Posts filed under 'New Institutional Economics'
Doug North Line of the Day
| Peter Klein |
From Bob Margo’s EH.Net review of North, Wallis, and Weingast’s Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History:
In my book people are iconic if I can summarize their life’s work in ten words or less. North takes two: “Institutions matter.”
He adds: “The opposite perspective — viewed in isolation most institutions don’t matter much, being Harberger triangles and small ones at that — has its fans in modern economics. But North has convinced the majority of economic historians, a goodly share of world’s development wonks, and the Nobel Prize Committee that he’s right.”
Update: Art Carden beat me to this.
2 comments 25 June 2009
Is the Future in Contract Manufacturing?
| Benito Arruñada |
The purchase of Opel by Magna shows the strength of contract manufacturers and their strategies, which I discussed with Xosé H. Vázquez in our 2006 article in the Harvard Business Review. Once thought of as a lifebelt for the decreasing margins of large-brand owners, contract manufacturing has now become a major source of competition. Shanghai Automotive Industry Corporation (SAIC), which learned the business by producing initially for Volkswagen and GM, has actually started to sell its own cars in Europe and North America. It has even bought R&D knowledge, acquiring from bankrupt MG Rover the drawings needed to build the Rover 25, Rover 45, and Rover 75.
The economic crisis is accelerating this process. The need to liberate assets to increase ROI has been facilitated by technological and organizational change. This is stimulating business practices at the corporate level that are pushing outsourcing practices to dangerous limits. The wrong management of contract manufacturing will thus increasingly provoke knowledge leaks to direct competitors and the loss of internal manufacturing knowledge; more importantly, it will continue to eliminate barriers to entry, allowing large distributors and contract manufacturers themselves to market their own brands much more easily.
3 comments 9 June 2009
De Figueiredo on Political Strategy
| Peter Klein |
We’ve previously mentioned the chapters by Nicolai and Nils Stieglitz and by Lasse and me in the forthcoming Advances in Strategic Management volume titled Economic Institutions of Strategy. John de Figueiredo’s chapter, “Integrated Political Strategy,” is now available as an NBER Working Paper. John is a leader of this emerging field, which studies how firms attempt to influence the legal and political environment to achieve competitive advantage. As he points out:
Legal and acceptable competitive behavior is determined endogenously by legislators, regulators and judges who are influenced, positively and negatively, by the very same firms the regulations are designed to control. By understanding the theories of how firms affect politics, one can better determine how to gain competitive advantage through political institutions. This is a natural extension of the traditional tools of strategic management. Moreover, for young scholars, this is an area in which the lines of investigation are clear and the openings for serious research opportunities available. In this sense, it is robust area for future research and major contributions to understanding firm performance.
1 comment 9 June 2009
Introducing Guest Blogger Benito Arruñada
| Peter Klein |
We’re delighted to announce Benito Arruñada as our newest guest blogger. Benito is Professor of Business Organization at Pompeu Fabra University in Barcelona, a former President of ISNIE, and a prolific researcher in the areas of organization, law and economics. Most of his work focuses on the organizational conditions that facilitate impersonal exchange, from property titling or business regulation to moral systems. He has published widely in journals such the Journal of Law and Economics, Industrial & Corporate Change, Harvard Business Review, Journal of Law, Economics, and Organization, Journal of Economic Behavior & Organization, Journal of Comparative Economics, and International Review of Law and Economics.
Benito will be blogging about his new book on property and business formalization, Building Market Institutions: Property Rights, Business Formalization, and Economic Development, coming out next year from the University of Chicago Press, and other topics that strike his fancy. Welcome, Benito!
1 comment 3 June 2009
Research Workshop on Institutions and Organizations
| Peter Klein |
The IV Research Workshop on Institutions and Organizations takes place at Insper (formerly Ibmec) São Paulo 5-6 October 2009. Lee Alston and David Stark are keynoting. There are panels on “Judicial Norms and Development,” “New Theories of the Firm,” and “Social Capital and Organization.” There’s an open call for papers, with abstracts due 20 July.
I attended the 2007 version and enjoyed it very much.
1 comment 26 May 2009
Vive la Révolution!
| Peter Klein |
So says the all-star team of Acemoglu, Cantoni, Johnson, and Robinson in “The Consequences of Radical Reform: The French Revolution.” Check it out:
The French Revolution of 1789 had a momentous impact on neighboring countries. The French Revolutionary armies during the 1790s and later under Napoleon invaded and controlled large parts of Europe. Together with invasion came various radical institutional changes. French invasion removed the legal and economic barriers that had protected the nobility, clergy, guilds, and urban oligarchies and established the principle of equality before the law. The evidence suggests that areas that were occupied by the French and that underwent radical institutional reform experienced more rapid urbanization and economic growth, especially after 1850. There is no evidence of a negative effect of French invasion. Our interpretation is that the Revolution destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth. The evidence does not provide any support for several other views, most notably, that evolved institutions are inherently superior to those ‘designed’; that institutions must be ‘appropriate’ and cannot be ‘transplanted’; and that the civil code and other French institutions have adverse economic effects.
Think of this as a fixed-effects model estimating the within-country effect of legal origin; what happens when a society’s institutional (particularly, legal) environment changes suddenly and unexpectedly? If a common-law country is invaded and occupied by a civil-law country, what happens to financial-market development? An interesting counterpoint to the cross-sectional studies that are the norm in this field.
Add comment 24 April 2009
Economic Institutions of Strategy
| Peter Klein |
That’s the title of a forthcoming volume of Advances in Strategic Management edited by Jackson Nickerson and Brian Silverman. You’ll recognize the allusion to a certain classic book. Like that book, this volume maps out an ambitious agenda for new scholarship on institutions and organizations, particularly within the field of strategic management. The chapters provide critical reviews and syntheses of various strands of the strategy literature, intended to support and to challenge new and established scholars starting work in these areas. (They should make excellent readings, for example, for doctoral courses in strategy and the economics of organization.)
Lasse and I contributed a chapter, “Diversification, Industry Structure, and Firm Strategy: An Organizational Economics Perspective,” that you can download on SSRN. Here’s the abstract:
We review theory and evidence on corporate diversification, industry structure, and firm strategy from an organizational economics perspective. First, we examine the implications of transaction cost economics (TCE) for diversification decisions. TCE is essentially a theory about the costs of contracting, and TCE sheds light on the firm’s choice to diversify into a new industry rather than contract out any assets that are valuable in that industry. While TCE does not predict much about the specific industries into which a firm will diversify, it can be combined with other approaches, such as the resource-based and capabilities views, that describe which assets are useful where. We also discuss the transaction-cost rationale for unrelated diversification, which focuses on the potential efficiencies from exploiting internal capital markets. We review this argument as it emerged in the transaction cost literature in the 1970s and 1980s and, more recently, theoretical and empirical literature in industrial organization and corporate finance. We then discuss how diversification decisions, both related and unrelated, affect industry structure and industry evolution. Here, the stylized facts suggest that diversifying firms have a crucial impact on industry evolution because they are larger than average at entry, grow faster than average, and exit less often than the average firm. We conclude with thoughts on unresolved theoretical, methodological, and empirical issues and problems and provide suggestions for future research.
Add comment 20 April 2009
GM vs. TCE: Another “Block Upon Block”?
| Mike Sykuta |
Ronald Coase has spent the past two decades or more lamenting the lack of progress in economic theory. He bemoans the fact that economics, unlike its physical-science counterparts, fails to dispose of (or pursue new versions of) theories when facts show that prevailing theories are inaccurate or incomplete.
Among his many arguments, Coase has pointed to Williamson’s Transaction Cost Economics (TCE) as one that seems impervious to the facts. Part of Coase’s discontent with the TCE story rests on his observation that many firms sustain relationships characterized by high degrees of asset specificity using contractual means. While Ben Klein and others pointed to General Motors-Fisher Body as evidence to support the TCE story, Coase pointed to relations with auto frame manufacturer A.O. Smith at the same time that were not subsumed by vertical integration. This eventually led to the infamous GM-Fisher Body debate that seems for want of a real conclusion (see some of Peter’s previous comments on this here, here and here).
Well once again, General Motors seemingly plays the foil against TCE. Several weeks ago, GM announced plans to purchase Delphi Group’s global steering manufacturing operations. Delphi operated the steering unit solely for GM’s use. Delphi, in bankruptcy since October 2005, has been able to use GM’s dependence on Delphi’s operations to secure roughly $450 million in liquidity capital from GM to maintain its operations. Sounds like the classic hold-up problem, doesn’t it? But wait! (more…)
12 comments 17 April 2009
The Economics of Prehistory
| Dick Langlois |
Greg Dow at Simon Fraser is organizing a conference this summer on “Early Economic Developments.”
This conference is a meeting for scholars interested in economic aspects of prehistoric events. The organizers welcome proposals for papers on topics at the boundaries among economics, archaeology, and anthropology. Topics can include economic prehistory, the economics of human biological evolution; pre-industrial economic history; and the evolution of economic, social, and political institutions.
Looks interesting. Abstract deadline is April 15, which I guess isn’t tax day in Canada.
Add comment 26 March 2009
Conference on Law and New Institutional Economics
| Peter Klein |
Vic Fleischer and Phil Weiser have organized a conference on Law and New Institutional Economics at the University of Colorado, 4-5 June 2009. Along with Lee Fennel, Mark Ramseyer, Henry Smith, and Eric Talley, Vic and Phil will facilitate discussion of classic (Demsetz 1967, Klein, Crawford, and Alchian, 1978) and contemporary papers dealing with property rights, contract design, behavioral finance, the teaching of NIE, and more. See the link for details.
1 comment 16 March 2009
The Political Economy of Vertical Integration
| Peter Klein |
An understudied area in the organizations literature is the effect of organizational form on lobbying, rent-seeking, tax-rate arbitrage, and similar kinds of political behavior. The accounting literature on transfer pricing looks at the ability of vertically integrated multinationals to shift income between tax jurisdictions to reduce the overall tax burden, and regulators have expressed concerns about diversified multinationals putting downward pressure on environmental and labor regulations (by threatening to withdraw production from countries with high tax or regulatory burdens). Of course we know that as industries mature, firms are more likely to open lobbying offices in state or national capitols. But, in general, we know little about how firms organize to take advantage of political processes and institutions.
Joseph Fan, Jun Huang, Randall Morck, and Bernard Yeung have a new NBER paper on vertical integreation in China showing that vertical integration in highly interventionist environments may be aimed not at reducing transaction costs, protecting relationship-specific investments, and the like, but at rent-seeking and the pursuit of other forms of political privilege. Abstract:
Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.
Add comment 14 March 2009
Reducing Transaction Costs in Government Procurement
| Mike Sykuta |
Lest anyone think I (or, by association, O&M) am just a disgruntled Obama-basher, let me applaud the Administration’s announcement today of its intent to overhaul the ways in which the government contracts for goods and services, particularly in the Department of Defense. I suspect the collective “we” are all in favor of identifying methods and processes that will reduce transaction costs (and overall costs) in government procurement programs.
On this point, there is economic research that should help guide the Administration’s deliberations. To wit, William Rogerson provides a pretty thorough assessment of the economic incentives in defense procurement (JEP, 1994) and has a follow-up article on the optimal structure of fixed-priced cost reimbursement contracts (AER, 2003). Bajari and Tadelis (RAND J., 2001) provide a study of incentives versus transaction costs in procurement contracts. Although focused on private-sector construction, their findings are likely relevant to government procurement as well. Important lesson: cost-plus is not necessarily bad.
6 comments 4 March 2009
Accounting Rules and Spontaneous Order
| Peter Klein |
David Albrecht thinks the US should not replace its accounting rules (GAAP) with the new, international standard (IFRS).
A language evolves to fit its culture. Language is not static. Moreover, there is no one best way for a language to be. . . .
If Americans wish to speak to a person from Peking, they can get their communication translated. The translation comes at a cost. The benefit from avoiding this cost by switching [to Chinese] would be much less than the huge opportunity costs of educating everyone in the U.S. to speak another language. If we continued using English, the translation to Chinese would (and is) a trivial expense, and a minor inconvenience.
Similarly, there is no good reason for anyone to have the U.S. discontinue using its accounting language (GAAP) and switch over to IFRS. Having multiple accounting languages in the world is a minor inconvenience and translation expenses are, in the grand scheme of things, trivial. Moreover, GAAP seems to fit our culture, economy and system of financial markets. . . .
Who would benefit if the U.S. switched to IFRS? Certainly not investors, for the same reason that they would not benefit if the country moved immediately to Chinese. The beneficiaries would be the accounting firms that would teach us the new IFRS, and company executives. (more…)
4 comments 15 February 2009
An Empirical Test of Williamson’s Adaptation Theory
| Peter Klein |
We’ve noted before, following Bob Gibbons, how Williamson’s transaction-cost approach can be called an adaptation theory of the firm. Vertical integration, in this context, is seen as an efficient means of adjusting a production process to unanticipated changes in market conditions, regulation, or technology.
Most of the empirical TCE literature focuses on the equilibrium rent-seeking version of the story, however (perhaps more influenced by Klein, Crawford, and Alchian’s interpretation). Vertical integration is viewed as an efficient means of mitigating holdup in the presence of asset specificity — and, in equilibrium, holdups don’t occur, so there is nothing to mitigate. Hence the typical TCE empirical paper which compares observed organizational forms to observed transactional characteristics (e.g., the degree of asset specificity). Newer studies attempt to test the relationship between efficient alignment, in the sense above, and long-term performance or survival, but few study the process of adaptation itself. (Exceptions include Mayer and Argyres, 2004 and Argyres and Mayer, 2007.)
Arnaud Costinot, Lindsay Oldenski, and James Rauch have written what I think is the first large-N empirical paper on the adaptation theory, “Adaptation and the Boundary of Multinational Firms.”They construct an occupation-level measure of “routineness” — whether a job involves mainly routine tasks or more creative, problem-solving activities — and show that routineness and vertical integration are negatively correlated. An interesting operationalization of the theory. Abstract:
What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their “routineness” by merging two sets of data: (i) ratings of occupations by their intensities in “problem solving” from the U.S. Department of Labor’s Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.
2 comments 13 February 2009
ESNIE 2009
| Peter Klein |
The European School on New Institutional Economics is taking applications for its 2009 Summer Institute, 18-22 May in Corsica. Speakers include Kenneth Binmore, Peter Murrell, John Wallis, Peter Maskell, Scott Masten, John de Figueiredo, Jackson Nickerson, Florencio Lopez-de-Silanes, and Antonio Estache. PhD students and junior faculty are encouraged to apply. Deadline is 8 Mar 2009.
Add comment 9 February 2009
Google: Too Big to Fail?
| Peter Klein |
It’s horrible to contemplate, but is Google a future candidate for subsidization and regulation under the essential facilities doctrine? Matt Asay wonders. It’s right to ask these questions, but I think people who worry about the catastrophic effects of a Google failure on the economy underestimate how quickly market participants adapt to changes in product offerings, even in the presence of network effects.
Add comment 6 February 2009
That Great Klein (1996) Paper
| Peter Klein |
No, not this one. I’m talking about Ben Klein’s 1996 Economic Inquiry paper, “Why Would Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” It’s from a special issue honoring Armen Alchian, the entire contents of which are worth reading. Klein’s paper extends the Klein, Crawford, and Alchian (1978) model by explaining why, in equilibrium, holdups can occur, even if parties are farsighted. The basic story — that parties deliberately leave “gaps” in their contracts because the marginal costs of filling in the gaps exceed the marginal benefits — is closer in spirit to neoclassical economics than is Williamson’s Carnegie-style appeal to bounded rationality. Writes Klein:
[In an uncertain world where complete contractual specification is costly, transactors use incomplete contracts that deliberately do not take account of every contingency. As a result, transactors knowingly leave themselves open to the possibility of hold-ups.
The costs associated with contractual specification that lead transactors to use incomplete and imperfect contracts involve much more than the narrow transaction costs of writing down responses to additional contingencies. In addition to these extra “ink costs,” complete contractual specification entails wasteful search and negotiation costs associated with discovering and negotiating prespecified contractual responses to all potential contingencies. Because most future events can be accommodated at lower cost after the relevant information is revealed, much of this activity involves largely redistributive rent dissipation with little or no allocative benefit. Transactors are merely attempting to obtain an informational advantage over their transacting partners, hoping to place themselves in a position where they will be more likely to collect on (and less likely to pay for) hold-ups. Therefore, rather than attempting to determine all of the many events that might occur during the life of a contractual relationship and writing a prespecified response to each, the gains from exchange are increased by the use of incomplete contracts.
Transactors also use incomplete contracts because writing something down to be enforced by the court creates rigidity. Since contract terms are necessarily imperfect, once something is written down transactors can engage in a hold-up by rigidly enforcing these imperfect contract terms, even if the literal terms are contrary to the intent of the contracting parties (p. 447). (more…)
5 comments 21 January 2009
Some Interesting Working Papers
| Peter Klein |
- Jennifer Arlen and Eric Talley, “Experimental Law and Economics”
This chapter provides a framework for assessing the contributions of experiments in Law and Economics. We identify criteria for determining the validity of an experiment and find that these criteria depend upon both the purpose of the experiment and the theory of behavior implicated by the experiment. While all experiments must satisfy the standard experimental desiderata of control, falsifiability of theory, internal consistency, external consistency and replicability, the question of whether an experiment also must be “contextually attentive” — in the sense of matching the real world choice being studied — depends on the underlying theory of decision-making being tested or implicated by the experiment.
- Matthew J. Holian, “Optimal Decentralization in Corporations and Federations”
Oates’ Theorem and the M-form Hypothesis are both organizational theories of decentralization, though they deal with different types of organizations. This brief note describes how the two theories complement one another, through both verbal description and mathematical models. The result is a simple but comprehensive account of the delegation problem.
- Abhijit V. Banerjee, Esther Duflo, “The Experimental Approach to Development Economics”
Randomized experiments have become a popular tool in development economics research, and have been the subject of a number of criticisms. This paper reviews the recent literature, and discusses the strengths and limitations of this approach in theory and in practice. We argue that the main virtue of randomized experiments is that, due to the close collaboration between researchers and implementers, they allow the estimation of parameters that it would not otherwise be possible to evaluate. We discuss the concerns that have been raised regarding experiments, and generally conclude that while they are real, they are often not specific to experiments. We conclude by discussing the relationship between theory and experiments.
Add comment 27 November 2008
The Emergence of English Commercial Law
The English system of commercial law or the lex mercatoria has been described as an example of “spontaneous order,” a set of rules that emerged without central direction and yet provided remarkable stability and favorable institutional environment for trade. Harold Berman and Bruce Benson, among others, have written extensively on this. Here’s an interesting paper by Daniel Klerman on the early history of English commercial law, framed as a comparison of the English and Ottoman systems:
Thirteenth-century England was a commercial backwater whose trade was dominated by foreigners. To accommodate and encourage foreign merchants, England modified its legal system by creating legal institutions which were available to both domestic and foreign traders. Among the most important of these institutions were streamlined debt collection procedures and mixed juries composed of both Englishmen and foreigners. By introducing institutions which treated locals and foreigners equally, England created a level playing field which enabled English merchants to become increasingly prominent in the later Middle Ages. England’s ability to modernize its law was facilitated by the secular nature of English law, the representation of merchants in Parliament, and legal pluralism. Medieval England contrasts sharply with the early modern Ottoman Empire. The latter created special institutions for foreign merchants, which eventually put Ottoman Muslims at a competitive disadvantage.
1 comment 5 November 2008
Interviews with Alchian, Coase, Kirzner, Manne
| Peter Klein |
The Liberty Fund has put online several interviews from its Intellectual Portrait Series. Of particular interest to O&M readers:
- Armen Alchian, interviewed by Dan Benjamin
- Ronald Coase, interviewed by Richard Epstein
- Israel Kirzner, interviewed by Tibor Machan
- Henry Manne, interviewed by Fred McChesney
Update (Nov. 2): Manne link fixed.
Add comment 1 November 2008
ESNIE School on NIE Archives
| Nicolai Foss |
The European Society for New Institutional Economics, the semi-formal Euro branch of ISNIE, runs a yearly School on New Institutional Economics, usually taking place on Corsica. Organized by Eric Brousseau, the School has now run for seven consecutive years. The line-up is impressive, including Oliver Williamson, Sid Winter, Avinash Dixit, Doug North, Giovanni Dosi, Dick Langlois, Joanne Oxley, Jackson Nickerson, Lee Alston and many other luminaries. The great thing is that the PPTs of their talks are online (here)! Enjoy.
1 comment 8 October 2008
Organizational Economics and International Trade
| Peter Klein |
New NBER paper from Pol Antràs and Esteban Rossi-Hansberg, “Organizations and Trade” (ungated here). Surveys “an emerging literature at the intersection of organizational economics and international trade,” arguing that “a proper modelling of the organizational aspects of production provides valuable insights on the aggregate workings of the world economy.” Indeed, “certain predictions of standard models . . . are affected or even overturned when organizational decisions are brought into the analysis.”
A valuable survey, but the focus is quite narrow; an older and broader literature seeking to apply transaction cost economics to issues in international business, going back to Teece (1977), should also be consulted. (Joanne Oxley’s research page is a good place to start.)
Add comment 15 September 2008
Wiki Textbooks
| Peter Klein |
I teach two graduate courses without textbooks, Economics of Institutions and Organizations and Entrepreneurship: Theory, Applications, Debate. Maybe I should ask the students to create a Wiki Textbook? Anybody out there in the blogosphere want to coordinate such a project? (Thanks to Molly Burress for the link.)
See also previous entries on Wikisummaries, the Global Text Project, wiki notes, and Wikiversity.
Add comment 11 September 2008
How Well Does the Market Handle Network Effects?
| Peter Klein |
Quite well, according to Dan Spulber’s paper “Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets with Network Effects,” out recently in the Journal of Competition Law and Economics (June 2008). Dan distinguishes between network effects in small- and large-numbers bargaining situations; Coasean bargaining can solve the problem in the former while Hayekian “spontaneous order” can emerge in the latter. The paper also contains a useful, up-to-date summary of the network effects literature. Highly recommended!
Add comment 8 September 2008
Influence of E. A. G. Robinson on Coase
| Peter Klein |
The March 2008 issue of the Journal of the History of Economic Thought features “On Robinson, Coase, and ‘The Nature of the Firm’” by Lowell Jacobsen. Robinson is E. A. G. Robinson, the Cambridge economist and longtime editor of the Economic Journal, now known mainly as the husband of Joan Robinson. Coase was trained by Arnold Plant and has written much about Plant’s influence. Jacobsen argues that Coase was also influenced significantly by Robinson, an influence that has not been widely appreciated. Here’s a bit from the conclusion:
Robinson’s influence on Coase’s writing of ‘‘The Nature of the Firm’’ through his The Structure of Competitive Industry is both obvious and significant. This is understandable, as Robinson and Coase both embraced and looked to extend the Marshallian tradition with these noted works.19 They sought to directly engage the real world of business as they were keenly interested in how firms actually behave, and why. They pursued answers to very fundamental questions: Why do firms exist? and, To what size? In addition, the study of firms and their industries requires a variety of considerations if effective decision-making by the firms’ managers is to be properly understood. In Cairncross’ fine biography of Robinson, he noted the brilliance of Robinson was his ability ‘‘to look at problems from different angles, against an historical background, taking in technology, organisational considerations, political feasibility’’ (Cairncross 1993, p. 164). Much the same could be said about Coase. . . .
[Robinson and Coase] were both interested in applying simple, yet compelling, economic concepts and theory such as scale economies, substitution at the margin and, of course, transaction costs. Further, it was important for them that economic analysis be grounded on realistic assumptions; theory that depended on fabricated assumptions to ensure tractability and even elegance should be largely avoided. Moreover, mathematics should not be the sine qua non of economic theory. Unfortunately, formalism and a priori theorizing emerged in the 1930s (given such influences as Robbins, Pigou, and even Joan Robinson) to dominate, if not define, mainstream economics, including the treatment of the firm. As a result, Coase and Robinson arguably became ‘‘outsiders’’ as Medema (1994), in his equally fine biography, concludes about Coase.
The paper is free, for now at least, on the Cambridge Journals site, so grab it while you can.
Add comment 28 August 2008
Reflections on Cyert and March
| Peter Klein |
The April 2008 issue of JEBO features a symposium on Cyert and March’s 1963 classic, A Behavioral Theory of the Firm (an O&M favorite). The book has been highly influential in organization theory, somewhat influential in behavioral economics, but mostly ignored in the contemporary economics literature on the firm (see here). As Mie Augier and March note in their introduction to the special issue:
As long as the primary focus of the theory of the firm was on the aggregate outcomes of interaction among rational actors, the book’s role in economics was limited. As Cyert and March noted, “Ultimately, a new theory of firm decision making behavior might be used as a basis for a theory of markets, but at least in the short run we should distinguish between a theory of microbehavior, on the one hand, and the micro-assumptions appropriate to a theory of aggregate economic behavior on the other. In the present volume we will argue that we have developed the rudiments of a reasonable theory of firm decision making” (1963, 16).
As interest in economics moved slowly toward greater concern with behavioral micro-assumptions, ideas consistent with Cyert and March (1963) became more prominent ([Kay, 1979], [Day and Sunder, 1996] and [Day, 2002]), although with hesitations and qualifications ([Baumol and Stewart, 1971] and [Williamson and Winter, 1991]). Elements of a behavioral view of the firm can now be found in many modern developments in economics, but especially in transaction cost economics ([Williamson, 1996] and [Williamson, 2002]), evolutionary theory ([Nelson and Winter, 1982], [Nelson and Winter, 2002], [Winter, 1986] and [Dosi, 2004]), and organizational economics (Gibbons, 2003). Behavioral ideas have been elaborated not only in theories of the firm but also in collateral areas of economics, such as strategic management (Rumelt et al., 1991), organization theory (Argote and Greve, 2007), and the psychological foundations of economic choice ([Tversky and Kahneman, 1974], [Kahneman and Tversky, 1979] and [Camerer et al., 2004]). Ideas of bounded rationality, conflict, learning, and routines are now commonplace, as is the general idea that economic behavior is guided by principles of human behavior. Although those ideas have many ancestors, A Behavioral Theory of the Firm probably contributed some modest amount of DNA.
Of particular interest to the O&M crowd are “Outlines of a Behavioral Theory of the Entrepreneurial Firm” by Dew, Read, Sarasvathy, and Wiltbank; “Realism and Comprehension in Economics: A Footnote to an Exchange Between Oliver E. Williamson and Herbert A. Simon” by Augier and March; and “Unpacking Strategic Alliances: The Structure and Purpose of Alliance versus Supplier Relationships” by Mayer and Teece.
1 comment 22 August 2008
“El Pulpo”
| Peter Klein |
A few years ago I read, and enjoyed, Stephen Schlesinger and Stephen Kinzer’s Bitter Fruit: The Story of the American Coup in Guatemala. (Kinzer also has a nice book on the CIA’s role in Iran.) So when I saw Peter Chapman’s Bananas!: How The United Fruit Company Shaped the World in a local bookstore — yes, the bright-yellow cover caught my eye — I snapped it up. United Fruit — “El Pulpo” (the Octopus) to its detractors — is a fascinating company, the history of which should be required reading for students of international business. Bananas is a disappointment, unfortunately. I wasn’t expecting a scholarly treatment but, even by journalistic standards, the book is weak, substituting breathy clichés for facts and analysis. And Chapman’s unfamiliarity with even the most basic concepts of economics doesn’t help. (Spend your money on Bananas instead — my favorite Woody Allen movie.)
Today I learned of at least one scholarly treatment of United Fruit, focusing on its Colombian operations: Bananas and Business: The United Fruit Company in Colombia, 1899-2000 by Marcelo Bucheli (New York University Press, 2005). Alan Dye makes some interesting points about knowledge transfer in his review for EH.Net:
One important contribution is the story the book tells of how United Fruit eventually decided to abandon its initial policy of creating barriers to competition and accept fair dealing with rivals to its core business. Although its early history was one of raising barriers to competition and exploiting the weakness of unstable governments to establish its monospony position, he argues that in the long run the presence of this, or another multinational, was necessary for the development of a commercial banana industry in Colombia. United Fruit had pioneered techniques for how to commercialize a fragile and highly perishable product. Regardless of unethical practices when dealing with locals in the producing countries, the importation of the marketing techniques that such pioneers in the industry developed were of substantial value to local industry. (more…)
4 comments 20 August 2008
Organizational Structure and the Diversification Discount
| Peter Klein |
Do diversified conglomerates trade at a discount relative to more specialized firms? A huge literature in strategy and corporate finance emerged over the last couple of decades devoted to this question. Early studies claimed to find a substantial diversification discount, though more recent papers claim that the observed discount is due to measurement error, self-selection, and other characteristics, not a harmful effect of diversification per se. (For a good overview of this literature, now slightly dated, see this roundtable report edited by Belén Villalonga. Some of my own contributions are here and here.)
Seemingly lost in the search for a diversification discount, however, is a related question: What is being discounted? Potential benefits of diversification, according to the literature, include access to internal capital markets and more efficient redeployment of distressed assets; potential costs include inefficient rent-seeking, bargaining problems, and bureaucratic rigidity. But these benefits and costs have little to do with industry or geographic diversification per se — they apply to the management of any multi-unit organization, even if its activities do not span different industries or regions.
In a new paper, “Organizational Structure and the Diversification Discount: Evidence from Commercial Banking,” Marc Saidenberg and I try to distinguish the effects of diversification and organiztaional complexity by studying multi-unit firms within a single industry, commercial banking. (more…)
Add comment 11 August 2008
IBES-AAEA
| Peter Klein |
As the next phase of my Plan for World Domination I’ve taken office as Chair-Elect of the Institutional and Behavioral Economics Section (IBES) of the Agricultural and Applied Economics Association. One of my duties is to organize the section’s sessions for next year’s AAEA annual meeting, 26-28 July 2009 in Milwaukee, Wisconsin. I welcome participation from the O&M crowd so please email me your suggestions for session topics, papers, special formats, themes, or other ideas. Milwaukee is a lovely and interesting town (just ask Alice), so make plans to join us!
1 comment 7 August 2008
Homogeneity and Cooperation
| Peter Klein |
Why are Scandinavians so cooperative? Nicolai and Lasse might suggest it’s their superior moral character. La Porta et al. (1997), Putnam et al. (1992), and others point to Protestantism: hierarchical religions like Catholicism and Islam, it is argued, tend to discourage trust and retard the development of social capital. The Protestants, who already have Max Weber in their corner, seem to be piling it on.
Not so fast, says Kevin O’Rourke in a recent paper, “Culture, Conflict, and Cooperation: Irish Dairying Before the Great War” (Economic Journal, October 2007). O’Rourke compares the Danish and Irish dairy industries before 1914 and argues that cultural and ethnic homogeneity, not religion, explains the success of Danish cooperatives. Unlike recent large-sample econometric work on trust, the paper uses deeper, more robust indicators of cooperation. Key findings:
At first sight, the contrast between Protestant Ulster and the Catholic South (as well as between Denmark and Ireland as a whole) seems a striking confirmation of the LLSV hypothesis that culture matters for the ability to cooperate, and that hierarchical religions such as Catholicism undermine both trust and cooperation. However, on closer examination it appears that politics, not culture, was responsible for the lower Irish propensity to cooperate. Suspicion between Catholics and Protestants, and tenants and landlords, spilled over into Nationalist suspicion of the cooperative movement and hindered its spread, despite the efforts of the [Irish Agricultural Organisation Society] to remain apolitical. To this extent, the results are more consistent with the stress on [ethnolinguistic fractionalisation] in Alesina and La Ferrara (2000) than with the cultural perspective of LLSV, Knack and Keefer (1997) and Zak and Knack (2001).
Denmark benefited from several relevant advantages that Ireland did not enjoy during this period. In particular, it was an extremely homogeneous country, ethnically, religiously and linguistically. There was no conflict over who should own the land, since land reform in Denmark had been underway since the late eighteenth century. . . . Nor was there any ethnic conflict, or disputes over where national boundaries should lie (all such controversies became redundant following the loss of Schleswig-Holstein in 1864). The results suggest that this homogeneity of Danish society is what explains the success of cooperation there.
11 comments 6 August 2008
