Posts filed under ‘Recommended Reading’

More on Strategy and Game Theory

| Peter Klein |

downloadRecent posts on strategy and game theory (here and here) generated quite a lot of discussion here and on social media. Avinash Dixit offers more grist for the mill in his December 2014 Journal of Economic Literature essay on Lawrence Freedman’s Strategy: A History (Oxford, 2013). (An ungated version is here.) Dixit’s essay contrasts the economist’s and the historian’s view of strategy — “strategy” being game theory for the former, a broader, interpretive, interdisciplinary exercise for the latter — but the discussion is highly relevant for strategic management. The management literature has traditionally taken a wide, flexible view of “strategy,” closer to the historian’s sense than the economist’s, though that is rapidly changing as game theory becomes more widespread in strategic management research and teaching.

Here’s an excerpt from Dixit’s opening, which gives you the flavor:

[Freedman] heads the preface with a memorable quote from Mike Tyson: “Everyone has a plan till they get punched in the mouth.” Later he quotes another fighter, the legendary German Field Marshal Helmuth Karl Bernhard Graf von Moltke: “no plan survived contact with the enemy” (p. 104). The game theorist will respond: “Those plans are not strategies. They are incomplete. They fail to specify any action at the node of the game tree where you get punched in the mouth or meet the enemy army, or in the ensuing subgame.” It would be extreme stupidity, or arrogance tantamount to stupidity, for a boxer not to recognize the possibility of getting punched in the mouth. And although avoiding battle may be an important aspect of military strategy in many situations (see pp. 47–9), every plan should include a provision for action if or when battle commences. Tyson, or Freedman, will probably counter that even if the boxer starts with a complete plan that specifies the action for this contingency, the punch will make him forget the plan and react hot-headedly. Modern game theorists exposed to behavioral ideas will admit some truth in this, and agree that the boxer’s System 2 calculations are likely to fly out of the ring when the punch lands and System 1 instincts will take over. But they will add that that makes it all the more important for the boxer to strategize better in advance—to take actions before getting punched, either to reduce the risk, or to arrange matters in such a way that the anger and instinct (or the prospects of such reactions) are put to more effective use, as with the strategy of brinkmanship. More generally, “the art of creating power” often entails strategic moves like commitments, threats and promises that game theorists have analyzed following Thomas Schelling (1960). And Freedman’s picture of “strategy as a System 2 process engaged in a tussle with System 1 thinking” (p. 605) looks remarkably like Schelling’s (1984, ch. 3) “intimate contest for self-command.”

I have a twofold purpose in constructing the above exchange. One is to highlight the difference between the perspectives of economists and historians in thinking about the same situation. The second is to argue that each has something to learn from the other, and a fuller understanding can result from their dialog. The two perspectives share a lot of middle ground, and have useful complementarities.

The thoughtful essay is well worth reading in its entirety.

29 December 2014 at 2:47 pm 2 comments

The Paper the World Needs Right Now

| Lasse Lien |

I strongly think this paper is both timely and useful.

juleøl

21 December 2014 at 1:22 pm 10 comments

Behavioral Contract Theory

| Peter Klein |

The December 2014 issue of the Journal of Economic Literature contains a nice review article on “Behavioral Contract Theory” by Botond Köszegi. Abstract below, ungated version here.

This review provides a critical survey of psychology-and-economics (“behavioral-economics”) research in contract theory. First, I introduce the theories of individual decision making most frequently used in behavioral contract theory, and formally illustrate some of their implications in contracting settings. Second, I provide a more comprehensive (but informal) survey of the psychology-and-economics work on classical contract-theoretic topics: moral hazard, screening, mechanism design, and incomplete contracts. I also summarize research on a new topic spawned by psychology and economics, exploitative contracting, that studies contracts designed primarily to take advantage of agent mistakes.

12 December 2014 at 1:08 pm 2 comments

Two Interesting NBER Papers

| Peter Klein |

A couple of recent NBER papers of interest to O&Mers, one from Doug Irwin, another from Luis Garicano and Esteban Rossi-Hansberg:

Adam Smith’s “Tolerable Administration of Justice” and the Wealth of Nations
Douglas A. Irwin
NBER Working Paper No. 20636, October 2014

In the Wealth of Nations, Adam Smith argues that a country’s national income depends on its labor productivity, which in turn hinges on the division of labor. But why are some countries able to take advantage of the division of labor and become rich, while others fail to do so and remain poor? Smith’s answer, in an important but neglected theme of his work, is the security of property rights that enable individuals to “secure the fruits of their own labor” and allow the division of labor to occur. Countries that can establish a “tolerable administration of justice” to secure property rights and allow investment and exchange to take place will see economic progress take place. Smith’s emphasis on a country’s “institutions” in determining its relative income has been supported by recent empirical work on economic development.

Knowledge-based Hierarchies: Using Organizations to Understand the Economy
Luis Garicano, Esteban Rossi-Hansberg
NBER Working Paper No. 20607, October 2014

We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.

Update: See also Irwin’s article in Monday’s WSJ: “The Ultimate Global Antipoverty Program.”

3 November 2014 at 12:45 pm Leave a comment

The Use of History in Management Research and Education

| Peter Klein |

Another book recommendation, also courtesy of EH.Net. The book is Organizations in Time: History, Theory, Methods (Oxford University Press, 2014), edited by Marcelo Bucheli and R. Daniel Wadhwani. (Bucheli is author of an excellent book on the United Fruit Company.) Organizations in Time is about of the use of history in management research and education. Perhaps surprisingly, the field of business history is not usually part of the business school curriculum. In the US at least, business historians are typically affiliated with history or economics departments, not management departments or other parts of the business school. EH.Net reviewer Andrew Smith notes the following:

Until the 1960s, economic history and business history had an important place in business school teaching and research.  Many management scholars then decided to emulate research models developed in the hard sciences, which led to history becoming marginal in most business schools. History lost respect among positivistic management academics because historians made few broad theoretical claims, rarely discussed their research methodologies, and did not explicitly identify their independent and dependent variables. Historians in management schools became, effectively, disciplinary guests in their institutions.

The period from 2008 to the present has witnessed a revival of interest in history on the part of consumers of economic knowledge in a variety of academic disciplines, not to mention society as a whole. . . . It is now widely recognized that there needs to be more history in business school research and teaching. However, as Marcelo Bucheli and Dan Wadhwani note in the introductory essay, this apparent consensus obscures a lack of clarity about what a “historic turn” would, in practice, involve (p. 5).

This volume argues that the historic turn cannot simply be about going to the historical record to gather data points for the testing of various social-scientific theories, which is what scholars such as Reinhart and Rogoff do. Rather than being yet another device for allowing the quantitative social sciences to colonize the past, the historic turn should involve the adoption of historical methods by other management school academics. At the very least, people in the field of organization studies should borrow more tools from the historian’s toolkit.

Read the book (or at least the review) to learn more about these tools and approaches, which involve psychology, embeddedness, path dependence, and other concepts familiar to O&M readers.

23 July 2014 at 7:59 am Leave a comment

Competition in Early Telephone Networks

| Peter Klein |

As with other technologies involving network effects, the early telephone industry featured competing, geographically overlapping networks. Robert MacDougall provides a fascinating history of this period in The People’s Network: The Political Economy of the Telephone in the Gilded Age (University of Pennsylvania Press, 2013). From the book blurb:

In the decades around 1900, ordinary citizens—farmers, doctors, small-town entrepreneurs—established tens of thousands of independent telephone systems, stringing their own wires to bring this new technology to the people. Managed by opportunists and idealists alike, these small businesses were motivated not only by profit but also by the promise of open communication as a weapon against monopoly capital and for protection of regional autonomy. As the Bell empire grew, independents fought fiercely to retain control of their local networks and companies—a struggle with an emerging corporate giant that has been almost entirely forgotten.

David Hochfelder wrote a thoughtful review which appeared today on EH.Net. As Hochfelder points out, the history of the telephone is not just about technology and market structure, but broader social themes as well:

At one level, this is a story about industrial competition. At a deeper level, it reveals competing visions of an important technology, the social role that it ought to play. MacDougall shows that the Bell System and the Independents envisioned the telephone in far different ways. Bell, especially under Theodore Vail, president of AT&T between 1907 and 1919, sought to build a unified telecommunications network that spanned the United States. Bell Canada espoused a different vision, that the telephone ought to remain an expensive urban medium primarily used for business purposes. Both Bell systems shared the ideology that the telephone industry ought to be controlled by centralized, national corporations. On the other hand, the Independents described the Bell System as a grasping octopus that wanted a stranglehold over the nation’s communications. The Independents offered instead a vision of the telephone as a people’s network that enhanced local ties and preserved community autonomy. In the United States, MacDougall claims that the Independents’ vision for the telephone “descended from a civic understanding of communication that went back to the American Revolution,” that “free and open communications were a basic ingredient of democracy” (p. 5). On a more mundane level, the Independents encouraged social uses of the telephone — like gossiping and banjo-playing — that the Bell System actively discouraged at the time.

18 July 2014 at 6:38 pm Leave a comment

The Origin of Social Norms

| Peter Klein |

Some findings that would not have surprised Carl Menger:

Ode to the sea: Workplace Organizations and Norms of Cooperation
Uri Gneezy, Andreas Leibbrandt, John A. List
NBER Working Paper No. 20234, June 2014

The functioning and well-being of any society and organization critically hinges on norms of cooperation that regulate social activities. Empirical evidence on how such norms emerge and in which environments they thrive remains a clear void in the literature. To provide an initial set of insights, we overlay a set of field experiments in a natural setting. Our approach is to compare behavior in Brazilian fishermen societies that differ along one major dimension: the workplace organization. In one society (located by the sea) fishermen are forced to work in groups whereas in the adjacent society (located on a lake) fishing is inherently an individual activity. We report sharp evidence that the sea fishermen trust and cooperate more and have greater ability to coordinate group actions than their lake fishermen counterparts. These findings are consistent with the argument that people internalize social norms that emerge from specific needs and support the idea that socio-ecological factors play a decisive role in the proliferation of pro-social behaviors.

I await comments below about how social norms emerge and persist not because they facilitate cooperation and joint gains, but because they legitimize existing social structures or support exploitation or power or. . . .

23 June 2014 at 2:43 pm 5 comments

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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).
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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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