Archive for December, 2012

Top Posts of 2012

| Peter Klein |

It’s been a wild and crazy 2012, with the continued global recession, new developments and trends in strategic management and entrepreneurship research and practice, the resurgence of the Austrian school, and perhaps the most exciting worldwide event of 2012, the publication of the Foss and Klein book. We have an exciting 2013 planned as well.

Here are our most popular posts written in 2012:

31 December 2012 at 1:56 pm 2 comments

Quickmemes for Academics

| Peter Klein |

True confession: I love quickmemes. Yes, I know, they’re juvenile, most are silly, and more than a few are vulgar. But they make me laugh, sometimes uncontrollably. What about versions for academics? We could have Success Prof, Overly Attached Coauthor, Successful Grad Student, Sheltering Suburban Department Head, and so on. I’ve made a few below; try your hand at the quickmeme site and share the results in the comments.

Success ProfOverly Attached CoauthorSuccessful Grad StudentSheltering Suburban Department HeadGood Guy ScholarBad Luck Instructor

Bonus: Earlier this year I was struggling with a particularly difficult revision and created this Karate Kyle collage as a therapeutic exercise. (It did make me feel better.)

23 December 2012 at 12:31 am 2 comments

Virtual Seminar with Benito Arruñada – Reminder

| Lasse Lien |

2013 will get a flying start here at O&M. Wednesday the 3rd of January we will kick off a virtual seminar over former guest blogger Benito Arruñada’s new book, Institutional Foundations of Impersonal Exchange (Chicago UP). Here are some reasons you should log on and join the discussion:

  • The book deals with issues that O&M readers love: Conditions that make transactions more or less difficult, and the implications of this for—among other things—investment, economic growth, and a number of other issues. Benito’s analysis is not some slightly modified version of the standard transaction cost story, though. It is quite original in its focus on the importance of impersonal exchange, and the tradeoffs involved in designing institutions that facilitate impersonal exchange.
  • The book is both original and well written, but don’t take my word for it. As Henry E. Smith of Harvard Law School puts it: “This is law and economics at its best. Benito Arruñada’s brilliant book greatly advances our understanding of how law and legal institutions affect the possibilities for trade. Very unusually, it also demonstrates how the needs of transacting parties and the interests of those who serve them profoundly shape a wide range of institutions from contract enforcement to title registries.”
  • A number of interesting contributors have already agreed to post comments, critique, and thoughts inspired by Benito’s book, including:
    • Wade Channell (USAID)
    • Pamela O’Connor (Monash University)
    • Klaus Deininger (World Bank)
    • Paul Dower (New Economic School)
    • Nuno Garoupa (University of Illinois)
    • P.J. Hill (Wheaton College and PERC)
    • Paul Holden (The Enterprise Research Institute)
    • Philip Keefer (World Bank)
    • Stuart Kerr (Millennium Challenge Corporation)
    • Amnon Lehavi (Radzyner School of Law, IDC)
    • Corrado Malberti (University of Luxembourg and Commissione Studi Consiglio Nazionale del Notariato)
    • Richard Messick (Consultant)
    • John Nye (George Mason University)
    • Matteo Rizzolli (Free University of Bozen)
    • Rod Thomas (Auckland University of Technology)
    • Giorgio Zanarone (CUNEF)
    • And of course Benito himself….

We hope many more will join in the discussion as it get’s going from Wednesday January 3rd. The more the merrier. So read the book and join the discussion—or join the discussion even if you haven’t read the book, but have thoughts on the subjects discussed.

20 December 2012 at 2:07 pm 2 comments

You See the Apocalypse, I See a Profit Opportunity

| Peter Klein |

Game theorists often discuss finitely repeated games by asking, “What if both parties know the world ends in period T?” If the principle of backwards induction holds, then I suppose no Mayans have been able to achieve cooperation in a repeated prisoners’ dilemma game for thousands of years — both parties know the other will defect in T-1, so each defects in T-2, and so on. . . . But where beliefs about the end of the world differ, there are potential gains from trade.

download (3)

See also this Hummer commercial, one of my favorites in explaining how time preference and discount rates affect behavior.

20 December 2012 at 10:23 am 3 comments

Review Paper on Prospect Theory

| Peter Klein |

We haven’t been entirely kind to behavioral economics, but we certainly recognize its importance, and have urged our colleagues to keep up with the latest arguments and findings. A new NBER paper by Nicholas Barberis summarizes the literature, focusing on prospect theory, and is worth a read.

Thirty Years of Prospect Theory in Economics: A Review and Assessment
Nicholas C. Barberis
NBER Working Paper No. 18621, December 2012

Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.

18 December 2012 at 10:18 am 2 comments

TILEC Workshop on “Economic Governance and Organizations”

| Peter Klein |

The Tilburg Law and Economics Center (TILEC) is organizing a very interesting  workshop on ” Economic Governance and Organizations,” 6-7 June 2013 in Tilburg. The core themes revolve around governance mechanisms — legal, contractual, social, etc. — that can address social dilemmas (free riding). Keynote speakers are Luis Garicano, Henry Smith, Henry Hansmann, and Guido Tabellini. See the full details here. Sample questions of interest:

  • What makes organizations that combine classical incentives with some kind of pro-social mission, e.g. religious organizations or charities, more or less suitable to solve economic governance problems?
  • Can firms whose owners are mainly driven by profit incentives mitigate economic governance problems equally good as nonprofit organizations?
  • What are the effects on “industry structure” and  performance of allowing for-profits to enter into traditional not-for-profit sectors? Are there important differences between sectors?
  • There has been a recent trend to run charities as tightly controlled and efficiency-oriented as business firms (e.g. the Gates Foundation). What are the effects of this development on the effectiveness of those organizations (measured by the number of poor people helped, etc.)? What is the risk of crowding out charity workers’ intrinsic motivation by control?
  • (How) can organizations help to support political movements in the internet age, where decentralized social online networks seem omnipotent to coordinate citizens’ actions?
  • Is there a need to foster new organizational forms, such as “societal enterprises” next to traditional firms and not-for-profit organizations? If so, in which sectors, and what forms?
  • Is the decline of formal private organizations providing social capital, such as clubs or many other nonprofits, an inevitable consequence of technological advancements that enable individuals to do many things on their own that required big organizations in earlier times on their own today? If so, is this a problem?
  • What is the (a) de facto (b) optimal role of the state in allowing or promoting different types of organizations in order to mitigate economic governance problems? (How) does it differ between countries?
  • Is it true that the state has crowded out many private initiatives to support collective action, e.g. in the provision of local public goods such as water and sewage, but less so in contract enforcement? If so, which types of organizations are best suited to mitigate this or that economic governance problem? Why?
  • It seems that the number of old for-profit firms is very limited. In contrast, there are quite some religious (nonprofit) organizations which mitigate economic governance problems and are hundreds or even thousands of years old (e.g. Churches, monasteries or religiously affiliated hospitals/nursing homes). Is this impression true? If so, why? What can we learn from the longevity of many religious organizations for the organizational design of other nonprofit organizations?

15 December 2012 at 5:00 pm Leave a comment

Web-Savvy Profs

| Peter Klein |

top_web_savvy_professor_2012I’m #57 on a new list of Top 100 Web-Savvy Professors. Teppo smokes me at #19, but I’m right up there with Clay Christensen, Noriel Roubini, Austan Goolsbee, Richard Thaler, and other luminaries. I don’t know the group behind the list or how the ranking was compiled, but it looks good to me. In any case, this will give you more names to follow on blogs or Twitter. Enjoy!

11 December 2012 at 10:27 pm 2 comments

Complementaries in the Age of the App

| Peter Klein |

Josh Gans asks if “we have yet evolved to the right set of institutions in the app economy,” comparing contracts between app developers and distributors/publishers to those between book authors and publishers. He also notes, correctly I think, that app development may have more to do with signaling programming skill than making money from selling the app. Still, there are important contractual issues to be sorted out in the age of the app.

More generally, Josh’s post highlights the need for organizational scholars to think more broadly about the complementarities between technology, organization, and strategy. Milgrom and Roberts (1990, 1995) are the pioneers here, but there management literatures on modularity and other aspects of fit among organizational attributes are relevant too. (Here’s an example from outside the tech sector.) Milgrom and Roberts put it this way:

[C]hange in a system marked by strong and widespread complementarities may be difficult and . . . centrally directed change may be important for altering systems. Changing only a few of the system elements at a time to their optimal values may not come at all close to achieving all the benefits that are available through a fully coordinated move, and may even have negative payoffs. Of course, if those making the choices fail to recognize all the dimensions across which the complementarities operate, then they may fail to make the full range of necessary adaptations, with unfortunate results. At the same time, coordinating the general direction of a move may substantially ease the coordination problem while still retaining most of the potential benefits of change. Moreover, the systematic errors associated with centrally directed change are less costly than similarly large but uncoordinated errors of independently operating units.

In other words, when a system is characterized by strong complementarities, the diffusion and evolution of business practices requires simultaneous, coordinated changes among all complementary features within the system — technology, organizational form, strategy, and perhaps other elements as well. When simultaneous or coordinated changes occur within strongly complementary systems, business practices like contractual form will also tend to evolve, and to do so rapidly. By contrast, when simultaneous or coordinated changes within systems characterized by strong complementarities do not occur, organizational change will tend to be slow or uneven.

The rapid growth of the app economy might seem an exception to these principles, as the app market has exploded without (it appears) complementary changes in the contractual and organizational aspects of app production. As noted above, this may be because app design performs a signaling role independent of its ability to generate profits. If this becomes less important over time — perhaps because clever programmers find more effective ways to signal ability — then getting the compensation system right will be critical to ensure the success of this particular business model.

11 December 2012 at 12:32 am 3 comments

The Perfect Christmas Tree

| Peter Klein |

Looking for the perfect holiday gift for that special someone? Lots of friends and family on your Nice List? Get them a book from your favorite O&M authors. If you really want to show your love, get the whole bunch! Links and ordering information are on the right-hand sidebar on the O&M home page (you may have to scroll down to see them). Several are available as e-books as well as the traditional versions. Beats the heck out of a lump of coal. (Naughty Listers can be given a complimentary one-year subscription to


8 December 2012 at 11:32 am 1 comment

Against Scientism

| Peter Klein |

Hayek defined “scientism” or the “scientistic prejudice” as”slavish imitation of the method and language of Science” when applied to the social sciences, history, management, etc. Scientism represents “a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed, and as such is “not an unprejudiced but a very prejudiced approach which, before it has considered its subject, claims to know what is the most appropriate way of investigating it.” (Hayek’s Economica essays on scientism were collected in his 1952 Counter-Revolution of Science and reprinted in volume 13 of the Collected Works.)

Austin L. Hughes has a thoughtful essay on scientism in the current issue of the New Atlantis (HT: Barry Arrington). Hughes thinks “the reach of scientism exceeds its grasp.” The essay is worth a careful read — he misses Hayek but discusses Popper and other important critics. One focus is the “institutional” definition of science, defined with the trite phrase “science is what scientists do.” Here’s Hughes:

The fundamental problem raised by the identification of “good science” with “institutional science” is that it assumes the practitioners of science to be inherently exempt, at least in the long term, from the corrupting influences that affect all other human practices and institutions. Ladyman, Ross, and Spurrett explicitly state that most human institutions, including “governments, political parties, churches, firms, NGOs, ethnic associations, families … are hardly epistemically reliable at all.” However, “our grounding assumption is that the specific institutional processes of science have inductively established peculiar epistemic reliability.” This assumption is at best naïve and at worst dangerous. If any human institution is held to be exempt from the petty, self-serving, and corrupting motivations that plague us all, the result will almost inevitably be the creation of a priestly caste demanding adulation and required to answer to no one but itself.

6 December 2012 at 1:13 pm 3 comments

Creative Destruction Chart of the Day

| Peter Klein |

Via John Hagel, a chart from Mary Meeker showing the percent of personal computing devices (including, today, phones and tablets) accessing the web from various operating systems. Joseph Schumpeter, call your office!

4 December 2012 at 4:36 pm 1 comment

A Paper You Might Want to Read

| Lasse Lien |

Here’s a link to the “online first” version of a new Org. Science paper by Peter and myself. This one has been in the pipeline for some time, and we’ve blogged about the WP version before, but this is the final and substantially upgraded version. Please read it and cite it, or we will be forced to kidnap your cat:

The survivor principle holds that the competitive process weeds out inefficient firms, so that hypotheses about efficient behavior can be tested by observing what firms actually do. This principle underlies a large body of empirical work in strategy, economics, and management. But do competitive markets really select for efficient behavior? Is the survivor principle reliable? We evaluate the survivor principle in the context of corporate diversification, asking if survivor-based measures of interindustry relatedness are good predictors of firms’ decisions to exit particular lines of business, controlling for other firm and industry characteristics that affect firms’ portfolio choices. We find strong, robust evidence that survivor-based relatedness is an important determinant of exit. This empirical regularity is consistent with an efficiency rationale for firm-level diversification, though we cannot rule out alternative explanations based on firms’ desire for legitimacy by imitation and attempts to temper multimarket competition.

2 December 2012 at 6:51 pm Leave a 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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