Posts filed under ‘Papers’

The Theory of Mind in Agency Theory

| Nicolai Foss |

Agency theory is a highly important foundational theory in management research. It has been of great assistance with respect to conceptualizing and framing key problems in the design and management of reward systems, and it yields sharp and clear predictions. However, it does not provide a realistic treatment of a key psychological aspects of interpersonal relations. Specifically, agency theory does not adequately account for the principal’s ability to develop, hold and adjust a “theory of the agent’s mind”. The theory in fact contains a very lopsided account of the principal’s ability to read the agent’s desires, intentions, knowledge, and beliefs. Thus, in many models in agency theory, the principal’s knowledge of much of what is “inside the head” of the agent (e.g., the agent’s taste for risk, opportunity costs, and disutility of work) is assumed to be perfect, while he is assumed to be entirely ignorant of other aspects of what the agent intends, knows and believes. Such “asymmetrical” assumptions  allow for analytical tractability and clean predictions regarding how incentives and monitoring influences the behavior of agents, such as employees, managers, and suppliers. However, extreme and asymmetrical assumptions can also lead more applied research astray and lead to misapplications of theory in managerial practice. Thus, the assumption that a principal is capable of perfectly grasping, for example, an agent’s motivations seems highly, and increasingly, tenuous: High personnel turnover and the increasing use of fleeting project organization in many industries, as well as the increasing prevalence of cross-national and cross-cultural management teams and networks, make an assumption of a perfect ToM unrealistic.

In a new paper, “Putting a Realistic Theory of Mind Into Agency Theory: Implications for Reward Design and Management in Principal Agent Relations,” my CBS colleague Diego Stea and I take some initial and  highly exploratory steps towards working with a more realistic theory of mind in the context of agency relationships within firms (in an as yet unpublished modelling paper, we work these ideas into an adverse selection model). We argue that novel insights into the design and management of rewards follow from explicitly incorporating a realistic theory of mind into agency theory. Thus, a principal with a good theory of mind can better learn the type of the agent, read the signals related to the agent’s effort, signal to the agent, and adjust rewards to the agent.  A ToM creates value because it results in lower-variance estimates of the agent’s effort and type, and eases the matching of agents with contracts.

20 February 2014 at 1:54 pm 1 comment

Kirzner and Entrepreneurship Research

| Peter Klein |

downloadPer Bylund and I have written a paper on Israel Kirzner’s influence on the entrepreneurship literature. It’s titled “The Place of Austrian Economics in Contemporary Entrepreneurship Research” but deals mainly with Kirzner. Comments are appreciated.

The paper was written for a forthcoming special issue of the Review of Austrian Economics on Kirzner’s contributions. We take a nuanced position: While Kirzner’s work underlies the dominant opportunity-discovery perspective in the entrepreneurship research literature, this perspective is increasingly challenged among entrepreneurship scholars, for some of the same reasons that Kirzner’s theoretical framework has been criticized by his fellow Austrian economists. Nonetheless, it is impossible to make progress in entrepreneurship studies, or the Austrian analysis of the market, without engaging Kirzner’s ideas.

9 December 2013 at 9:33 am 1 comment

Blind Review Blindly Reviewing itself

| Lasse Lien |

From Scott Masten we received this classic gem:

A growing interest in and concern about the adequacy and fairness of modern peer-review practices in publication and funding are apparent across a wide range of scientific disciplines. Although questions about reliability, accountability, reviewer bias, and competence have been raised, there has been very little direct research on these variables.

The present investigation was an attempt to study the peer-review process directly, in the natural setting of actual journal referee evaluations of submitted manuscripts. As test materials we selected 12 already published research articles by investigators from prestigious and highly productive American psychology departments, one article from each of 12 highly regarded and widely read American psychology journals with high rejection rates (80%) and nonblind refereeing practices.

With fictitious names and institutions substituted for the original ones (e.g., Tri-Valley Center for Human Potential), the altered manuscripts were formally resubmitted to the journals that had originally refereed and published them 18 to 32 months earlier. Of the sample of 38 editors and reviewers, only three (8%) detected the resubmissions. This result allowed nine of the 12 articles to continue through the review process to receive an actual evaluation: eight of the nine were rejected. Sixteen of the 18 referees (89%) recommended against publication and the editors concurred. The grounds for rejection were in many cases described as “serious methodological flaws.” A number of possible interpretations of these data are reviewed and evaluated.

(Peters and Ceci, 1982)

Are these findings specific to the 80s and psychology? Care to replicate?

30 May 2013 at 11:32 am 3 comments

Rational Inattention

| Dick Langlois |

The idea of attention as a scarce resource goes back at least to Herbert Simon and Nelson and Winter. I hadn’t seen much application of this idea in a while until I ran across this interesting paper called “Rational Inattention and Organizational Focus” by Wouter Dessein, Andrea Galeotti, and Tano Santos. Here’s the abstract:

We examine the allocation of scarce attention in team production. Each team member is in charge of a specialized task, which must be adapted to a privately observed shock and coordinated with other tasks. Coordination requires that agents pay attention to each other, but attention is in limited supply. We show how organizational focus and leadership naturally arise as the result of a fundamental complementarity between the attention devoted to an agent and the amount of initiative taken by that agent. At the optimum, all attention is evenly allocated to a select number of “leaders”. The organization then excels in a small number of focal tasks at the expense of all others. Our results shed light on the importance of leadership, strategy and “core competences” in team production, as well as new trends in organization design. We also derive implications for the optimal size or “scope” of organizations: a more variable environment results in smaller organizations with more leaders. Surprisingly, improvements in communication technology may also result in smaller but more balanced and adaptive organizations.

Apparently, Dessein has been working on attention models for some time, though I hadn’t noticed. (But, of course, Peter had.) I should also note that this model is similar in spirit to the work of Sharon Gifford, now 20 years old, which Dessein et al. do not cite.

22 March 2013 at 2:49 pm Leave a comment

A Paper You Might Want to Read

| Lasse Lien |

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

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

2 December 2012 at 6:51 pm Leave a comment

Permeable Boundaries

| Dick Langlois |

The new table-of-contents alert from Industrial and Corporate Change carries an interesting new paper by Carliss Baldwin and her coauthors called “The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors.” Here’s the abstract:

Many products are manufactured in networks of firms linked by transactions, but comparatively little is known about how or why such transaction networks differ. This article investigates the transaction networks of two large sectors in Japan at a single point in time. In characterizing these networks, our primary measure is “hierarchy,” defined as the degree to which transactions flow in one direction, from “upstream” to “downstream.” Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector because of the presence of numerous inter-firm transaction cycles. These cycles, in turn, reveal that a significant group of firms have two-way “vertically permeable boundaries”: (i) they participate in multiple stages of an industry’s value chain, hence are vertically integrated, but also (ii) they allow both downstream units to purchase intermediate inputs from and upstream units to sell intermediate goods to other sector firms. We demonstrate that the 10 largest electronics firms had two-way vertically permeable boundaries while almost no firms in the automotive sector had adopted that practice.

As I was downloading the article from the ICC website, a link to the Best Twenty ICC Articles from First Twenty Years of Publication (1992-2011) caught my eye. Definitely some interesting and important articles on this list, which was chosen by the editors. But I was struck that there is no overlap at all between this list and the list of 20 most cited articles in ICC. On a quick and sloppy count, there is an overlap of only 3 with the top 50 most cited. (Similar story for most read, where there is one overlap with the top 20.) Given my interest in this odd fact, perhaps you can guess on which lists my own articles lie.

30 November 2012 at 9:59 am 6 comments

Conference in Honor of Oliver Williamson

| Peter Klein |

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

3 September 2012 at 4:05 pm Leave a comment

Why Do Firms Differ?

| Peter Klein |

This year marks the thirtieth anniversary of two major contributions to strategy and organization, Nelson and Winter’s Evolutionary Theory of Economic Change and Lippman and Rumelt’s “Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition.” Both tried to explain inter-firm performance differences without reference to market power or random shocks. Interestingly, as Ruff Coff points out, both were aimed at economists, but had little impact there, instead becoming foundational contributions to the emerging strategy field. Here’s a concise summary of Lippman and Rumelt from Peter Zemsky:

Lippman and Rumelt (1982), in the first formal theoretical paper inspired by the distinctive concerns of the strategy literature, demonstrate how superior performance can arise without assumptions of imperfect competition and market power, which are the defining features of the IO approach. In their model there are a large number of potential entrants that can pay a fixed cost to enter an industry. The key assumption is that there is imperfect imitability so that each entrant’s cost function is determined by an independent draw from a known distribution. In equilibrium, firms with bad draws exit and the remaining firms on average must have abnormal returns even when in the case where the firms are all small and have no market power. Ex ante however expected profits from entry are zero. The paper remains an outstanding example of high quality theorizing in strategy. Barney (1986) in his paper on strategic factor markets applies the same reasoning in his verbal argument that from an economics perspective superior performance must be the result of luck.

L&$ also explain the background and context of their article in a new video.

Kirzner’s theory of entrepreneurship is another example of a contribution intended to change the conversation in economics — by shifting attention from equilibrium states to adjustment processes — that seems to have little impact upon its intended audience, while becoming hugely influential in a different field (entrepreneurship).

17 May 2012 at 2:52 pm 2 comments

No Best Practice for Best Practice

| Lasse Lien |

An important selling point for the consulting industry is that consultants can presumably help a firm identify and implement “best practice.” Surely the consulting industry is an important channel for disseminating knowledge of better ways of doing things, but identifying what constitutes best practice for a given firm in a given situation is no trivial task, and even if the best practice could be identified, transferring it will be a significant challenge.

This begs the question of whether there is a best practice for identification and transfer of best practices, and whether the consulting industry has identified and adopted such a practice. According to this paper Benjamin Wellstein and Alfred Kieser, the consulting industry in Germany is nowhere near a best practice for best practice. This goes for for both inter- and intra-industry transfer. I’ll bet my hat that this finding holds everywhere.

Well, I guess as long as the consulting industry keeps finding better practices for transferring better practices, we shouldn’t be too disappointed that there is no best practice for best practice. (HT: E.S. Knudsen)

20 April 2012 at 4:56 am 4 comments

New Article from Langlois

| Peter Lewin |

Since it hasn’t been mentioned here yet, I would like to take the liberty of recommending a great “how it all fits together” article by Dick Langlois forthcoming in the Review of Austrian Economics, entitled “The Austrian Theory of the Firm: Retrospect and Prospect.” I just reread it with great pleasure (I saw it a few years ago at a seminar). With characteristic Langlois ease (or so it seems) Dick weaves the connections between Coase, Hayek, Lachmann, Richardson, Pensrose, Chandler, Foss, Langlois, and others to provide a very clear picture.

1 March 2012 at 10:55 am 3 comments

Perceptions of Opportunities – Part 2

| Peter Lewin |

The second review article in the latest issue of AMR by Venkataraman, Sarasvathy, Dew, and Forster (VSDF) is more ambitious than the first by Shane, discussed in Part 1. In fact one might describe the ambition motivating the article as grandiose. VSDF “seek to recast entrepreneurship as a science of the artificial” an entirely new way of looking at entrepreneurship in the interest of uncovering (what I take to be universal) principles that can serve as the basis of a new empirical and policy-useful science of entrepreneurship. [I see this article as a companion piece to the article by Sarasvathy and Venkataraman (SV) in ET&P January, 2011, in which this grandiose vision is even more apparent.]

The science of the artificial(supposedly a distinct category of science from natural or social science) is derived from the work of Herbert Simon (1996).

As a theory develops it splits into two streams: (1) “basic” research that continues to refine the causal explanations and (2) “applied” research that seeks to alter the variables of explanation. At that point the phenomenon of interest has become an artifact. …

A science of the artificial is interested in phenomena that can be designed [and controlled]. … Design lies is the choice of the boundary values; control lies in the means to change them. (24).

So a useful theory is itself an artifact something that can be used to understand and (importantly) control aspects of the (social) world. And, I suppose, the new science of entrepreneurship will eventually develop such artifacts. [At the end of the article they talk about “recasting opportunities as artifacts” – so I am not sure how this is all connected.]

My lack of expertise regarding the work of Herbert Simon (something which I am now more encouraged to remedy) prevents me from pronouncing with confidence on this part of the article. Suffice it to say that the meaning and contribution of this new “science of the artificial” is far from clear to me. I am left with a feeling that if it is indeed such an important and path-breaking meta-scientific turn, the authors should be able to explain it better. It should be more accessible and transparent. I am left highly skeptical, but I urge readers of this post to read the article and perhaps enlighten me and others. (more…)

5 February 2012 at 1:32 am 8 comments

Perceptions of Opportunities – Part 1

| Peter Lewin |

The January 2012 issue of the AMR (available here for subscribers or those with academic access) features two review articles assessing the progress of the “Promise” examined in the well-known article by Scott Shane and Sankaran Venkataraman (AMR 2000: The Promise of Entrepreneurship as a Field of Research) — one from each of the original co-authors. The first is an interesting, if somewhat pedestrian, article by Scott Shane. The second is a much more profound and ambitious contribution by Venkataraman together with Saras Sarasvathy, Nicholas Dew, and William Forster.

In the decade since that article there has, indeed, been a significant shift in the focus of research in entrepreneurship. Most notable, perhaps, is the focus on entrepreneurial “opportunities” — familiar to Austrian economists from the work of Israel Kirzner, but by now a standard element in the story. Each of the articles spends considerable time revisiting questions about the nature of entrepreneurial opportunities and provides its own resolutions. Here I will provide just a quick overview of this part of Shane’s article. (I intend to provide one for the second article soon).

In considering the “nexus of opportunities and individuals” offered originally in “Promise” as a reason to shift attention from the person to the function, Shane addresses the question of whether entrepreneurial opportunities should be considered “objective” or “subjective” — a question that has proliferated in this research stream, albeit with varying focus and terminology. The problem is, it seems to me, that the notion of “opportunity” is one that depends on the formation of a mental image by some individual or individuals. Opportunity implies plan — a plan of action to use, transform, combine, existing resources in a profitable way. Without the plan there is just the world. So how can “opportunity” be objective? This is related to the question: are opportunities “discovered” (Alvarez and Barney: Organizaҫões em Contexto, 2007) or are they created; or in the words of Venkataraman, et. al. are they made or found? (more…)

23 January 2012 at 3:38 pm 18 comments

Are We Quacks?

| Lasse Lien |

Rich Bettis makes an important point in a forthcoming issue of SMJ. Bettis points out how two unfortunate practices interact with each other to create a very serious and fundamental problem for knowledge accumulation in (strategic) management.

One is the widespread practice of running numerous regressions on a given dataset and subsequently adapting (or in milder cases “tuning”) hypotheses or theory to fit the data. By itself this practice is quite unfortunate, since data patterns can and will occur by chance, and the more regression models one tries the more likely that one will “find” something. We obviously do not want such random patterns to influence either theory building or our catalog of empirical findings. However, this problem would be a great deal less serious if replication studies were common and we gladly published non-findings. Random correlations in the data would not survive replication tests, and would be eliminated fairly quickly.

As we all know, in management, replication studies cannot get published and are basically just not done. To make matters worse, we don’t publish non-findings either. This is the second unfortunate practice. Taken together these two practices may in the worst case indicate that much of what we think we know in management are just random data patterns, discovered through data mining, and protected by our lack of replication studies and refusal to publish non-findings. This is a sobering thought. As Bettis points out, we should all be very thankful that replication studies are more common in medical research than in management.

What is the solution? Well, a first step might be to launch the Journal of Managerial Replication Studies and give it the prestige it deserves. Either SMS or AOM should see the launch of such a journal as a crucial responsibility. I mean, we really don’t want to be quacks, do we?

HT: Helge Thorbjørnsen

28 November 2011 at 5:23 am 14 comments

Entrepreneurial Paradoxes and Simulations

| Peter Lewin |

Back from the SEA meetings in Washington DC, the venue for our annual SDAE conference and membership meeting. At the annual banquet we honored Leonard Liggio for his contribution to the teaching of Austrian economics. Dick Wagner gave the presidential address. Both received a standing ovation.

The panels were well attended and, from what I could tell, the quality very high. I presented my paper on Entrepreneurial Paradoxes (which has been around for a while). Young Bak Choi commented on it and presented an interesting paper on the role of entrepreneurship in economic development and development policy. David Harper and Anthony Endres presented a paper on another variation on the theme of heterogeneous capital and its structure. Perhaps most interesting was a paper by a strategic management Ph.D candidate at York University, Mohammad Keyhani (co-authored with Moren Lévesque), on “The Role of Entrepreneurship in the Market Process: A Simulation Study of The Equilibrating and Disequilibrating Effects of Opportunity Creation and Discovery.” Randy Holcombe commented. Interesting that the issue of equilibration is considered important enough to investigate with simulations. But it raises some important questions. My own current view, having spent a lifetime contemplating the issue, is that we are no nearer an answer than we ever were, and that perhaps the more important distinction is between entrepreneurial actions that add value and those that do not.

Next year’s meetings will be in New Orleans. The president-elect of the SDAE is Larry White. He will be putting together the panels. So if you have an interest in presenting a paper, discussing one, or chairing a panel, let him know (lwhite11@gmu.edu).

24 November 2011 at 12:15 am 7 comments

In the Journals

| Peter Klein |

Three newly published papers of likely interest to O&Mers:

While cumulative knowledge production is central to growth, little empirical research investigates how institutions shape whether existing knowledge can be exploited to create new knowledge. This paper assesses the impact of a specific institution, a biological resource center, whose objective is to certify and disseminate knowledge. We disentangle the marginal impact of this institution on cumulative research from the impact of selection, in which the most important discoveries are endogenously linked to research-enhancing institutions. Exploiting exogenous shifts of biomaterials across institutional settings and employing a difference-in-differences approach, we find that effective institutions amplify the cumulative impact of individual scientific discoveries.

This paper studies a retail chain that introduced a sales incentive plan that rewarded for exceeding a sales target and subsequently cut the incentive intensity in addition to increasing the target. Utilizing monthly panel data for 54 months for all 53 units of the chain the paper shows that the introduction of the sales incentive plan increased sales and profitability, whereas the changes in the plan lead to a marked drop in sales and profitability. Thus, modifying the incentive plan proved costly for the firm. The results are consistent with the gift-exchange model of labor contracts.

We discuss how the use of field experiments sheds light on long-standing research questions relating to firm behavior. We present insights from two classes of experiments—within and across firms—and draw common lessons from both sets. Field experiments within firms generally aim to shed light on the nature of agency problems. Along these lines, we discuss how field experiments have provided new insights on shirking behavior and the provision of monetary and nonmonetary incentives. Field experiments across firms generally aim to uncover firms’ binding constraints by exogenously varying the availability of key inputs such as labor, physical capital, and managerial capital. We conclude by discussing some of the practical issues researchers face when designing experiments and by highlighting areas for further research.

9 September 2011 at 5:48 pm 2 comments

“Micro Chauvinists” Pushing Back …

| Nicolai Foss |

A reviewer of a recent book proposal by Teppo Felin and me (which was accepted, BTW; details later) had the effrontery to note that “Felin and Foss get considerable pushback when they take a strong stand on methodology.” Of course, this reviewer got it all wrong. To wit:

  • Teppo and I recently published “The endogenous origins of experience, routines and organizational capabilities: The poverty of stimulus” in the Journal of Institutional Economics, accompanied by critical comments by Sidney Winter, Brian Pentland, Geoff Hodgson and Thorbjørn Knudsen. Here is our response to the comments of our critics. The response has been accepted for publication in the Journal of Institutional Economics.
  • In a recent paper in Sociological Theory, influential sociologists  Ronald Jepperson and John W Meyer took issue with the rampant “micro-chauvinism” that, in their opionion, increasingly dominates social science, and called for multi-level explanation that admits a role for causation that (in some unexplained fashion) takes place at levels above that of individuals. In this brief note, Teppo and I (and Peter Abell of LSE) take issue with their arguments, and argue that they fundamentally misunderstand methodological individualism and its crucial role in understanding those phenomena that are “multi-level”, “complex” and “emergent.”

Thus, the macro chauvinists are the ones who are getting the pushback ;-)

7 September 2011 at 7:01 am 8 comments

“A Simple Model of the Evolution of Simple Models of Evolution”

| Lasse Lien |

If you don’t think this title is cool there is something very wrong with you. Here is the associated abstract:

Abstract: In the spirit of the many recent simple models of evolution inspired by statistical physics, we put forward a simple model of the evolution of such models. Like its objects of study, it is (one supposes) in principle testable and capable of making predictions, and gives qualitative insights into a hitherto mysterious process.

And this is the essence of the simple model(2):

  1. A physicist runs across or concocts from whole cloth a mathematical model which is simple, neat, and contains a great many variables of the same sort.
  2. The physicists has heard of Darwin (1859), and may even have read Dawkins (1985) or some essays by Gould, but wouldn’t know Fisher (1958), Haldane (1932), and Wright (1986) from the Three Magi, and doesn’t dream that such a subject as mathematical evolutionary biology exists.
  3. The physicist is aware that lots of other physicists are interested in annexing biology as a province of statistical physics.
  4. The physicist interprets his multitude of variables as species or (if slightly more sophisticated) as genotypes, and proclaims that he has found “Darwin’s Equations” (cf. Bak et al. (1994)), or, more modestly, has made an important step towards eventually finding those equations.
  5. His paper is submitted for review to other physicists, who are just as ignorant of biology as he, but see that it’s about equivalent to the other papers on evolution by physicists. They publish it.
  6. The paper is read by other physicists, because at least it’s not another derivation of specific heats on some convoluted lattice under a Hamiltonian named for some Central European worthy now otherwise totally forgotten. Said physicists think this is cutting-edge evolutionary theory.
  7. Some of those physicists will know or discover simple, neat models with lots of variables of the same type.

(Shalizi and Tozier, 1999, p. 2)

What could substitute for physics and evolution here if we wanted to make a social science analogy? I think game theory could play the role of physics in many cases. What else?

7 September 2011 at 5:08 am 6 comments

Overdue on Boundaries/Crises

| Lasse Lien |

Good papers often seem like they are long overdue. One can’t help but wonder why they weren’t written a long time ago since the questions they raise are of such obvious interest and importance. In that sense I think this paper qualifies as overdue:

Abstract: How economic crises impact the boundaries of firms has been offered virtually no attention in the literature on the theory of the firm. I review the best-known theories of the firm and identify the variables that matter for the explanation of firm boundaries. I then examine how an economic crisis may impact these variables and change efficient firm boundaries. The various theories of the firm have difficulties explaining how firms efficiently adapt their boundaries to such prominent characteristics of economic crisis as declining demand and increased costs of external finance. However, all these theories stress uncertainty as an antecedent of firm organization, and as uncertainty is also an important characteristic of an economic crisis I examine how uncertainty is allowed to play out in the various theories in order to identify what predictions we can derive from the theory regarding changes in efficient firm boundaries as consequence of changes in uncertainty. The analysis suggests that we need to be more precise in describing the nature of the uncertainty that is assumed in the various theories. Moreover, allowing for changes in levels of uncertainty requires that we take the processes of boundary changes into account in the theory of firm boundaries.

Foss, Kirsten. 2010. How do economic crises impact firm boundaries? European Management Review7: 217–27.

6 September 2011 at 12:44 am 4 comments

More on Selective Intervention

| Nicolai Foss |

“Selective intervention” and the more narrow notion of the “impossibility of selective intervention” are among the more elusive notions in the theory of the firm. We have blogged on them a number of times (the most explicit treatment is here). Coined by Oliver Williamson, selective intervention simply means intervention to produce net gains. Thus defined, selective intervention is, of course, not “impossible.” The” impossibility” refers to the conjecture that firms cannot just be grown continuously by selective intervention; at some point various commitment and enforcement problems associated with managerial intervention kicks in, resulting in zero net gains. However, demonstrating this is a “puzzle.”

A new paper, “Solving the Selective Intervention ‘Puzzle’,”  by noted French economist, Jacques Cremer, usefully places the problem in context, provides a nice overview of the extant literature, and argues that the problem has essentially been solved:

I have shown that the common thread to all the solutions is the fact that the principal stays in the game” after the contract is signed, and cannot commit himself to a policy which would make the world similar to the world in which there would be no vertical integration. On this basis, solutions that stress incompleteness of contracts, the change in the allocation of authority, the change in the amount of information available to the principal, all provide solutions that are theoretically consistent, and, furthermore, often not incompatible with each other. Determining which solution provides a better guide to applied analysis requires an examination of other features of the model.

26 August 2011 at 7:13 am Leave a comment

Academic Nepotism in Italy

| Lasse Lien |

In case you wonder the author of this paper — Stefano Allesina — works in Chicago:

Abstract: Nepotistic practices are detrimental for academia. Here I show how disciplines with a high likelihood of nepotism can be detected using standard statistical techniques based on shared last names among professors. As an example, I analyze the set of all 61,340 Italian academics. I find that nepotism is prominent in Italy, with particular disciplinary sectors being detected as especially problematic. Out of 28 disciplines, 9 – accounting for more than half of Italian professors – display a significant paucity of last names. Moreover, in most disciplines a clear north-south trend emerges, with likelihood of nepotism increasing with latitude. Even accounting for the geographic clustering of last names, I find that for many disciplines the probability of name-sharing is boosted when professors work in the same institution or sub-discipline. Using these techniques policy makers can target cuts and funding in order to promote fair practices.

Allesina, S. (2011). “Measuring Nepotism through Shared Last Names: The Case of Italian Academia.” PLoS ONE 6(8): e21160. doi:10.1371/journal.pone.0021160

9 August 2011 at 9:46 am 1 comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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