out politically connected organizations will bail them out; the only government that can credibly commit not to intervene is one that is not legally empowered to intervene. And no modern state is willing to give up that discretionary authority. Here is evidence from Korea:

Ending “Too Big To Fail”: Government Promises vs. Investor Perceptions
Todd A. Gormley, Simon Johnson, Changyong Rhee
NBER Working Paper No. 17518, October 2011

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997-99 crisis, suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups (chaebol) – facing severe financial and governance problems – could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected.

24 October 2011 at 10:18 am 4 comments

Papers of Interest from the NSF’s Call for Long-Term Research Agendas

| Peter Klein |

The NSF recently commissioned a set of papers on long-term research agendas in economics:

This is a compendium of fifty-four papers written by distinguished economists in response to an invitation by the National Science Foundation’s Directorate for the Social, Behavioral and Economic Sciences (NSF/SBE) to economists and relevant research communities in August 2010 to write white papers that describe grand challenge questions in their sciences that transcend near-term funding cycles and are “likely to drive next generation research in the social, behavioral, and economic sciences.” These papers offer a number of exciting and at times provocative ideas about future research agendas in economics. The papers could also generate compelling ideas for infrastructure projects, new methodologies and important research topics.

Here are a few of particular interest for O&Mers:

Challenges for Social Sciences: Institutions and Economic Development
Daron Acemoglu

Making the Case for Contract Theory
Oliver Hart

Research Opportunities in Social and Economic Networks
Matthew O. Jackson

The Economics of Digitization: An Agenda for NSF
Shane M. Greenstein, Josh Lerner, and Scott Stern

The Productivity Grand Challenge: Why Do Organizations Differ so Much?
John Van Reenen

You can find the whole set at SSRN.

21 October 2011 at 9:05 am 2 comments

Credible Commitment

| Peter Klein | A rather extreme form of the Schelling strategy of tying one’s own hands:

Courtesy of the indispensable Fail Blog.

20 October 2011 at 12:04 pm 3 comments

Self Employment, Entrepreneurship and Economic Growth

| Peter Lewin|

Interesting new monograph from the IEA (Institute of Economic Affairs) in the UK on: Self Employment, Small Firms and Enterprise. A pdf is available for free here. And here is the executive summary.


  • Self-employment is a form of contractual relationship which, in certain circumstances, will have greater benefits to the parties involved than an employer–employee relationship. Government intervention, however, may make selfemployment artificially more attractive by raising the costs of employment relationships.
  • Certain ethnic minority groups, older people and those without English as a first language tend to be overrepresented among the self-employed. This is partly because of the flexibility the arrangement provides but also because self-employment offers a ‘safety valve’ for those who find it difficult to find employment in the formal labour market.
  • It is vital that businesses are not impeded from moving from a situation where the owner is self-employed without employees to a situation where the business has employees. There is evidence that businesses are impeded in this way. In just nine years to 2009, the proportion of micro-businesses with employees fell by almost one fifth. At the same time the proportion of self-employed with no employees rose rapidly.
  • Women, individuals from certain ethnic groups, those with young dependants, those with low or no qualifications, those for whom English is not a first language and those who have recently experienced unemployment make up a much greater proportion of the workforce of small firms. For example, whereas 11 per cent of employees of small firms had no qualifications, only 4 per cent of employees of large firms had no qualifications.
  • Some workers will prefer to work for small firms because of the greater flexibility they offer in their working practices. In many cases, however, small firms will employ people who are talented but who are not able to negotiate the more formal recruitment processes of larger firms. Micro-businesses therefore perform an important economic and social function – employing people who might be overlooked by larger employers.
  • Genuine entrepreneurial insight and discovery tends to come from small firms. Entrepreneurship is crucial for economic growth. The nature of entrepreneurial insight is such, however, that we have no idea where it will come from – not even in the most general terms. Probably only one in every thousand ‘start-up’ firms will become one of the large businesses of the future.
  • Policies to promote entrepreneurship must come in the form of removing impediments to business and should not involve the promotion of particular business activities. It is simply not possible for government intervention to pick this tiny number of winners. All government can do is create a climate in which entrepreneurship can thrive.
  • The smallest firms are a key driver of job creation. Businesses do not start big. One quarter of employees working in firms that were established ten years earlier are working for firms that started from a position of employing only one person.
  • The cost of regulation has grown enormously over the last fifteen years. This particularly affects small firms with employees because regulatory costs act like a ‘poll tax’. Wide ranging exemptions from employment regulation and the minimum wage would be appropriate for small firms. Such exemptions would have the additional advantage of allowing the government to ‘experiment’ with deregulation. Standard terms and conditions of employment could be drawn up which would ensure that employees clearly understood the exemptions. Radical reforms of the tax system would also assist small firms which experience much greater compliance costs than large firms.
  • Moves by the government to promote entrepreneurship through the state education system or provide specific tax exemptions and reliefs for particular forms of business activity are wasteful or counterproductive.

20 October 2011 at 11:48 am 4 comments

Cuba’s First MBA Program

| Peter Klein |

Mises considered the stock market the distinguishing feature of capitalism. “There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist.” But he forgot another capitalist marker: the MBA program. Cuba still lacks a stock market, but the streets of Havana will soon ring with sounds of PowerPointese. The Financial Times has the scoop. Just imagine running some Marxist Revolutionary rhetoric through the MBA Writer!

19 October 2011 at 3:47 pm 1 comment

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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).


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