Heavily Cited, But Wrong

11 May 2006 at 12:30 pm Nicolai Foss 4 comments

| Nicolai Foss |

Here is an example of the apparent irrationality of citation practices. The example concerns the paper “Production, Information Costs, and Economic Organization,” by Armen A. Alchian and Harold Demsetz (American Economic Review 62, 1972, 772-95). This is the famous “team-production” paper, one of the first to try to revitalize the Coasian agenda of explaining the “nature” of the firm (why firms exist, what explains their scope and internal organization). It is also one of the first agency theory papers (in what is sometimes misleadingly called “positive agency theory”).

However, the analysis in the paper is flatly errorneous. Here are some points where the paper gets it wrong:

Contra what the paper asserts, authority does make (economic) sense, and there is a difference between the authority exercised within the firm and the “authority” exercised in the marketplace. This is so for legal reasons and because specialization may influence bargaining powers (Williamson, Masten, Hart).
The team problem cannot really explain the boundaries of firms; it doesn’t explain vertical integration and it flies in the face of the conglomerate firm (Holmström and Tirole).
The team problem cannot really explain the boundaries of firms; it doesn’t explain vertical integration and it flies in the face of the conglomerate firm (Holmström and Tirole).
The paper does not really explain why and how the monitor/owner can overcome the informational asymmetries implied by the team problem.

Despite such errors the paper remains heavily cited. Why? Note that is usually not cited in an explicit attempt to correct it (although its extremism with respect to the treatment of authority is sometimes critically mentioned). It is very often cited as an early precursor. (So, is Coase 1937, but there aren’t really any obvious errors in that paper, just an analysis calling for “operationalization”).

Perhaps part of the reason is that the Alchian and Demsetz paper is very, very well written. And most of economics plainly isn’t. Moreover, the team production story suggests all sorts of illuminating parables. Students can immediatly relate to the agency problems that may arise in a group. It is nice paper to teach.

I suggest that A&D remains a heavily cited paper because of its rhetorical and pedagogical qualities. I will leave it to the reader to draw further conclusions about this.

Entry filed under: - Foss -, Management Theory, Methods/Methodology/Theory of Science, Teaching, Theory of the Firm.

Citations and Critical Commentary Scots, Wha Hae

4 Comments Add your own

1. Bo Nielsen | 11 May 2006 at 2:30 pm

Perhaps. I may also be that this is an example of evolution in understanding of the complexity of the matter – that is what we thought to be true in the 1970s has since been analyzed more in detail and found flawed – to me this is great because it shows that our field is dynamic and that we do in fact advance our theoretical understanding.

Perhaps the real value of publications such as these is to spur interest in the topic and entice others to investigate in more depth. If you are suggesting that only papers with no flaws should be published then we would only get truly incremental and boring publications! Hence, in my opinion, this may be a matter of changing (and not to the better) requirements associated with publications. Today, it is so difficult to publish anything unless if is considered flawless (and by whom?) – in the 1970s there was still room for loose ideas and innovative studies because the review process was less rigorous..

I also suspect that one reason why this paper is still cited widely is simply that most people do not read it! Far too often we see citations to studies based on secondary sources – that is because somebody else thinks that this is a seminal paper and the original source of information it is included in the citations without regard to its timeliness and relevance in the current discussion…
2. Jung-Chin Shen | 12 May 2006 at 1:39 am

Good point. It is not easy to judge whether an idea is right or wrong in social science. From an inspiration perspective, a great error perhaps is more valuable than a correct but dull idea. The great error may tell you more than the correct but dull idea does.

Back to Nicolai’s question: Why is Alchian and Demsets (1972) still heavily cited? Once again, I did a little search on Google Scholar. Here are the results.
Alchian and Demsetz (1972) has got 2148 citations so far. More than 50% of the citations mentioned at least once either “team” or “authority” (1140 and 1190 times respectively).

We can suspect that if one paper that cited A&D mentions the term “authority” but not “team,” it is more likely to be a critical paper. How many? 517 (about 25%).

We do not know how many papers use Holmström and Tirole’s idea to criticize A&D, but at least we can know the number should not exceed the number of papers that cite H&T and A&D at the same time. So the ceiling number is 86 (only 4%). It may indicate that very few authors try to use H&T to criticize A&D, or most authors who cite A&D are not aware of the conflicting perspectives between H&T and A&D.

Are the authors who cite A&D and use the term “team” really interested in team theory? Well, at least it shows that most of them are not interested in Marschak and Radner’s team theory. Only 7.7% (167) papers cite A&D and at least one of Rander’s papers.

Is A&D cited for the theory of the firm? Or which author is most often cited with A&D? The answer is Williamson (1290; 60%). Followed by Coase (1030; 48%). Jensen and Meckling only represents 31% (666).
3. Gary Furash | 17 May 2006 at 8:14 am

What happened since then? Has someone else figured out why we have firms and why they exist. Coase explanation to a non-economist seemed to make a lot of sense.
4. Peter Klein | 17 May 2006 at 9:59 am

Yes, the 1970s saw the emergence of several distinct approaches to answering the basic Coasian questions of why firms exist and what determines their boundaries and internal organization. The best known today are Williamson's transaction cost economics and Oliver Hart's property rights approach. Unlike Alchian and Demsetz, these writers focus on relationship-specific physical and human capital as the key to the emergence of the firm.

Nicolai and I summarize some of these developments here and here. We will have a longer treatment in our forthcoming book.