Posts filed under ‘Recommended Reading’

Notes on Inequality

| Peter Klein |

Everyone’s talking about inequality. I confess don’t find inequality terribly interesting, intrinsically. Of course, inequality that results from special government privilege — the incomes of top executives at Lockheed Martin or Goldman Sachs, the speaking fees earned by Hillary Clinton, the wealth of US sugar farmers — should be analyzed and criticized, and those privileges removed. Firm policies that result in pay differentials — pay-for-performance schemes, for example — are important and interesting, not because they generate inequality per se, but because they have systematic and significant effects on firm behavior and performance. Of course, inequality may have important long-run social and cultural effects, but these are highly speculative and not obviously actionable.

I haven’t yet read Thomas Piketty’s new book but am aware of — and amazed by — the buzz it’s generating. I suspect most of the excitement reflects confirmation bias: people who think inequality is the major issue of our time naturally think this is the most important economics book of the decade, probably before reading it. (Naturally, I’d love to exploit that formula in marketing my own books.)

I do have a few thoughts on how the discussion is framed, in light of Piketty’s work. First, Piketty and his admirers define “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.” (more…)

23 April 2014 at 10:32 am 5 comments

Firm Boundaries Matter

| Peter Klein |

Do firm boundaries — defined as ownership of the relevant capital goods — affect firm behavior and performance? Or is the firm best understood as a nexus of contracts, in which ownership boundaries represent arbitrary legal distinctions? Coase, Williamson, Hart, and Foss and Klein take the former position, while Alchian (sometimes), Demsetz, Jensen, and Meckling lean toward the latter.

A very interesting paper from Amit Seru, “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity,” offers some empirical evidence on the effects of boundary choices on innovation, finding significant and important effects.

This paper examines the impact of the conglomerate form on the scale and novelty of corporate R&D activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-difference estimation reveals that, relative to failed targets, firms acquired in a diversifying mergers produce both a smaller number of innovations and also less novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint-ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggests that conglomerate organizational form affects the allocation and productivity of resources.

Here is a longer, less technical write-up on the Corporate Governance and Financial Regulation blog.

2 April 2014 at 10:35 am 1 comment

In the Journals

| Peter Klein |

Some interesting review issues and special collections are hot off the virtual presses. The Journal of Management has just released its annual review issue with a number of valuable papers, including this one of particular interest to the O&M crowd:

The Many Futures of Contracts: Moving Beyond Structure and Safeguarding to Coordination and Adaptation
Donald J. Schepker, Won-Yong Oh, Aleksey Martynov, and Laura Poppo

In this article, we review the literature on interfirm contracting in an effort to synthesize existing research and direct future scholarship. While transaction cost economics (TCE) is the most prominent perspective informing the “optimal governance” and “safeguarding” function of contracts, our review indicates other perspectives are necessary to understand how contracts are structured: relational capabilities (i.e., building cooperation, creating trust), firm capabilities, relational contracts, and the real option value of a contract. Our review also indicates that contract research is moving away from a narrow focus on contract structure and its safeguarding function toward a broader focus that also highlights adaptation and coordination. We end by noting the following research gaps: consequences of contracting, specifically outcome assessment; strategic options, decision rights, and the evolution of dynamic capabilities; contextual constraints of relational capabilities; contextual constraints of contracting capabilities; complements, substitutes, and bundles; and contract structure and social process.

The always-interesting Strategic Organization has also released a package of previously published papers as a virtual special issue titled “Whither Strategy?” I have a soft spot for anything using the word “whither,” but this is a great collection by any name. Check out the ToC:

17 January 2014 at 12:02 pm 3 comments

Top Posts of 2013

| Peter Klein |

It’s been another fine year at O&M. 2013 witnessed 129 new posts, 197,531 page views, and 114,921 unique visitors. Here are the most popular posts published in 2013. Read them again for entertainment and enlightenment!

  1. Rise of the Three-Essays Dissertation
  2. Ronald Coase (1910-2013)
  3. Sequestration and the Death of Mainstream Journalism
  4. Post AoM: Are Management Types Too Spoiled?
  5. Nobel Miscellany
  6. The Myth of the Flattening Hierarchy
  7. Climate Science and the Scientific Method
  8. Bulletin: Brian Arthur Has Just Invented Austrian Economics
  9. Solution to the Economic Crisis? More Keynes and Marx
  10. Armen Alchian (1914-2013)
  11. My Response to Shane (2012)
  12. Your Favorite Books, in One Sentence
  13. Does Boeing Have an Outsourcing Problem?
  14. Doug Allen on Alchian
  15. New Paper on Austrian Capital Theory
  16. Hard and Soft Obscurantism
  17. Mokyr on Cultural Entrepreneurship
  18. Microfoundations Conference in Copenhagen, June 13-15, 2014
  19. On Academic Writing
  20. Steven Klepper
  21. Entrepreneurship and Knowledge
  22. Easy Money and Asset Bubbles
  23. Blind Review Blindly Reviewing Itself
  24. Reflections on the Explanation of Heterogeneous Firm Capability
  25. Do Markets “React” to Economic News?

Thanks to all of you for your patronage, commentary, and support!

31 December 2013 at 7:55 am 1 comment

Business Groups in the US

| Peter Klein |

Diversification continues to be a central issue for strategic management, industrial organization, and corporate finance. There are huge research and practitioner literatures on why firms diversify, how diversification affects financial, operating, and innovative performance, what underlies inter-industry relatedness, how diversification ties into other aspects of firm strategy and organization, whether diversification is driven by regulation or other policy choices, and so on. There are many surveys of these literatures (Lasse and I contributed this one).

Some of the most interesting research deals with the institutional environment. For example, many US corporations were widely diversified in the 1960s and 1970s when the brokerage industry was small and protected by tough legal restrictions on entry, antitrust policy frowned on vertical and horizontal growth (maybe), and a volatile macroeconomic environment encouraged internalization of inter-firm transactions (also maybe). After the brokerage industry was deregulated in 1975, the antitrust environment became more relaxed, and the market for corporate control heated up, many conglomerates were restructured into more efficient, specialized firms. To quote myself:

The investment community in the 1960s has been described as a small, close-knit group wherein competition was minimal and peer influence strong (Bernstein, 1992). As Bhide (1990, p. 76) puts it, “internal capital markets … may well have possessed a significant edge because the external markets were not highly developed. In those days, one’s success on Wall Street reportedly depended far more on personal connections than analytical prowess.” When capital markets became more competitive in the 1970s, the relative importance of internal capital markets fell. “This competitive process has resulted in a significant increase in the ability of our external capital markets to monitor corporate performance and allocate resources” (Bhide, 1990, p. 77). As the cost of external finance has fallen, firms have tended to rely less on internal finance, and thus the value added from internal-capital-market allocation has fallen. . . .

Similarly, corporate refocusing can be explained as a consequence of the rise of takeover by tender offer rather than proxy contest, the emergence of new financial techniques and instruments like leveraged buyouts and high-yield bonds, and the appearance of takeover and breakup specialists like Kohlberg Kravis Roberts, which themselves performed many functions of the conglomerate headquarters (Williamson, 1992). A related literature looks at the relative importance of internal capital markets in developing economies, where external capital markets are limited (Khanna and Palepu 1999, 2000).

The key reference is to Amar Bhide’s 1990 article “Reversing Corporate Diversification,” which deserves to be better known. But note also the pointer to Khanna and Palepu’s important work on diversified business groups in emerging markets, which has also led to a vibrant empirical literature. The idea there is that weak institutions lead to poorly performing capital and labor markets, leading firms to internalize functions that would otherwise be performed between firms. More generally, firm strategy and organization varies systematically with the institutional environment, both over time and across countries and regions.

Surprisingly, diversified business groups were also common in the US, in the early 20th century, which brings me (finally) to the point of this post. A new NBER paper by Eugene Kandel, Konstantin Kosenko, Randall Morck, and Yishay Yafeh studies these groups and reaches some interesting and provocative conclusions. Check it out:

Business Groups in the United States: A Revised History of Corporate Ownership, Pyramids and Regulation, 1930-1950

Eugene Kandel, Konstantin Kosenko, Randall Morck, Yishay Yafeh
NBER Working Paper No. 19691, December 2013

The extent to which business groups ever existed in the United States and, if they did exist, the reasons for their disappearance are poorly understood. In this paper we use hitherto unexplored historical sources to construct a comprehensive data set to address this issue. We find that (1) business groups, often organized as pyramids, existed at least as early as the turn of the twentieth century and became a common corporate form in the 1930s and 1940s, mostly in public utilities (e.g., electricity, gas and transportation) but also in manufacturing; (2) In contrast with modern business groups in emerging markets that are typically diversified and tightly controlled, many US groups were focused in a single sector and controlled by apex firms with dispersed ownership; (3) The disappearance of US business groups was largely complete only in 1950, about 15 years after the major anti-group policy measures of the mid-1930s; (4) Chronologically, the demise of business groups preceded the emergence of conglomerates in the United States by about two decades and the sharp increase in stock market valuation by about a decade, so that a causal link between these events is hard to establish, although there may well be a connection between them. We conclude that the prevalence of business groups is not inconsistent with high levels of investor protection; that US corporate ownership as we know it today evolved gradually over several decades; and that policy makers should not expect policies that restrict business groups to have an immediate effect on corporate ownership.

12 December 2013 at 11:40 am Leave a comment

Entrepreneurship, Financial Capital, and Social Capital

| Peter Klein |

Two interesting new papers on entrepreneurship. The first deals with financial capital — specifically, the degree to which entrepreneurship (defined as self-employment) is constrained by credit availability. As regular readers know, I’ve been crusading against the idea that entrepreneurship consists of recognizing opportunities, in favor of the alternative idea that entrepreneurship involves putting assets at risk. The latter view directs our attention to how entrepreneurial activities are funded; rather than assuming that all positive-NPV opportunities are exploited, we should focus on the investor’s decision to allocate risk capital to one or another potential project. Put simply, “entrepreneurship is exercised not only by founders, but by funders.”

Funders care about collateral, which suggests that self-employment is constrained by the availability of durable personal assets like housing. In a new NBER working paper, “Housing Collateral and Entrepreneurship,” Martin Schmalz, David Sraer, and David Thesmar find a strong correlation between self-employment and house prices. “Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run.”

My Missouri colleague Colleen Heflin, along with Seok-Woo Kwon and Martin Ruef, have a new paper in the American Sociological Review on social capital and self-employment. Many papers have examined how an individual’s “social capital” — defined as networks of social and professional relationships — affects various economic outcomes, including the propensity to start a firm. Colleen and her colleagues focus at the community level and find that “individuals in communities with high levels of social trust are more likely to be self-employed compared to individuals in communities with lower levels of social trust. Additionally, membership in organizations connected to the larger community is associated with higher levels of self-employment, but membership in isolated organizations that lack connections to the larger community is associated with lower levels of self-employment.”

Of course, self-employment is only a crude proxy for entrepreneurship in the functional sense, but it is a widely used proxy in the empirical literature. I suppose entrepreneurship researchers, like other social scientists, resemble the drunk looking for his car keys under the lamppost. Who am I to complain?

5 December 2013 at 9:55 am 1 comment

Your Favorite Books, in One Sentence

| Peter Klein |

Craig Newmark pointed me to this list of “15 Famous Business Books Summarized In One Sentence Each.” I don’t think highly of any of the books on the list except Innovator’s Dilemma, but it’s an interesting exercise. Care to try your hand? I’ll start:

Oliver Williamson, Economic Institutions of Capitalism: Be shrewd in your dealings with suppliers and customers; they may not do what they promised.

Edith Penrose, Theory of the Growth of the Firm: The more you do what you’re good at, the better you get at similar things that may surprise you.

Ludwig von Mises, Bureaucracy: Fixed rules are better than employee discretion when you’re producing stuff that isn’t bought and sold on markets.

Michael Porter, Competitive Strategy: Be efficient and productive, but pay attention to your rivals and partners, or they’ll eat you for lunch.

John Maynard Keynes, The General Theory: Chicken chicken chicken, chicken chicken chicken chicken chicken.

2 December 2013 at 11:51 am 12 comments

Easy Money and Asset Bubbles

| Peter Klein |

Central to the “Austrian” understanding of business cycles is the idea that monetary expansion — in Wicksellian terms, money printing that pushes interest rates below their “natural” levels — leads to overinvestment in long-term, capital-intensive projects and long-lived, durable assets (and underinvestment in other types of projects, hence the more general term “malinvestment”). As one example, Austrians interpret asset price bubbles — such as the US housing price bubble of the 1990s and 2000s, the tech bubble of the 1990s, the farmland bubble that may now be going on — as the result, at least partly, of loose monetary policy coming from the central bank. In contrast, some financial economists, such as Laureate Fama, deny that bubbles exist (or can even be defined), while others, such as Laureate Shiller, see bubbles as endemic but unrelated to government policy, resulting simply from irrationality on the part of market participants.

Michael Bordo and John Landon-Lane have released two new working papers on monetary policy and asset price bubbles, “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence,” and “What Explains House Price Booms?: History and Empirical Evidence.” (Both are gated by NBER, unfortunately, but there may be ungated copies floating around.) These are technical, time-series econometrics papers, but in both cases, the conclusions are straightforward: easy money is a main cause of asset price bubbles. Other factors are also important, particularly regarding the recent US housing bubble (I suspect that housing regulation shows up in their residual terms), but the link between monetary policy and bubbles is very clear. To be sure, Bordo and Landon-Lane don’t define easy money in exactly the Austrian-Wicksellian way, which references natural rates (the rates that reflect the time preferences of borrowers and savers), but as interest rates below (or money growth rates above) the targets set by policymakers. Still, the general recognition that bubbles are not random, or endogenous to financial markets, but connected to specific government policies designed to stimulate the economy, is a very important result that will hopefully influence current economic policy debates.

28 October 2013 at 9:40 am 1 comment

Davenport’s Theory of Enterprise

| Peter Klein |

Kudos to Richard Ebeling for a nice piece on Herbert J. Davenport, one of the most American economists of the early twentieth century, mostly forgotten today. (One exception: Daveport was the founding Dean of the University of Missouri’s business school, which named its donor society after him.) Davenport, one of Frank Knight’s teachers, was an early adopter of the subjective theory of value introduced by Carl Menger and, along with Philip Wicksteed and Frank Fetter, helped to spread the marginal revolution in the English-speaking world.

Davenport was also a contributor to the economic theory of entrepreneurship, as noted by Ebeling:

Here was the mechanism by which the logical causality between demands and supplies was brought into actual implementation in the complexity of market activities. The entrepreneur stood, Davenport argued, “as the intermediary in the case, representing in his hiring and buying of productive factors, the demand of the purchasing public, and representing in his cost computations, the degree of scarcity of the productive factors relative to the demand for their products.”

On the one hand, it was “the entrepreneurs who furnished the demand for all . . . the things which are called production goods,” he explained. On the other hand, it was “the competition of the entrepreneurs of each industry with the other entrepreneurs of the same industry, and the competition of the entrepreneurs of each industry with those of other industries” that brought about the emergence of factor prices. All the money outlays, the objectified market “costs” that an entrepreneur had to incur, all traced back to the demand for other things as reflected in the bids of competing entrepreneurs. . . .

“The various markets in which he [the entrepreneur] must hire and buy are fluctuating in their prices,” he said. “And the price at which he will finally market his product is uncertain . . . His alternative lines of activities, also, are subject to uncertainties.” All of the entrepreneur’s calculations, therefore, were expectiational.

His computations of “costs of production,” Davenport went on, “appears to be backward-looking computation,” but in reality was “only a basis for a further and forward-looking computation.” The entrepreneur’s glance was turned towards those future – uncertain – opportunities that still lie before him, and from which he would have to choose the one that he believed offered the greatest net advantages.

Ultimately, then, the entrepreneur’s “cost” of production was reducible to his individual judgments,

Ebeling is quoting Davenport’s 1913 book The Economics of Enterprise, which hints at the “judgment-based view” of entrepreneurship elucidated more fully by Knight.

16 October 2013 at 8:30 am 3 comments

NBER Papers of Interest

| Peter Klein |

Three recent NBER papers on compensation, performance, and productivity:

Ann Bartel, Brianna Cardiff-Hicks, Kathryn Shaw
NBER Working Paper No. 19412, September 2013

Due to the limited availability of firm-level compensation data, there is little empirical evidence on the impact of compensation plans on personal productivity. We study an international law firm that moves from high-powered individual incentives towards incentives for “leadership” activities that contribute to the firm’s long run profitability. The effect of this change on the task allocation of the firm’s team leaders is large and robust; team leaders increase their non-billable hours and shift billable hours to team members. Although the motivation for the change in the compensation plan was the multitasking problem, this change also impacted the way tasks were allocated within each team, resulting in greater teamwork.

William Mullins, Antoinette Schoar
NBER Working Paper No. 19395, September 2013

Using a survey of 800 CEOs in 22 emerging economies we show that CEOs’ management styles and philosophy vary with the control rights and involvement of the owning family and founder: CEOs of firms with greater family involvement have more hierarchical management, and feel more accountable to stakeholders such as employees and banks than they do to shareholders. They also see their role as maintaining the status quo rather than bringing about change. In contrast, professional CEOs of non-family firms display a more textbook approach of shareholder-value-maximization. Finally, we find a continuum of leadership arrangements in how intensively family members are involved in management.

George J. Borjas, Kirk B. Doran
NBER Working Paper No. 19445, September 2013

Knowledge generation is key to economic growth, and scientific prizes are designed to encourage it. But how does winning a prestigious prize affect future output? We compare the productivity of Fields medalists (winners of the top mathematics prize) to that of similarly brilliant contenders. The two groups have similar publication rates until the award year, after which the winners’ productivity declines. The medalists begin to “play the field,” studying unfamiliar topics at the expense of writing papers. It appears that tournaments can have large post-prize effects on the effort allocation of knowledge producers.

Thank goodness I haven’t won the Clark Medal, Nobel Prize, or a MacArthur Award. I want to keep my productivity high!

23 September 2013 at 9:34 am Leave a comment

Twenty Years of IJEB

| Nicolai Foss |

“IJEB” is the International Journal of the Economics of Business. The inaugural issue contained a veritable who-is-who in the management/economics intersection, and the journal has published much good stuff over the years (including papers by Peter Klein and yours truly, as well as lesser known people like Reinhart Selten, Richard Nelson, and Frederick Scherer). To mark the journal’s first twenty years, twenty of the more influential papers have been made available for free online (here), and the first issue of 2014 will be like the inaugural issue in that it will be composed of many short papers on the directions that the economics of business is going to take in the future.

16 September 2013 at 1:33 pm Leave a comment

Organizational Learning without Markets

| Peter Klein |

A really interesting NBER paper from Thomas Triebs and Justin Tumlinson confirms what you may suspect, that firms operating outside the market system — in this case, in the former East Germany — do not learn the capabilities for judging market signals. Triebs and Tumlinson compare East and West German firms after unification and find that East German firms did not anticipate, or respond to, market information as well as their West German counterparts, other things equal, suggesting that during the Communist period, firms lost (or failed to acquire) the ability to work within a market setting. The paper is based on a formal learning model but the empirical results seem to square with a variety of approaches, including resource-based and managerial capabilities theories.

Learning Capitalism the Hard Way—Evidence from Germany’s Reunification
Thomas P. Triebs, Justin Tumlinson
NBER Working Paper No. 19209, July 2013

Communism in East Germany sought to dampen the effect of market forces on firm productivity for nearly 40 years. How did East German firms respond to the free market after being thrust into it in 1990? We use a formal learning model and German business survey data to analyze the lasting impact of this far-reaching treatment on the way firms in former East Germany predicted their own productivity relative to firms in former West Germany during the two decades since Reunification. We find in confirmation of our formal model’s predictions, that Eastern firms forecast productivity less accurately, particularly in dynamic and uncertain markets, but that the gap gradually closed over 12 to 13 years. Second, by analyzing the direction of firm level errors in conjunction with contemporaneous market signals we find that, in the years immediately following Reunification, Eastern firms estimate the market’s role as generally less potent than Western firm do, an observation consistent with overweighting experiences from the communist era; however, over roughly 14 years both converge to the same (incorrect) overestimate of the market’s role on their productivity.

I’m reminded of Mises’s remark that entrepreneurs, in a socialist economy, learn to excel at “diplomacy and bribery.” I suspect a study like Triebs and Tumlinson’s on political capabilities or skill at political entrepreneurship might yield the opposite result.

15 July 2013 at 3:15 pm Leave a comment

Mokyr on Cultural Entrepreneurship

| Peter Klein |

I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:

[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.

Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”

Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)

I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.

26 June 2013 at 8:43 am 4 comments

Advice to Journal Editors

| Peter Klein |

The Story of French, a fun and interesting history of the French language by Jean-Benoit Nadeau and Julie Barlow, offers a number of valuable insights for writers and editors. Aspiring journal editors could learn from François de Malherbe (1555–1628), described by Nadeau and Barlow as “the biggest and most brazen language snob the world has ever seen.” Despite being “a fretful fault-finder who spent his life attacking, both verbally and in writing, every mistake — or what he regarded as mistakes — he could find and anyone who made one,” Malherbe had sound editorial instincts. In particular, he valued simplicity and clarity and despised unnecessary verbiage.

As a pastime, Malherbe edited Ronsard’s poetry, removing about half the words. His future biographer, Honorat de Racan, once asked him, “Does this mean you approve of the rest?” Malherbe responded by erasing what was left on the page.

Tough, but fair. . . . Anyway, Malherbe was clearly onto something. He “preached the virtues of clarity, precision, and rigor” while denouncing “ornamentation, repetition, archaisms, regionalisms, and hyperbole.” Perhaps academic journals need a few more Malherbes.

6 June 2013 at 9:31 am 2 comments

Clusters of Entrepreneurship and Innovation

| Peter Klein |

That’s the title of a new review paper by Aaron Chatterji, Ed Glaeser, and William Kerr (a gated NBER working paper, unfortunately). Agglomeration has been a huge issue in the entrepreneurship, technology strategy, innovation policy, and economic growth literatures and it’s nice to have an up-to-date, not-very-technical review paper. (Hopefully there is an ungated copy out there somewhere.)

Clusters of Entrepreneurship and Innovation
Aaron Chatterji, Edward L. Glaeser, William R. Kerr
NBER Working Paper No. 19013, May 2013

This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.

Update: ungated version here.

6 May 2013 at 10:01 am 4 comments

Hart on Incomplete Contracts

| Peter Klein |

Transaction cost economics, the property-rights approach to the firm, and the judgment-based view all assume that contracting parties cannot sign complete, contingent contracts, in which case firm boundaries would be arbitrary and unimportant. TCE tends to attribute incompleteness to bounded rationality, while the judgment-based view appeals to Knightian uncertainty and subjectivism to describe markets for judgment are incomplete. The property-rights approach of Grossman, Hart, and Moore did not have an explicit theory of incompleteness, which critics such as Maskin and Tirole saw as a major weakness.

Oliver Hart has written a series of recent papers on “reference points” as a new explanation for incompleteness. The newest, released today as an NBER working paper (with Maija Halonen-Akatwijuka), is the most explicit. It argues that parties deliberately leave gaps in contracts because explicit clauses can make it more difficult for parties to parties to renegotiate after the fact. Check it out and see what you think.

More is Less: Why Parties May Deliberately Write Incomplete Contracts
Maija Halonen-Akatwijuka, Oliver D. Hart
NBER Working Paper No. 19001, April 2013

Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on “contracts as reference points”. Including a contingency of the form, “The buyer will require a good in event E”, has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract can be strictly superior to a contingent contract.

29 April 2013 at 9:58 am Leave a comment

AMP Symposium on Private Equity

| Peter Klein |

The new issue of the Academy of Management Perspectives features a symposium, edited by Mike Wright, on “Private Equity: Managerial and Policy Implications.” The symposium includes “Private Equity, HRM, and Employment” by Mike with Nick Bacon, Rod Ball, and Miguel Meuleman; “The Evolution and Strategic Positioning of Private Equity Firms” by Robert E. Hoskisson, Wei Shi, Xiwei Yi, and Jing Jin; and “Private Equity and Entrepreneurial Governance: Time for a Balanced View” by John L. Chapman,  Mario P. Mondelli, and me. The symposium came out very nicely, if I may say so, covering a variety of strategic, entrepreneurial, and organizational issues related to private equity firms and companies receiving private equity finance.

In his introduction Mike highlights five main contributions:

First, the papers address the need to consider the systematic evidence on the managerial and strategic aspects of PE, in relation to both portfolio firms and PE firms, which has been largely fragmented if not nonexistent. Second, the papers analyze the impact of PE during economic downturns and demonstrate the underlying resilience of PE-backed portfolio firms. Third, the symposium provides an opportunity to develop insights that compare the managerial impact of PE with different forms of ownership and governance. Fourth, the articles in this symposium highlight the heterogeneity of the private equity phenomenon. Finally, in the context of continuing public attention to PE, which has been heightened by the U.S. presidential race and the global recession, the evidence presented in this symposium paints a rather more positive view than the hyperbole of some of the industry’s critics would suggest. Taken together, these contributions indicate a need for caution in attempts to tighten the regulation of PE lest the economic, financial, and social benefits be lost.

Bonus: We are organizing a session on private equity at the upcoming Academy of Management meeting based on the ideas of the symposium. It’s scheduled for Saturday, 10 August 2013, 11:30-12:30 (location TBA). Come join us!

13 April 2013 at 4:12 pm 1 comment

Incomplete Contracts and the Internal Organization of Firms

| Peter Klein |

That’s the title of a new NBER paper by Philippe Aghion, Nicholas Bloom, and John Van Reenen, indicating that organization design, from the perspective of incomplete-contracting theory, continues to be a hot topic among the top economists. Like all NBER papers this one is gated, but intrepid readers may be able to locate a freebie.

Incomplete Contracts and the Internal Organization of Firms
Philippe Aghion, Nicholas Bloom, John Van Reenen

NBER Working Paper No. 18842, February 2013

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

15 March 2013 at 5:46 pm 2 comments

New Review Paper on Multinational Firms

| Peter Klein |

The econ and strategy literatures on multinational firms have grown dramatically since the pioneering works of Caves, Casson, Teece, and others. Besides established journals like the Journal of International Economics and Journal of International Business Studies, there is the new Global Strategy Journal and plenty of space in the general-interest journals for issues dealing with multinationals.

Pol Antràs and Stephen Yeaple have written a new survey paper for the Handbook of International Economics, 4th edition, and it’s available as a NBER working paper, “Multinational Firms and the Structure of International Trade.” The review focuses on the mainstream economics literature but should be useful for management and organization scholars as well — particularly section 7 on firm boundaries which includes both transaction cost and property rights theories. Here’s the abstract:

This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.

The NBER version is gated but I’m sure our intrepid readers can dig up an open-access copy.

11 February 2013 at 4:14 pm 1 comment

Handbook of Organizational Economics

| Peter Klein |

It’s edited by Bob Gibbons and John Roberts, just published by Princeton, and you can read about it here, including the table of contents and the introduction. As Gibbons and Roberts note:

Organizational economics involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones. As this handbook documents, economists working on organizational issues have now generated a large volume of exciting research, both theoretical and empirical. However, organizational economics is not yet a fully recognized field in economics — for example, it has no Journal of Economic Literature classification number, and few doctoral programs offer courses in it. The intent of this handbook is to make the existing research in organizational economics more accessible to economists and thereby to promote further research and teaching in the field.

This is a fair assessment, though some O&M readers may find the editors’ definition of the field too narrow. The volume covers a wide variety of issues, topics, and applications but nearly all from the perspective of modern neoclassical economics (there’s a chapter on TCE by Williamson and Steve Tadelis, but nothing on “old” property rights theory, capabilities, the knowledge-based view, etc.). Still, it appears to be an excellent collection of state-of-the-art papers. Besides the usual topics like incentives, authority, complementarity, innovation, ownership, vertical integration, and the like, there’s also an interesting methodological section featuring “Clinical Papers in Organizational Economics” by George Baker and Ricard Gil, “Experimental Organizational Economics” by Colin Camerer and RobertoWeber, and “Insider Econometrics by Casey Ichniowski and Kathy Shaw. Check it out.

20 January 2013 at 11:44 pm 1 comment

Older Posts


Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts


Former Guests | posts


Recent Posts



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).


Get every new post delivered to your Inbox.

Join 220 other followers