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.
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.
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!
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.”
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.
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!
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…)
Pomo Periscope IV: A Rothbard Classic
| Nicolai Foss |
Pomo had no greater enemy than the late Murray Rothbard. Here is a hilarious comment on “the hermeneutical invasion of philosophy and economics,” which was originally published in 1989 in the Review of Austrian Economics (and published a bit later in Danish translation by yours truly in the rather short-lived Danish Austrian economics journal, Praxeologica). (more…)
Pomo Periscope III: From Sex and the City to Spengler
| Nicolai Foss |
Although it lies somewhat outside the scope of the Pomo Periscope (cf. this and this), Steven LaTulippe has an interesting commentary, “Statism, Post-Modernism, and the Death of the Western World,” at LewRockwell.com that simultaneously blasts post-modernism and defends cultural conservatism, while reaching from “Sex and the City” (here is another great blasting of that show) to Oswald Spengler. It is a bit like “Scruton light.” (more…)
Bleg: Parsons, Popper, and the Austrians
| Peter Klein |
From Rafe Champion:
I am working up a paper on the way Talcott Parsons rediscovered the Austrian wheel of methodological individualism and the “action frame of reference” during the 1930s when he wrote “The Structure of Social Action” (1937). Karl Popper also picked up some elements of the Austrian approach (not surprisingly) including methodological individualism and “situational analysis” which is essentially the action frame of reference including subjectivism.
Can people help out with any cross references and citations between those three lines of work? The volume of literature in each of the three is immense, and in my reading of the principals there is next to no cross referencing.
I am not aware that Parsons ever cited Mises or Popper and their associates. Popper in personal communication described Parsons as a contributor to verbalism in the social sciences but did not cite him in print. Jarvie (of the Popper school) referred briefly to Parsons in the course of a protracted debate by sociologists and anthropologists over MI involving associates of Popper (mostly Watkins) and others. In that context Hayek was cited as an exponent of MI but there was no reference to Mises or the Austrian tradition generally. This appears to indicate a high degree of fragmentation in the field or at least a lack of collegiate spirit in recognizing the contribution of scholars in other schools of thought who are fellow travelers in some respects.
Any Parsons scholars out there who can help him out? If so, please write Rafe or, even better, post a comment below.
I Love France
| Peter Klein |
Here is a confession. I love France. Not just the food or the countryside or the language, but also the culture, the history, the way of life. Perhaps that makes me a cheese-eating surrender monkey. I don’t know. But I do know that I like France. And I don’t even mind the French all that much.
Seriously, I’m fortunate to count such diverse thinkers as Pierre Garrouste, Jean-Michel Glachant, Guido Hülsmann, Nathalie Janson, Armelle Mazé, Claude Ménard, Philippe Nataf, Pascal Salin, Stéphane Saussier, and Anne Yvrande-Billon as friends, colleagues, and research collaborators.
Despite my Francophilia — or perhaps because of it — I have enjoyed reading Stephen Clarke’s A Year in the Merde, a send-up of French society and culture written by a young British expat. It’s funny (though a bit raunchy), and resonates well with those of us who admire, but fail to comprehend, so much of what it means to be French. A good read.
What’s So Great About Tacit Knowledge? — Cont’d
| Nicolai Foss |
Peter asks, “what’s so great about tacit knowledge?”, pointing out that there is a tendency in the KM literature (and, I may add, parts of the strategic management literature as well) to exalt tacit above explicit knowledge. He correctly points out that tacit knowledge may well be errorneous, to which it may be added that errorneous tacit knowledge is usually more of a problem than errorneous explicit knowledge, since the latter is presumably easier to correct. In a comment on Peter’s post, JC Spender points out that “for the most part the discussion of tacit knowledge is sheer obscurantism.”
I agree with both Peter and JC. But I may want to be even more radical, and ask “What’s — analytically speaking — so great about tacit knowledge?” (more…)
Motivation Workshop at CBS
| Nicolai Foss |
Today the unit that I direct at Copenhagen Business School, The Center for Strategic Management and Globalization, arranged a well-attended “Workshop on the Motivational Foundations of Knowledge Sharing.” The workshop was part of a major research project that we run at the Center, the FOKS project (i.e., Foundations of Knowledge Sharing: Behaviors and Governance). It was organized by my very able PhD student, Mia Reinholt.
We were lucky to have two of the most profound thinkers on motivation in psychology and economics giving keynote speeches, namely Edward Deci and Bruno Frey. (more…)
What’s So Great About Tacit Knowledge?
| Peter Klein |
The knowledge management and capabilities literatures are in love — in love with tacit knowledge. Managing tacit knowledge, leveraging tacit knowledge, growing tacit knowledge — these are seen as the keys to achieving sustained competitive advantage. Economists, too, have gotten into the act, asking how incentive plans and the allocation of decision rights affects employees’ use of dispersed, specific knowledge. And, of course, F. A. Hayek’s analysis of socialism is built on the notion that centralized systems without markets and prices cannot make effective use of tacit knowledge.
But is tacit knowledge always “better” — more correct — than explicit knowledge? The knowledge management and capabilities literatures seem to take this for granted. And yet, a growing body of evidence on behavioral anomalies suggests that cognitive biases and heuristics can render individual judgments unreliable.
This came to my mind when reading Alex Tabarrok’s recent comments on the surprisingly primitive practice of medicine (here and here). (more…)
Economics and Literature Redux: Panics in Fiction
| Peter Klein |
On the heels of these remarks on economic analysis in fiction comes a review of David Zimmerman’s Panic! Markets, Crises, and Crowds in American Fiction (University of North Carolina Press, 2006), reviewed by Scott Dalrymple for EH.Net.
In _Panic!_, David Zimmerman, a professor at the University of Wisconsin, Madison, has chosen a fascinating lens through which to view the phenomenon of bank panics: contemporary novels written in response to the panics. As Zimmerman points out, bank panics left people searching for answers about what had just happened, and why. And as they always do, authors of fiction stepped forward in an attempt to make sense of it all.
See also this discussion on teaching economic history through fiction and narrative.
Thanks to David Gordon
| Peter Klein |
Many thanks to guest blogger David Gordon for his fine posts on the philosophical and methodological underpinnings of economics and organizational analysis. We look forward to his continued participation as an occasional commenter and, if the urge strikes him, as a guest blogger once again.
The Costs of Family Succession in Firms
| Peter Klein |
Interesting new paper shows that keeping senior management positions within the family reduces firm performance:
Inside the Family Firm: The Role of Families in Succession Decisions and Performance, by Morten Bennedsen, Kasper M. Nielsen, Francisco Pérez-González, Daniel Wolfenzon
This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO’s firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms’ outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. . . . Overall, our empirical results demonstrate that professional, non-family CEOs provide extremely valuable services to the organizations they head.
The instrumental-variables technique reminds me of another paper on the value of top management that exploits a different source of exogenous variation in succession patterns: death. (more…)
Was Coase Right About the Lighthouse?
| Peter Klein |
A few years ago I attended a Liberty Fund conference on the private provision of public goods. In preparation for the conference I re-read Coase’s classic 1974 article, “The Lighthouse in Economics,” for the first time since my graduate-school days. I recall being surprised how much weaker the argument was than the way I had remembered it. Far from showing that British lighthouses were “private” — as the paper is widely thought to have demonstrated — Coase’s analysis shows simply that public goods can be financed through user fees, rather than general tax revenue. But, in the case of the British lighthouses, the user fees were compulsory, government-enforced levies on ship owners, not voluntary market transactions. The British lighthouses were government-granted monopolies, more like the East India Company or a local public utility than “free-enterprise” institutions. (more…)
Coordination (Games) in Organizations
| Nicolai Foss |
The basic thrust of new institutional economics and contract-theory approaches to organizations and contracts is to conceptualize virtually any issue related to economic organization in terms of solving incentive conflicts. The motivation for this presumably is an underlying argument that in the absence of such conflicts, the first-best can be reached without major obstacles. (more…)
US Moving to Ban Microcredit
| Peter Klein |
Larry White asks an important question: Given the near-universal enthusiasm for microcredit, why is its US equivalent — the payday loan — constantly under fire? Payday loans, cash advance loans, check advance loans, and the like are small, short-term, high-interest loans, typically offered to low-income, credit-constrained consumers. As Larry points out, the 2007 National Defense Authorization Act, signed last week by President Bush, includes a 36% interest-rate cap on payday loans made to military personnel; there are calls to extend such a cap to all payday loans in the US, which would effectively shut down much of the payday-loan industry.
Of course, the typical payday-loan consumer in the US is not an entrepreneur seeking capital to start a new venture, but a low-income consumer without savings or credit cards trying to pay the rent, make a car payment, or even buy groceries. Still, the basic principles are the same. Payday loans are high-risk, uncollateralized loans, and naturally carry higher interest rates than conventional secured debt. They provide credit to individuals who are otherwise unable to acquire funds. Grameen Bank defends its interest rates — typically 25 to 50 percent annually — on the grounds that the alternatives facing borrowers are even worse. Wouldn’t the same apply to payday lending?
Organizations and Markets 
Recent Comments