Posts filed under ‘Institutions’

Arrunada Seminar: Pamela O’Connor – Conflating Contractual and Property Rights

| Pamela O’Connor |

Conflating Contractual and Property Rights

Coming from a property law perspective, I welcome Arruñada’s recognition of the need for economists to acknowledge the nature of property as as rights in rem (rights in things, enforceable against third parties) and their essential difference from contractual rights that bind only the contracting parties. Although legal scholars such as Bernard Rudden, Thomas Merrill and Henry E Smith have been pointing out the inadequacies of traditional economic conceptions of property for some time, economic theorists have been slow to grapple with the implications.
One consequence of conflating contractual and property rights is apparent in recent Australian legislation on resource rights. State legislatures have introduced new types of rights that run with land and bind third parties as rights in rem, but are largely defined by individual agreements. Their relationship to other property rights remains unclear, and their variability makes them costly for other people to assess. Although uptake of the new rights has been slow, they have the potential to burden land titles with proliferating rights that bind all future owners and which nobody really understands.

Pamela O’Connor. Associate Professor, Faculty of Law. Monash University. Australia

14 January 2013 at 5:13 pm 3 comments

Arrunada Seminar: Paul Dower – Centralized vs. Decentralized Allocation

| Paul Dower |

Centralized vs. Decentralized Allocation

In Benito Arruñada’s insightful new book, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries, the widespread failure of titling programs in developing countries is used as motivation for a greater appreciation of the role of contractual registries. In many developing countries, immovable assets, especially land, are initially and subsequently allocated using a centralized mechanism as opposed to a decentralized market mechanism implicitly assumed in the book.

The conflict between those holding property and those acquiring property is different under a centralized allocation mechanism. Sara Berry in Chiefs Know Their Boundaries, an interesting work on an agricultural region of Ghana, describes the political process involved in determining the complicated overlapping and competing property claims in a system where land is allocated by a centralized mechanism. Here, the relevant asset is not exactly land but community membership. This asset consists of various rights, one of which entails a kind of social insurance that functions through land allocated based on perceived need. The chief simultaneously serves as the contractual registry, performing public reallocation of rights when necessary, as well as the steward of the community members’ rights in rem, enforceable against all parties. Since need is imperfectly observable, this allocation mechanism suffers from a moral hazard problem, in which the acquiring party has private information putting the holding party at a disadvantage. In this setting, the registry is and can not be independent but it can aim to be impartial.

This example highlights the institutional specialization required for impersonal exchange, a point made well in the book, but it also points to several difficulties not apparent in the analysis. First, the judgment proof problem is more complicated. Power and social status can create a judgment proof problem that is independent or even negatively correlated with the standard one of not having enough wealth to compensate the victim of a violation of rights.  The judgment proof problem can create problems for the voluntary registration of property claims. Second, the asset that is transferred or involved in transactions in a centralized system may not easily map into assets exchangeable in a decentralized system. Here, there is a parallel to the informational externality discussed in the book concerning transactions of rights in rem. The lack of institutional specialization leads to significant information costs if rights in rem are transferred.  Third, since local legal orders are usually less specialized and serve multiple purposes under a centralized allocation mechanism, they may appear weaker than they actually are. On one hand, the apparent favoritism of a local may merely reflect the fact that an outsider does not have a legitimate claim to rights in rem because the local that transacted with the outsider did not possess rights in rem (even though, as shown above, rights in rem exist and can be transferred). On the other hand, due to the social insurance role of land allocation, the local property holder commonly has a superior claim to land in the abstract than what can be acquired at any moment in time by another local or an outsider. Thus, local legal orders can be in better positions to track the competing or overlapping claims than a public registry based on a state-backed legal order, even though the political process required to adjudicate competing claims under the local legal order restricts trade opportunities.

Paul Dower

Kinross Assistant Professor of Development Economics, New Economic School (NES). Research Economist, Center for Financial and Economic Research (CEFIR).

10 January 2013 at 9:49 am 3 comments

Arrunada Seminar: Giorgio Zanarone – The Contracts behind Contracting

| Giorgio Zanarone |

The Contracts behind Contracting

Benito Arruñada’s “Institutional Foundations of Impersonal Exchange” is an important book in many ways. It develops a unified theory of property and business registries. It provides the reader with deep historical and institutional analyses that make the theory compelling. And it discusses paths for the reform of business formalization policies that challenge the conventional wisdom.

In my view, however, the most important contribution of Benito Arruñada’s book is broader and more subtle: it shifts the unit of analysis in the theory of the firm from personal to impersonal exchanges. From Coase (1937, 1960) and Williamson (1979) to Grossman and Hart (1986), Holmstrom and Milgrom (1994), and others, the economic theories of the firm have treated contracts as personal exchanges, with little analytic distinction between phyisical and legal persons. This has led to Alchian and Demsetz’s (1972) famous definition of the firm as a “nexus of contracts”.

By focusing on how hidden “originative” contracts make the consequences of present contracts uncertain, and on how registering contracts ex ante can reduce the uncertainty of good-faith acquirers of rights, Benito Arruñada’s book moves an important step towards an economic theory of the firm as a legal person. In that perspective, the nexus of contracts we call “firm” differs from a similar nexus of market contracts because, being the firm registered, external parties can contract with it without fearing that previous “internal” contracts will dilute their rights. In this sense, one could say that ex ante registration marks the boundary between firms and markets.

Beyond the book, these important insights are motivating and will motivate further research, along several lines. In a joint work in progress, Benito Arruñada, Nuno Garoupa and I are developing a formal model to compare “private-ordering” market solutions to the problem of impersonal exchange with regulated solutions, such as the contractual registries discussed in Benito’s book. In a similar vein, it would be interesting to incorporate impersonal exchange and contractual registries in a formal theory of firms’ boundaries. Finally, the book opens promising avenues for empirical research, from the comparative performance of registries and market solutions to the effects of business formalization policies in rich and developing countries. An exciting agenda for XXI-Century institutional and organizational economics!

Giorgio Zanarone

Associate Professor, Colegio Universitario de Estudios Financieros (CUNEF)

9 January 2013 at 2:40 am 1 comment

Arrunada Seminar: Amnon Lehavi – Economics, Property Rights, and Third Parties

| Amnon Lehavi |

Economics, Property Rights, and Third Parties

Benito Arruñada’s book offers an innovative and intriguing analysis of the crucial role that institutions such as land registries play for securing property rights. A key observation that Benito makes deals with the different focus that economists have vis-à-vis lawyers in their view of property. While “everybody agrees that security of property is essential for development” (p. 24), Benito argues that economists tend to be more concerned with the public order function of property, one which guards against violence and confiscation and which then allows for parties to engage in subsequent efficient bilateral transactions, as modeled by Coase and others. But as Benito aptly notes, lawyers are also concerned with a different aspect of securing property rights, one which has to do with otherwise “routine” property dealings that may fall prey to misuse of transactions. Such conflicts can arise, for example, between a good faith purchaser of an asset and the original owner whose property has been deprived by an intermediate party and then “sold” on the market. Sticking to a contractual paradigm, one that is simply assumed by economists, may thus come short in identifying the true complexity of property rights.

To more fully protect against potential abuse of property rights, or against other cases undermining the security of title, the legal system should be able to award remedies to property owners to protect their interests not only vis-à-vis the direct party to the transaction but also vis-à-vis third parties (in rem protection). This is where land registries come into play. These institutions provide the mechanisms which ensure that private rights would be broadly enforced, “good against the world.” The publicity granted to property rights through such registries and the guarantee of good title, especially in those jurisdictions which follow the registration (Torrens) system, add a key feature of certainty to property rights, one that may be missing from standard economic analysis. Benito’s book offers a unique contribution in identifying the economic and legal foundations of such institutions. His work should be closely studied by scholars across all fields.

Amnon Lehavi
Atara Kaufman Professor of Real Estate, Radzyner School of Law
Academic Director, Gazit-Globe Real Estate Institute Interdisciplinary Center (IDC)

4 January 2013 at 4:17 am 2 comments

Arrunada Seminar: P.J. Hill – The Importance of Sequential Exchange

| P. J. Hill |

The Importance of Sequential Exchange

Arruñada’s important contribution to the vast literature on institutions and exchange comes from a concept that has been largely ignored by previous contributors (including me), namely the sequential nature of exchange. Most of us have treated the definition and enforcement of property rights as important for exchange, but we have not thought seriously about the ongoing nature of such exchange. If specialization and impersonal exchange are going to occur, the transfer of a property right will be repeated numerous times. Arruñada has integrated well the sequential nature of exchange into his analysis. That integration leads to a host of insights about informality, property registers, and the trade-offs that come from lowering the transaction costs of exchange versus the strength of property rights. How did so many of us miss such an important concept in our work on property rights and the exchange of those rights?

P.J. Hill
Professor Emeritus, Wheaton College and Senior Fellow, Property and Environment Research Center (PERC)

3 January 2013 at 11:22 am 2 comments

The “Market Power” of Top Journals

| Peter Klein |

When elite academic journals impose stricter submission requirements, authors comply. When lower-ranked journals impose these restrictions, authors submit elsewhere. Key insight for editors: know your place.

Revealed Preferences for Journals: Evidence from Page Limits
David Card, Stefano DellaVigna
NBER Working Paper No. 18663, December 2012

Academic journals set a variety of policies that affect the supply of new manuscripts. We study the impact of page limit policies adopted by the American Economic Review (AER) in 2008 and the Journal of the European Economic Association (JEEA) in 2009 in response to a substantial increase in the length of articles in economics. We focus the analysis on the decision by potential authors to either shorten a longer manuscript in response to the page limit, or submit to another journal. For the AER we find little indication of a loss of longer papers – instead, authors responded by shortening the text and reformatting their papers. For JEEA, in contrast, we estimate that the page length policy led to nearly complete loss of longer manuscripts. These findings provide a revealed-preference measure of competition between journals and indicate that a top-5 journal has substantial monopoly power over submissions, unlike a journal one notch below. At both journals we find that longer papers were more likely to receive a revise and resubmit verdict prior to page limits, suggesting that the loss of longer papers may have had a detrimental effect on quality at JEEA. Despite a modest impact of the AER’s policy on the average length of submissions (-5%), the policy had little or no effect on the length of final accepted manuscripts. Our results highlight the importance of evaluating editorial policies.

2 January 2013 at 10:37 am 1 comment

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

Book Seminar: Institutional Foundations of Impersonal Exchange: The Theory and Policy of Contractual Registries

| Lasse Lien |

Very shortly O&M will host a Virtual Seminar on former guest blogger Benito Arruñada’s important new book, Institutional Foundations of Impersonal Exchange: The Theory and Policy of Contractual Registries (University of Chicago Press, 2012). 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.

So stay tuned for this. While we are finalizing the last details of the virtual seminar, you may want to attend one of Benito’s presentations:

27 November 2012 at 3:23 am 1 comment

Remembering the Ostroms

| Peter Klein |

Indiana University’s Workshop in Political Theory and Policy Analysis has a memorial section for the Elinor and Vincent Ostrom, both of whom passed away this year. Here’s my colleague David O’Brien:

I was a graduate student in Sociology at Indiana University in the late 1960s when I was looking for some courses in Political Science to fulfill the requirements for a minor. I had signed up for a course but the professor left for another university and somehow, by default, I took Lin’s course on “Political Calculus.” Like so many others in my discipline at the time I saw the world from a zero-sum conflict perspective. At the beginning of the semester I felt like I was in intermediate Chinese and had not taken the basic course. Riker’s Theory of Political Coalitions and Buchanan and Tullock’s Calculus of Consent were among the many readings that baffled me. What I remember most about Lin’s teaching was her enthusiasm and the fun she was having in doing her work. There were a lot of serious, somewhat dour, professors around in the late 1960s and not many women in teaching positions in the social sciences. So Lin stood out by her demeanor as well as her intellectual gifts. She had genuine concern for other human beings, including someone like me who did not have a clue as to what was going on and she persistently nudged me to keep an open mind about how I would approach the world as a social scientist. She did something very unusual in those days, which was to suggest that the boundaries between disciplines were artificial.

I did not fully appreciate Lin Ostrom’s influence on my scholarly life until many years after I left IU. Her encouragement to look beyond the disciplinary walls led me to use Mancur Olson’s Logic of Collective Action, one of the books assisgned in the Political Calculus course, as the theoretical foundation of my first work on urban neighborhood organization. Her encouragement for working across disciplines encouraged me to work in partnership with psychologists, political scientists and economists on a variety of research projects find a comfortable home in a Division of Applied Social Sciences.

I thoroughly enjoyed my conversations with Vincent, who became a member of my dissertation committee. He helped me to understand how collective action challenges that we face in our day are analytically similar to those faced centuries ago. I am especially grateful to Vincent for introducing me to the importance of constitutions and federalism, but also to Tocqueville’s observations of the relationship between “association” and “habits of the heart.” Vincent’s insightful observations on the complex relationships between formal and informal institutions have had a significant impact on my approach to household and village adaptations to post-command economy transitions in the former Soviet Union and East Africa.

Most important, Lin and Vincent led by example. They were genuinely kind human beings who were always willing to listen to others and encourage them, engage in spirited debate and thoroughly enjoyed doing applied scholarship.

7 November 2012 at 7:09 am Leave a comment

The Dissertation Defense

| Peter Klein |

Thanks to Pete Boettke for forwarding this thoughtful CHE piece on the dissertation defense. Like the writer, I never had a defense; I was exchanging dissertation drafts with my adviser (via snail mail — this was a long time ago), and one day he simply said, “Send me the title page,” and I was done.

Having participated as a professor in many defenses, both for my own students and for others at home and abroad, I not only appreciate the value of the defense, but recognize the substantial differences in defense formats around the world (fairly casual in the US, much more formal and ceremonial in Europe). I remember touring the University of Salamanca a few years ago and learning how defenses were conducted in the 15th and 16th centuries — multi-day events filled with huge parties and strange rituals, including the candidate spending the night before locked in a room and being stepped on by faculty and other students.

My favorite format is depicted in a 1987 New Yorker cartoon:

29 October 2012 at 9:51 am Leave a comment

Mormons in Management

| Peter Klein |

There’s an old joke about God calling the Pope. “I’ve got good news and bad news. The good news is that I’ve answered your prayer — I’m uniting all the world’s religions under one church and one leader.” Great, the Pope responds, what’s the bad news? “I’m calling from Salt Lake City.”

It’s commonly observed that the academic fields of strategy, organization, and entrepreneurship are over-represented by scholars from the Mormon faith: Christensen, Clark, Barney, Hoskisson, Dyer, Whetten, Zenger, and Felin, to name just a few. Often this is explained by superior social networking and the role of BYU as an anchor entity. But I don’t know any systematic academic research on the phenomenon.

A Wednesday HBR blog entry, “How Mormons Have Shaped Modern Management,” takes a different tack, focusing on the beliefs and practices of the Mormon church. An interesting read. See also a 2011 Business Week piece on the role of the Mormon mission.

19 October 2012 at 4:59 pm 9 comments

Henry Manne at Missouri, on the Crisis in Higher Education

| Peter Klein |

Missouri friends, please join us next Tuesday for a lecture by Henry Manne on the governance and organization of US higher education institutions:

The Crisis in Higher Education:
Origins and Problems of University Governance

Henry G. Manne
Dean Emeritus, George Mason University Law School

Tuesday, October 23, 2012, 3:30-4:45pm
MU Student Center, Room 2206
University of Missouri

Sponsored by the Liberty and Justice Colloquium, University of Missouri
Free and Open to the Public

Henry G. Manne is Dean Emeritus of the George Mason School of Law and an expert on insider trading, legal education, university governance, and law and economics. He has also taught at St. Louis University, the University of Wisconsin, George Washington University, the University of Rochester, Stanford University, the University of Miami, Emory University, the University of Chicago, and Northwestern University.

Dean Manne is an Honorary Life Member of the American Law and Economics Association, which honored him as one of the four founders of the field of Law and Economics. He launched the Law and Economics Center at Emory University and the University of Miami before bringing it to George Mason University. His monograph, An Intellectual History of the School of Law, George Mason University, traces the development of the law and economics.

Dean Manne’s other writings include such seminal works as Insider Trading and the Stock Market, Wall Street in Transition (with E. Solomon), and “Mergers and the Market for Corporate Control” Journal of Political Economy, 1965). He is also a frequent contributor to the Wall Street Journal. In 1999, the Case Western Reserve Law Review published the papers from a symposium honoring the many contributions of Dean Manne to the law and economics movement as The Legacy of Henry G. Manne. The Liberty Fund recently published The Collected Works of Henry G. Manne in three volumes.

Dean Manne holds a B.A. from Vanderbilt University (1950), J.D. from the University of Chicago (1952), J.S.D. from Yale University (1966), LL.D. from Seattle University (1987), and LL.D. from the Universidad Francesco Marroquin in Guatemala (1987).

16 October 2012 at 10:04 pm 5 comments

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

Management Scholars and the Media

| Peter Klein |

Reporting today from the Academy of Management meetingin Boston. Too many interesting sessions to list them all. Today I attended a very good Professional Development Workshop on the opportunity-discovery perspective in entrepreneurship studies, organized by Henrik Berglund, Steffen Korsgaard, and Kåre Moberg and featuring Bill Gartner, Per Davidsson, and others. Lots of discussion of “discovery opportunities” and “creation opportunities,” and even my own case for dropping the concept of opportunities altogether.

Then, a PDW session called “Engaging the Media: Equipping Management Faculty to Share Their Knowledge More Effectively” featuring me, Jay Barney, Ron Mitchell, Maria Minniti, Mike Lenox, and Scott Kirsner, an ambassador from the world of journalism. I gave the blogger’s perspective, arguing for this medium as an effective way of sharing research results and informed opinion with students, journalists, policymakers, and the lay public. I also shared some practical tips borrowed from Mike Munger.

During the session there was a lot of discussion of economics, and how economists have been much more successful than management scholars at engaging the media. I argued that this has less to do with technique than with substance — economists have a long history of involvement with key social and policy issues of interest to journalists. But there are pitfalls to such a cozy relationship. The desire for relevance and influence can lead to compromise on rigor and and a loss of independence (Exhibit A). Management scholarship is already prone to faddishness and buzzwords, and a closer engagement with the media could exacerbate those unfortunate trends.

But, a question near and dear to our hearts here at O&M: Why are there so few academic blogs devoted to management and organizational scholarship? Economics and law have many influential academic blogs. Management has just a handful (most linked from our sidebar). When I talk to  management colleagues about blogging, manyt are reluctant. Will I have something to say? How much time will it take? Will it hurt my academic reputation? Economists don’t seem too worried about these. In part, the difference may be due to core theories and approaches. A little economic theory goes a long way in addressing social and policy issues, and most economists feel comfortable talking about current events without deep knowledge of the specifics. “It involves a price control? Well, let me tell you how that will play out…” Management scholarship is far more eclectic and often calls for deeper knowledge of the concrete phenomena at hand. Is this the most important difference? Or are there other reasons why management scholars don’t blog?

3 August 2012 at 8:52 pm 4 comments

Coase-Theorem Behavior Actually Does Happen

| Dick Langlois |

I often find it hard to persuade students that the Coase Theorem actually “works” – that one party really will bribe another party to give up a right when transaction costs are low. So I was pleased to find this example on the Atlantic Monthly website. An author called Patrick Wensink ripped off the trademarked Jack Daniel’s label for the cover of a novel called Broken Piano for President, whose principal (perhaps only) interesting characteristic is that it was published by a press called Lazy Fascist. Clearly this is a conflict over the use of a property right, and the author is enjoying uncompensated benefits. One would think that, as Jack Daniel’s clearly owns the property right, the company could force the author to change the cover. Apparently, however, the transaction costs of doing that are high, so the attorney for Jack Daniel’s wrote the author a charming cease-and-desist letter that actually offered to bribe the author to change the cover right away. This is a general point, I suppose, now that I think about it: as the transaction costs rise of using official legal institutions to resolve externality conflicts, the de facto owner of the right can effectively switch, even in a world in which the transaction costs we usually talk about – those of finding and negotiating with the conflicting users of the property – remain small enough to allow Coasean bargaining.

2 August 2012 at 2:21 pm 3 comments

Today’s Mini-Rant

| Peter Klein |

From my colleague John Howe. Here’s the news item:

MarketWatch (June 20, Orol), meanwhile, has learned that “regulatory observers urged policy makers on Wednesday to require companies to make road-show discussions available to the broader public.” Among them was Ann Sherman, associate professor of finance at DePaul University. She spoke at the Senate Banking Committee hearing that was devoted to whether the IPO process was working for ordinary investors and stated: “It is very important that we try to give everyone the same information.” Lise Buyer, founder of Class V Group LLC, a firm that guides IPO-bound companies, agreed with Sherman. She added that one way to improve the flow of information would be to require companies on a road show to hold a scheduled “Ask the Management” Q&A session via the Internet.

John asks:

Do people actually think we can level the information playing field?  Not only is that naive (stupid), but it leads small/individual investors to the wrong conclusion — that they are not at a comparative disadvantage in the financial markets. They are, and they’re better off knowing it.

21 June 2012 at 3:51 pm Leave a comment

Elinor Ostrom (1933-2012)

| Peter Klein |

A guest post from former guest blogger Joe Mahoney, the Caterpillar Chair in Business and Director of Graduate Studies in the Department of Business Administration, University of Illinois:

As many readers of O&M know by now, Elinor Ostrom of Indiana University (born August 7, 1933) died of pancreatic cancer on Tuesday, June 12th at the age of 78.  She shared the Nobel Prize in Economics in 2009 with Professor Oliver Williamson (UC-Berkeley). Elinor along with her husband Vincent Ostrom (now 93) founded Indiana University’s Workshop in Political Theory and Policy in the mid-1960s, in which she remained active until this Spring, only a couple of weeks before her hospitalization. She also donated most of her Nobel Prize money to the Workshop, as Elinor and Vincent had no children and few living relatives.  Williamson said in a statement that Ostrom was “a great human being,” an inspiring teacher and colleague and accomplished social scientist. “She had a wonderful sense of joy about the importance of her work that she successfully communicated to others,” he said. A record five women won Nobel prizes in 2009, and Elinor Ostrom is the only woman to have been awarded the prize in Economics.

Elinor Ostrom, who was born and raised in Los Angeles as a child of the Great Depression, and received her education from undergraduate through Ph.D. at UCLA, contributed to our understanding of the evolution of institutions for collective action in common resource contexts such as forests, fisheries, oil fields, and grazing lands. She emphasized citizen involvement, the creativity of local communities, and cutting through sterile dichotomous classifications and ideological “solutions” that are glib and inaccurate. Ostrom states that “neither the State nor the market is uniformly successful in enabling individuals to sustain long-term, productive use of natural resources” (1990: 1). She emphasized the complementarities between public and private mechanisms for solving collective good problems (see Governing the Commons, Cambridge University Press, 1990.) Ostrom conducted field studies of the world’s fisheries, roamed with shepherds in Swiss pastures, and trudged around the Los Angeles water basin (during her dissertation work) to distill the essentials of harnessing cooperation. She writes in the preface to her 1990 book: “It is my conviction that knowledge accrues by the continual process of moving back and forth from empirical observation to serious efforts at theoretical formulation.” From this theoretically informed field case study method Elinor Ostrom concludes that instead of presuming that individuals sharing a common resource are “inevitably caught in a trap from which they cannot escape, . . . the capacity of individuals to extricate themselves from various types of dilemma situations varies from situation to situation” (1990: 14).

Ostrom championed unlocking the spirit of “public entrepreneurship” — a term she coined in her 1965 UCLA dissertation. Her spirit can live on within us, if we decide to “make it so.” Good years.

13 June 2012 at 6:44 pm 2 comments

With the Pols

| Peter Klein |

Two years ago I was in D.C. on Hayek-Klein day and found myself on an elevator with Ben Bernanke, upon which I persuaded him to sing me a few bars of Happy Birthday. True story. This year I was in D.C. again, this time to give an organizational economist’s perspective on the Federal Reserve System to the House Financial Services Committee’s Subcommittee on Domestic Monetary Policy and Technology. You can read my written testimony here and see the oral remarks at C-SPAN which has archived the event.

That’s Jeff Herbener to my right and John Taylor to my left, with Jamie Galbraith by Taylor. The one on the end is not Yoda, but Alice Rivlin.

Because the hearing was televised, I can truthfully say, “I’m not a macroeconomist, but I play one on TV.”

8 May 2012 at 2:52 pm 4 comments

Crowdsourcing in Academia

| Peter Klein |

It’s called “fractional scholarship.”

American universities produce far more Ph.D’s than there are faculty positions for them to fill, say the report’s authors, Samuel Arbesman, senior scholar at the Kauffman Foundation, and Jon Wilkins, founder of the Ronin Institute. Thus, the traditional academic path may not be an option for newly minted Ph.D.s. Other post-graduate scientists may eschew academia for careers in positions that don’t take direct advantage of the skills they acquired in graduate school.

Consequently, “America has a glut of talented, highly educated, underemployed individuals who wish to and are quite capable of effectively pursuing scholarship, but are unable to do so,” said Arbesman. “Ideally, groups of these individuals would come together to identify, define and tackle the questions that offer the greatest potential for important scientific results and economic growth.”

Given the level of relationship-specific investment many research projects require, this isn’t likely to work without some kinds of long-term commitments. But the model may be effective for other projects. And it beats the alternative.

1 May 2012 at 6:43 pm 2 comments

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