Archive for October, 2006

Imagining the Company of the Future

| Peter Klein |

Gary Hamel and Harvard Business Review are conducting an open-ended, non-random-sample survey on the future of the company. “What will the company of the future look like? Will it be any different from today’s leading-edge businesses? What are the important ways in which today’s companies must change in order to thrive?” To participate, go here and answer the following two questions:

1. Twenty years into the future, what one characteristic — principle, process, practice, or structural feature — of the late twentieth-century industrial organization will appear to be the most antiquated or anachronistic?

2. Looking out a generation or two, what feature or characteristic — principle, process, practice, or structural feature — of leading-edge organizations will be most different from what we observe today? Use your imagination to describe this new feature or characteristic in detail and in a way that illustrates the difference it will make to organizational success.

Or, for even greater impact, add your comments below.

31 October 2006 at 3:43 pm 1 comment

Prediction Markets and Corporate Governance

| Peter Klein |

Prediction markets have generated a lot of buzz (particularly in the econo-blogosphere). A new paper by Michael Abramowicz and Todd Henderson explores the potential role of prediction markets in corporate governance. The authors are enthusiasts:

Prediction markets can increase the flow of information, encourage truth telling by internal and external firm monitors, and create incentives for agents to act in the interest of their principals. The markets can thus serve as potentially efficient alternatives to other approaches to providing information, such as the Sarbanes-Oxley Act’s internal controls provisions. Prediction markets can also produce an avenue for insiders to profit on and thus reveal inside information while maintaining a level playing field in the market for a firm’s securities. This creates a harmless way around existing insider trading laws, undercutting the argument for the repeal of these laws. In addition, prediction markets can reduce agency costs by providing direct assessments of corporate policies, thus serving as an alternative or complement to shareholder voting as a means of disciplining corporate boards and managers.

For caveats and qualifications regarding the ability of prediction markets to replace entrepreneurial judgment, see this technical report and this non-technical, critical assessment.

31 October 2006 at 10:05 am 1 comment

Volleyball and Equilibrium

| Lasse Lien |

What exactly is the role of equilibrium in the competitive process? Believe it or not, I have found the answer. It plays the same role as gravity does in a volleyball match.

Think about it! The ball is continuously bounced in ways that direct it towards new states of rest (new equilibriums), but it hardly ever settles down in any of these, because it is subject to new bounces, sending it towards yet another equilibrium. Moreover, about half the time the ball is moving opposite of what gravity would dictate, i.e. it is moving upwards, but unless it is bounced again it will start falling downwards and settle in the position gravity dictates (operating on the last bounce). Of course, this never occurs because the ball is continuously bounced. So a theory of gravity alone would not provide a good prediction of where the ball is, nor where it is headed, or even how the game got started. But mind you, think about how absurd it would be to try to understand a game of volleyball without any notion of gravity!

31 October 2006 at 8:39 am 2 comments

Choosing Your Institutional Environment

| Peter Klein |

The new institutional economics typically treats the institutional environment — the background constraints, or rules of the game, that guide individual’s behavior — as exogenous, forming the framework within which individuals act. But what if parties could choose the institutional environment they want?

Physically moving from one country to another constitutes a strong form of institutional-environment selection. A weaker form is “forum shopping,” in which plaintiffs search for jurisdictions with favorable legal rules. (Prominent recent examples include David Irving’s libel suit against Deborah Lipstadt and Richard Perle’s threatened suit against Seymour Hersh.) US firms engage in a kind of forum shopping when they incorporate in Delaware, the state perceived to have the best corporate-chartering and dispute-resolution rules.

A new paper by Geoffrey P. Miller, “The Market for Contracts,” shows that firms most often choose New York as the venue for commercial contracting, making New York “the leading supplier of law and forum in commercial contracts.” Miller argues that New York lawmakers have deliberately designed a contract-law regime that is favorable to commercial transactions. I.e., “New York’s success in attracting choice-of law and forum selection clauses has been due, in substantial part, to the state’s provision of rules, procedures, and adjudicative services deemed attractive by major commercial parties. This explanation parallels the well-known theory that Delaware’s success in the incorporation market is largely due to the superior quality of legal services it provides to its corporate clients.”

30 October 2006 at 4:02 pm 2 comments

Posner and Becker on Microfinance

| Peter Klein |

Further reservations about the microfinance phenomenon, offered here by Richard Posner and Gary Becker. Posner:

The evidence for the efficacy of microfinance in stimulating production and alleviating poverty is so far anecdotal rather than systematic. The idea of borrowing one’s way out of poverty is passing strange. And I am unaware of any historical examples of nations that climbed out of poverty on the backs of small entrepreneurs financed by credit. Also, recall that Grameen Bank has lent almost $6 billion to some 6 million persons. This implies an average loan of almost $1,000, which in a country like Bangladesh is not chicken feed and makes one wonder how much of the Grameen Bank’s loan portfolio is actually microfinance.

Adds Becker:

[A]ll economists who have studied microfinance agree that it will never be more than a minor factor in ending poverty in any country. Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government. Microfinance makes only a small direct contribution to any of these variables.

30 October 2006 at 12:21 pm Leave a comment

Strategic Management Society Meetings

| Nicolai Foss |

I am currently in beautiful Wien for the Strategic Management Society Meetings. Beforehand I had decided that this would be the test case: Should I continue paying those exorbitant conference fees and expensive hotels for a mediocre conference, or should I just forget about it?

While the pre-conference sessions yesterday were a bit of a disappointment (too many presentations apparently improvised on the trans-Atlantic flight), I must say that I have only attended excellent paper sessions today (Monday). So far the conference is far superior to last year’s conference in Orlando (and the food is better).

Europeans constitute the majority of the participants, but that hasn’t harmed paper quality at all (on the contrary?). The days where the quality gap in strategic management between the US and Europe was huge and pronounced may be over.  The Euro research community in strategic management is really shaping up (largely as a result of interaction with US research and import of US research methodology). Bottom line: I will probably give the SMS meetings a shot next year as well!

30 October 2006 at 8:25 am 3 comments

New Perspectives on Political Economy

| Nicolai Foss |

New Perspectives on Political Economy is a Prague-based journal, edited by Josef Sima and Dan Stastny of the University of Economics in Prague.  It is now in its second year of existence.  It is a much like a mix of the Journal of Libertarian Studies and The Quarterly Journal of Austrian Economics. All issues/articles can be downloaded here.  Here is the list of contents of the most recent issue:  (more…)

30 October 2006 at 2:48 am Leave a 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).