Posts filed under ‘New Institutional Economics’
Upcoming Conferences
| Peter Klein |
- ISNIE, 16-18 June in Palo Alto. Registrations are closed but latecomers could try lobbying the Treasurer to accept a late payment — never mind, that’s me, don’t bother.
- “Open Source, Innovation, and New Organizational Forms,” 1 August in Johannesburg. “This first IPEG conference intends to explore new theoretical and empirical advances in open source organization: the interest is not just on voluntary Open Source Software production and its potential innovation implications, but also on such related ‘open source’ phenomena as collective invention, online collaboration (e.g., Wikipedia), online social networking (e.g., Facebook), open innovation, open science, open source biology, and open standards.” The conference website is not live as of this posting, but organizer Giampaolo Garzarelli can provide details. O&M’s Dick Langlois is a keynote speaker. 500-word abstracts are due 24 June.
- “Achieving Coexistence of Biotech, Conventional & Organic Foods in the Marketplace,” 26-28 October in Vancouver. Speakers include FAO Deputy Director General Ann Tutweiler and Canadian Ag Minister Gerry Ritz. Coexistence conferences have been held every other year since 2003; the first 3 conferences came out of EU Commission efforts, the next was in Australia, and this one is the first to be held in North America. A co-organizer tells me “we hope to bring a more ‘practical’ view of coexistence than is commonly held in Europe.”
Incomplete Contracts and the Theory of the Firm
| Peter Klein |
A very useful survey article from the Spring 2011 Journal of Economic Perspectives: “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. From the introduction:
In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,” and then we briefly review some recent developments of the incomplete contracts approach.
I plan to use it in “Economics of Institutions and Organizations” this fall.
Update: Thanks to Stéphane Saussier for the pointer to the upcoming conference, Grossman and Hart at 25, June 24-26 in Brussels.
Anti-Williamson
| Peter Klein |
Thanks to Per for reminding me of this 2004 paper by Daniel Ankarloo and Giulio Palermo, “Anti-Williamson: A Marxian Critique of New Institutional Economics” (Cambridge Journal of Economics 28, no. 3). It’s one thing to question Williamson’s behavioral assumptions and to complain about their implications for education and business practice. But apparently “Williamson’s categories, his method and conception are themselves products of bourgeois ideology.” Who knew?
Bonus: Here’s Doug North getting the same treatment. And if anyone thinks I don’t take Marx seriously, let me say that I once mitigated a contractual hazard in my pajamas — how it got in my pajamas I’ll never know.
Contributions from Mature Scholars
| Peter Klein |
Following up my earlier post on Austrian longevity: Rafe Champion notes that Max Weber died suddenly of pneumonia, in 1920, at age 56. What important further contributions might he have made if he had lived longer?
This prompts the thought, what would have been lost if some long-lived Austrians [and fellow travelers] had died at 56? For Mises, that was 1937, before his masterwork was completed (later translated as Human Action) and before he was a living presence in the US.
For Hayek, that was 1954. No Constitution of Liberty and later works, no Nobel Prize.
For Popper, 1958, before The Logic of Scientific Discovery appeared in English and a dozen other books apart from The Open Society and The Poverty of Historicism.
Coase turned 56 in 1966, with several important contributions still to come: the 1970 paper on durable-goods monopoly, the 1974 paper on the lighthouse, and his recent papers on Fisher Body, not to mention the Nobel Prize and his crowning achievement, the 2002 CORI Lecture. What other examples come to mind?
CORS Lecture and Mises Brazil
| Peter Klein |
O&Mers in Brazil, come see me at two events this week. Thursday, 7 April, I will deliver the inaugural CORS Lecture at the University of São Paulo on “Entrepreneurship, Strategy, and Public Policy.” CORS, the Center for Organization Studies, is a new institute organized by O&M friends Sylvia Saes and Decio Zylbersztajn and involving many scholars familiar to O&M readers. The lecture is co-sponsored by the Mises Institute Brazil, my main host for the trip, and I will speak at the Institute’s Second Conference on Austrian Economics 9-10 April in Porto Alegre, along with Hans-Hermann Hoppe, Robert Murphy, Guido Hülsmann, Gabriel Zanotti, Ubiratan Iorio, Antony Mueller, Fabio Barbieri, and Dalton Gardimam. I’ll give one talk on entrepreneurship and another on networks. I would love to see you at one of these events!
Interesting New NBER Papers
| Peter Klein |
Matching Firms, Managers, and Incentives
Oriana Bandiera, Andrea Prat, Luigi Guiso, Raffaella Sadun
January 2011
We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.
Business Failures by Industry in the United States, 1895 to 1939: A Statistical History
Gary Richardson, Michael Gou
March 2011
Dun’s Review began publishing monthly data on bankruptcies by branch of business during the 1890s. This essay reconstructs that series, links it to its successors, and discusses how it can be used for economic analysis.
The Consequences of Financial Innovation: A Counterfactual Research Agenda
Josh Lerner, Peter Tufano
February 2011
Financial innovation has been both praised as the engine of growth of society and castigated for being the source of the weakness of the economy. In this paper, we review the literature on financial innovation and highlight the similarities and differences between financial innovation and other forms of innovation. We also propose a research agenda to systematically address the social welfare implications of financial innovation. To complement existing empirical and theoretical methods, we propose that scholars examine case studies of systemic (widely adopted) innovations, explicitly considering counterfactual histories had the innovations never been invented or adopted.
Creative Destruction in Popular Culture
| Peter Klein |
Thanks to Thomas B. for forwarding links to US Sen. Rand Paul’s Monday-night appearance on the Daily Show (part 1, part 2, part 3). At the start of part 3, while discussing government bailouts, Paul uses the words “creative destruction,” and Jon Stewart bursts out laughing, apparently hearing the term for the first time. I guess Schumpeter is not as culturally relevant as I thought!
The show had some interesting moments, but I found the discussions (in the parts I watched) pretty shallow. Stewart was grilling Paul on his “free-market” views, focusing on health, safety, and environmental regulation. Both Paul and Stewart took the milquetoast position that sure, some of this type of regulation is needed, but it shouldn’t be “too much.” They didn’t get into a serious discussion of theory or evidence, however, or explore specific trade-offs. There are huge political economy and public-choice literatures on the FDA, EPA, OSHA, etc., showing that these organizations are easily captured, tend to retard innovation, fail to weigh marginal benefits and costs, and so on. The Journal of Law and Economics under Coase’s leadership made its bones on these kinds of studies in the 1970s. The FDA has been a particular target. The Stewart view also ignores comparative institutional analysis — e.g., the role of private ordering (third-party certification, reputation, etc. ) in the protection of health and safety.
At least Paul didn’t say he intended to become the best Senator, horseman, and lover in all Washington!
Chairman Mao and Comparative Institutional Analysis
| Peter Klein |
Coase? Williamson? No, Mao Tse-Tung:
Concrete analysis of concrete conditions, Lenin said, is “the most essential thing in Marxism, the living soul of Marxism.” Lacking an analytical approach, many of our comrades do not want to go deeply into complex matters, to analyse and study them over and over again, but like to draw simple conclusions which are either absolutely affirmative or absolutely negative. The fact that our newspapers are lacking in analytical articles and that the habit of analysis is not yet fully cultivated in the Party shows that there are such shortcomings. From now on we should remedy this state of affairs.
(Thanks to Pablo for the tip.)
"I say to you, Comrades. . . . No more blackboard economics!"
São Paulo Workshop on Institutional Analysis
| Peter Klein |
The next Coase Institute workshop for young scholars is 15-21 May 2011 in São Paulo. The application deadline is 15 February, so don’t delay!
John Nye on the New Institutional Economics and Economic Development
| Peter Klein |
The always-thoughtful and interesting John Nye, speaking last December on the New Institutional Economics and economic development.
BTW, for your convenience, a copy of the hard-to-find 1989 Nabli and Nugent paper, “The New Institutional Economics and Its Applicability to Development,” is available here.
Transaction Cost Regulation
| Peter Klein |
At last year’s ISNIE conference in Stirling Pablo Spiller gave an excellent presidential address on “Transaction Cost Regulation,” the application of transaction cost economics to regulatory issues. The text of the address has now been released as an NBER Working Paper with the same name:
This paper discusses the fundamental underpinnings and some implications of transaction cost regulation (TCR), a framework to analyze the interaction between governments and investors fundamentally, but not exclusively, in utility industries. TCR sees regulation as the governance structure of these interactions, and thus, as in standard transaction cost economics, it places emphasis in understanding the nature of the hazards inherent to these interactions. The emphasis on transactional hazards requires a microanalytical perspective, where performance assessment is undertaken within the realm of possible institutional alternative. In that sense, politics becomes fundamental to understanding regulation as the governance of public / private interactions. The paper discusses two fundamental hazards and their organizational implications: governmental and third party opportunism. Both interact to make regulatory processes and outcomes more rigid, formalistic, and prone to conflict than envisioned by relational contracting.
You can see the slides from the ISNIE version here.
What an Arrow-Debreu Contract Might Look Like
| Peter Klein |
A visual reminder why real-world contracts are typically incomplete, giving rise to interesting problems of ex ante incentive alignment and ex post governance.
ISNIE Annual Conference, Stanford University, June 16–18
| Scott Masten |
The 15th Annual Conference of the International Society for New Institutional Economics will be held this year at Stanford University on June 16-18. The conference is being organized by President-Elect Barry Weingast, and my inside, not-yet-public information is that the conference will have two very interesting keynotes. The ISNIE website has the just-released Call for Papers.
Remediableness Quote* of the Day
| Scott Masten |
In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
– G.K. Chesterton, The Thing (1929)
*Shouldn’t it be quotation of the day?
New Coase Interview
| Peter Klein |
In conjunction with Ronald Coase’s new book on China, he’s given a new interview to his co-author Ning Wang. (HT: Paul Walker via Mike Giberson.) Excerpt:
WN: You mentioned many times that you do not like the term, “Coasean economics,” and prefer to call it simply the “right economics” or “good economics.” What separates the good from bad, the right from wrong?
RC: The bad or wrong economics is what I called the “blackboard economics.” It does not study the real world economy. Instead, its efforts are on an imaginary world that exists only in the mind of economists, for example, the zero-transaction cost world.
Ideas and imaginations are terribly important in economic research or any pursuit of science. But the subject of study has to be real.
I’m sympathetic to this, but with some methodological reservations, expressed at the end of this post. Anyway, the interview focuses on China, its future economic prospects and likely influence, and the newly formed Coase China Society. Coase is bullish on China: “In the past, economics was once mainly a British subject. Now it is a subject dominated by the Americans. It will be a Chinese subject if the Chinese economists adopt the right attitude.” (more…)
The Future of Managerial Economics
| Peter Klein |
The December 2010 issue of Managerial and Decision Economics features an editorial by Paul Rubin and Tony Dnes on the state of the field, “Managerial Economics: A Forward Looking Assessment.” As they note, the “traditional approach” — basically applied neoclassical microeconomics, production theory in particular — has been augmented by new developments,
particularly in areas such as globalization, the economics of organization, information economics, strategic behavior, the learning organization, risk management, business ethics, and behavioral economics. All of these topics are hot in modern managerial economics and are slowly feeding through into MBA and similar courses.
The modern trends are often referred to as “the new managerial economics.” Some modern texts even use the term explicitly (Boyes, 2008) and focus on questions of “organizational architecture” including areas such as incentive structures in personnel economics. There are increasing numbers of specialist works emerging in these areas, which are coming to feature in influential handbooks (Lazear, 2009). Personnel economics, for example, applies economics to human resources topics, including information interactions, problems of team coordination, morale, and seniority systems. . . . In managerial terms, this field is a natural development of the economics of organization and of labor economics, and we hope to see much future research coming through. (more…)
Google Tries Selective Intervention?
| Peter Klein |
Can a large firm do everything a collection of small firms can do, and more? If not, how do we understand the limits to organization? Arrow focused on the information structure inside firms. I favor Mises’s economic calculation argument. Williamson’s preferred explanation for the limits to the firm is the impossibility of selective intervention — the idea that higher-level managers cannot credibly commit to leave lower-level managers alone, except when such selective intervention would generate joint gains. Williamson’s argument is not, however, universally embraced (or even understood the same way — see the comments to Nicolai’s post).
Google apparently sees things Williamson’s way and has formulated an explicit policy on “autonomous units” designed to address the problem. Such units ”have the freedom to run like independent startups with almost no approvals needed from HQ, ” reports TechCrunch. “For these divisions, Google is essentially a holding company that provides back end services like legal, providing office space and organizing travel, but everything else is up to the pseudo-startup.” Can it work? Insiders are doubtful. The TechCrunch reporter even frames Williamson’s thesis in this folksy way:
There’s a lie that companies and entrepreneurs tell themselves in order to commit to an acquisition.
Oh, we’re not going to change anything! We’re just going to give you more resources to do what you’ve been doing even better!
Yeah! They bought us for a reason, why would they ruin things?
It usually works for a little while, but big company bureaucracy– whether it’s HR, politics or just endless meetings– almost always creeps in. It’s a law of nature: Big companies just need certain processes to run and entrepreneurs hate those processes because they stifle nimble innovation.
The Economist on Coase at 100
| Peter Klein |
The new Economist celebrates Ronald Coase’s 100th birthday (this coming Wednesday) with a short piece on “The Nature of the Firm” (1937), the founding document of modern organizational economics (16,379 Google Scholar cites). (Thanks to Avi for the pointer.) It’s nice to see the theory of the firm get its props, and the first few paragraphs do a good job summarizing the paper. But the (anonymous) author has misread the modern literature, first in setting up an artificial conflict between Coase’s transaction-cost approach and the resource-based approach to the firm and, second, by missing the depth and nuance of Coase’s own research program.
On the first point: Much recent work tries to reconcile transaction cost economics (TCE) and the resource-based view (RBV) (e.g., Silverman, 1999; Foss and Langlois, 1999; Tsang, 2000; Madhok, 2002; Foss and Foss, 2005), pointing out that the two theories are, in important ways, complementary. Put simply: TCE and RBV start with different explananda. The RBV asks which resources will be combined in which ways to produce which outputs, while TCE asks how this activity will be organized (market, hierarchy, or hybrid). RBV offers a theory of competitive advantage, while TCE focuses on boundaries and governance. Second, the Economist writer confuses Coase with the (Coase-inspired) transaction cost approach of Williamson (1971, 1975, 1979) and Klein, Crawford, and Alchian (1978): (more…)
Love, Marriage, and Money
| Peter Klein |
Most interesting passage I read today:
Contrary to prevailing interpretations that attribute the [historical] rise in voluntary, romantic unions to an increased sexual division of labor and the domestication of family life, Howell argues that true companionship between husband and wife was necessary to weather the challenges of commercial life. In her words, “love was by no means the antithesis of the market. It was the market’s helpmate” (p. 141).
It’s from Francesca Trivellato’s review of Martha C. Howell, Commerce before Capitalism in Europe, 1300-1600 (Cambridge, 2010). As Howell notes, “the commercialization of society was not just an economic history as we understand the term but a social, legal, and cultural story, and it is incomprehensible if told from the perspective of one of these modern conceptual categories alone.”
Ronald Coase’s New Book
| Peter Klein |
Yes, you read that correctly. Ronald Coase, who turns 100 later this month, has a new book coming out from Palgrave Macmillan and the Institute of Economic Affairs, How China Became Capitalist. It’s coauthored with Ning Wang, Coase’s former research assistant at Chicago and now an assistant professor at Arizona State, and scheduled for publication in June 2011.
Examining the astonishing events that led to China’s transformation from a close socialist economy to an invincible manufacturing powerhouse of the global economy, How China Became Capitalist argues that the impact of events that led China to become capitalist could not have been predicted. From the death of Mao to China’s market reform and move to capitalism under the auspices of the Chinese Communist Party, How China Became Capitalist controversially argues that China’s growth potential will be inhibited in future without a vibrant market in ideas.
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