Archive for September, 2012

Does Strong Alumni Participation Make US Universities Stronger?

| Peter Klein |

What explains the dominance of the US in elite higher education? Shailendra Mehta offers a novel explanation: the role of alumni. Graduates of US colleges and universities tend to identify strongly with their institutions and care deeply about their school’s reputation and ranking. Only in the US do alumni play such a strong role, not only in financial support (often connected with athletics), but governance.

[N]o group cares more about a university’s prestige than its alumni, who gain or lose esteem as their alma mater’s ranking rises or falls.

Indeed, alumni have the most incentive to donate generously, and to manage the university effectively. Given their intimate knowledge of the university, alumni are also the most effective leaders. Through alumni networks, board members can acquire information quickly and act upon it without delay.

All great universities are nonprofit organizations, created to administer higher education, which benefits society as a whole. But US universities found a way to integrate competition’s benefits into the European concept of nonprofit, or so-called eleemosynary, corporations. The lack of profit does not diminish an alumni-dominated board’s incentive to compete for prestige by, for example, hiring distinguished faculty, accepting meritorious students, and striving for athletic or artistic achievement.

I asked Scott Masten, O&M’s resident higher-education expert, for a reaction:

Interesting, but incomplete. Although boards have formal authority in most universities, in practice they exercise very little, as the recent brouhaha at the University of Virginia serves to illustrate. In fact, the “American model” traces only to the post-Civil War era, when research universities came into being, and effective authority devolved to varying degrees to an administrative bureaucracy and faculty. It was only following that period that U.S. institutions began their dominance. On that alone, one could argue just as convincingly that it was faculty governance that accounted for the success of American higher education. It seems to me there’s a paper on that out there somewhere.

23 September 2012 at 10:22 pm 7 comments

Arruñada’s Institutional Foundations of Impersonal Exchange

| Peter Klein |

Former O&M guest blogger Benito Arruñada has a new book, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries (University of Chicago Press, 2012), presenting his influential and important work on the measurement of property rights and transaction costs. Here’s the blurb:

Governments and development agencies spend considerable resources building property and company registries to protect property rights. When these efforts succeed, owners feel secure enough to invest in their property and banks are able use it as collateral for credit. Similarly, firms prosper when entrepreneurs can transform their firms into legal entities and thus contract more safely. Unfortunately, developing registries is harder than it may seem to observers, especially in developed countries, where registries are often taken for granted. As a result, policies in this area usually disappoint.

Benito Arruñada aims to avoid such failures by deepening our understanding of both the value of registries and the organizational requirements for constructing them. Presenting a theory of how registries strengthen property rights and reduce transaction costs, he analyzes the major trade-offs and proposes principles for successfully building registries in countries at different stages of development. Arruñada focuses on land and company registries, explaining the difficulties they face, including current challenges like the subprime mortgage crisis in the United States and the dubious efforts made in developing countries toward universal land titling. Broadening the account, he extends his analytical framework to other registries, including intellectual property and organized exchanges of financial derivatives. With its nuanced presentation of the theoretical and practical implications, Institutional Foundations of Impersonal Exchange significantly expands our understanding of how public registries facilitate economic growth.

My copy is on the way, and I’m eagerly looking forward to reading it!

18 September 2012 at 12:04 pm Leave a comment

First, They Ignore You. . . .

| Peter Klein |

Paul Krugman writes a typically silly column on the Austrian school’s approach to defining the money supply. As usual, his purpose is not to inform, or analyze, or explore, but to ridicule anyone who disagrees with The Paul. A few reactions:

  • The substantive question, do Austrians consider money-market mutual funds as part of the money supply, is easily answered with 30 seconds of research, which is apparently more than Paul could muster up. Paul, use The Google!
  • Krugman frequently mocks ideas he does not understand, so his tone and style here are hardly surprising. But it’s interesting that he finds Ron Paul’s “hard-money” views influential enough to mention.
  • Krugman seems to believe that the Republican Establishment, and Paul Ryan in particular, are in thrall to the economic teachings of the Austrian school, which would be news to everyone in the Republican Establishment and the Austrian school. In his defense, I think Krugman recognizes only Krugman and non-Krugman, so he cannot quite grasp that there may be some diversity among his critics.
  • Krugman dimly recognizes that Austrians have some objections to fractional-reserve banking in connection with government intervention, and sneers that “[t]his is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.” He also seem to think that Austrians want to ban the use of money-market mutual funds. Of course, Krugman has never read anything written by an Austrian economist, and he offers no citations or quotes, so it’s hard to know where he gets these ideas. To my knowledge. no Austrian has called for banning MMMFs. On fractional-reserve banking, the opinion among Austrian scholars ranges from those who think FRB is inherently unworkable and illegitimate and could not survive apart from government intervention (most Rothbardians) to those who think that private FRB is legitimate and workable but that the current system of government deposit insurance, government fiat currency as the base money, the Fed as the lender of last resort, etc. is inefficient and illegitimate (Larry White, George Selgin). Needless to say, Austrian scholars have written thousands of pages on these issues, including detailed studies of the history of banking. Krugman apparently thinks Austrians are merely journalists or propagandists, as he himself has become.

17 September 2012 at 3:21 pm 11 comments

Interesting Paper on Entrepreneurship and Growth

| Peter Klein |

Does entrepreneurship cause economic growth, or do high growth rates stimulate entrepreneurship? Ed Glaeser, Sari Pekkala Kerr, and William Kerr have an interesting new paper that uses the presence of heavy industry to instrument for the population of potential entrepreneurs (using startups as the proxy for entrepreneurship).

Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines
Edward L. Glaeser, Sari Pekkala Kerr, William R. Kerr
NBER Working Paper No. 18333, August 2012

Measures of entrepreneurship, such as average establishment size and the prevalence of start-ups, correlate strongly with employment growth across and within metropolitan areas, but the endogeneity of these measures bedevils interpretation. Chinitz (1961) hypothesized that coal mines near Pittsburgh led that city to specialization in industries, like steel, with significant scale economies and that those big firms led to a dearth of entrepreneurial human capital across several generations. We test this idea by looking at the spatial location of past mines across the United States: proximity to historical mining deposits is associated with bigger firms and fewer start-ups in the middle of the 20th century. We use mines as an instrument for our entrepreneurship measures and find a persistent link between entrepreneurship and city employment growth; this connection works primarily through lower employment growth of start-ups in cities that are closer to mines. These effects hold in cold and warm regions alike and in industries that are not directly related to mining, such as trade, finance and services. We use quantile instrumental variable regression techniques and identify mostly homogeneous effects throughout the conditional city growth distribution.

12 September 2012 at 3:58 pm 3 comments

The Wrong Way to Measure Returns to Public Science Funding

| Peter Klein |

A new Milken Institute report purports to show that “[t]he benefit from every dollar invested by National Institutes of Health (NIH) outweighs the cost by many times. When we consider the economic benefits realized as a result of decrease in mortality and morbidity of all other diseases, the direct and indirect effects (such as increases in work-related productivity) are phenomenal.” There are so many problems with the study I hardly know where to begin. For instance:

1. The authors measure long-term benefit to society as real GDP for the bioscience industries. This is a strange proxy. It is well-known that one of the major impact of public science funding is higher wages for science workers. It is hardly surprising that NIH funding results in higher wages and profits for those in the bioscience industry. Moreover, even if industry activity were the variable of interest, don’t we care about the composition of that activity, not the amount? Which projects were stimulated by NIH funding, and were they the right ones?

2. The results are based on a panel regression of the following equation:

Real GDP for the bioscience industries = f (employment in bioscience industry, labor skill, capital stock, real NIH funding, Industrial R&D in all industries) + state fixed effects + error term.

They interpret the coefficient on NIH funding as the causal effect of NIH funding on bioscience performance. E.g.: “Preliminary results show that the long-term effect of a $1.00 increase in NIH funding will increase the size (output) of the bioscience industry by at least $1.70.” But all the right-hand-side variables are potentially endogenous. For instance, the positive correlation between the dependent variable and NIH funding could reflect winner-picking: the NIH funds projects that are likely to be successful, with or without NIH funding. (The authors briefly mention endogeneity but dismiss it as unimportant.)

This is a version of the basic methodological flaw I attributed to the the political scientists lobbying for NSF money. The issue in question — even assuming the dependent variable is a reasonable measure of social benefit — is what bioscience industry output would have been in the absence of NIH funding. (And, even more important, what would have been the direction of that activity.) Public funding could crowd out private funding, and almost certainly changes the direction of research activity, for good or ill.

3. There are a host of econometric problems, aside from endogeneity — no year fixed effects, no interactions between federal and private funds, the imposition of linear relationships, etc.

If I’m being unfair to the authors, I hope readers will correct me. But this looks to me like another example of special pleading, not careful analysis.

9 September 2012 at 9:49 pm 3 comments

Conference in Honor of Oliver Williamson

| Peter Klein |

The University Paris-Dauphine is awarding an honorary doctorate to Oliver Williamson Friday, 19 October 2012, and organizing a one-day conference to honor his work. The conference is co-sponsored by the European School on New Institutional Economics (ESNIE). Speakers include Carmine Guerriero (U. of Amsterdam), Roger Guesnerie (Collège de France), David Martimort (EHESS & PSE), Marian Moszoro (IESE Business School, Barcelona), Jens Prüfer (Tilburg U.), and Brian Silverman (Rotman Business School, U. of Toronto), and Williamson will give a speech during the formal award ceremony. Registration is required. See the conference website for details.

3 September 2012 at 4:05 pm Leave a comment

Now THAT’s a Principal-Agent Problem

| Lasse Lien |

The Swedish secret service has caused quite an uproar recently. Following a difficult year, the Chief of the agency decided to spend 5 million Swedish kroner on a James Bond themed (!) party to boost the morale among its 1,000 employees. That sum amounts to more than 750 USD per agent-slash-employee for one single party. The principals — the Swedish taxpayers — seem to think that this was way over the top, and evidence of imperfect interest alignment and agents acting in their self interest. Jokesters have also pointed out that if they had thrown a STASI or KGB-themed party instead, it would have been a tad less glamorous, but spending could have been more in line with the principals’ interests. I don’t know, but perhaps the Swedes will have to invest more in monitoring their monitors.

1 September 2012 at 11:03 am 1 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).
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Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
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