Archive for December, 2006
Four Theories of the Firm
| Peter Klein |
This week in my PhD course, “Economics of Institutions and Organizations,” we discussed Bob Gibbons’s paper ”Four Formal(izable) Theories of the Firm” (JEBO, 2005; working-paper version here). Lest readers think I oppose formalization per se, let me take a moment to strongly recommend this paper, which provides an excellent summary and synthesis of several critical issues in the economic theory of the firm. (This review is also pretty good.) While the paper can be read profitably even without working through the mathematical models, Gibbons’s training in formal theory was obviously an asset in sorting out the similarities and differences among theories, harmonizing the diverse and sometimes-confusing terminology in this literature, and identifying the core assumptions of various approaches.
Gibbons distinguishes among four theories of the firm: rent seeking, property rights, incentive systems, and adaptation. Rent seeking is his label for TCE as expressed by Williamson and Klein, Crawford, and Alchian (1978). Students find the formulation of TCE in rent-seeking language, a la Tullock — “individually optimal (but socially destructive) haggling over appropriable quasi-rents” — useful and informative. Gibbons also provides an excellent discussion of the differences between TCE and the property-rights approach, showing that Grossman, Hart, and Moore’s model is not “a formalization of Williamson” (a distinction also emphasized by Williamson in his 2000 JEL piece and by Mike Whinston here and here). (more…)
Bruno Frey on Awards
| Nicolai Foss |
Bruno Frey is one of those economists who make economics fun. Like economists such as Yoram Barzel, Gary Becker, and, of course, Stephen Levitt, he has a great intuition for applying economics to new areas where nobody has hitherto thought of taking it.
Like George Akerlof, but unlike Barzel, Becker and Levitt, Frey is, however, not that satisfied with the behavioral core of mainstream economics, mainly because it tends to provide an impoverished treatment of human motivation. Thus, he is no Becker-style economic imperialist (or, at least, the charicature thereof), but on the contrary is quite attentive to relevant insights in, particularly, psychology. Whereas numerous economists have taken an interest in the cognitive dimensions of psychology research — as witness the recent explosion of interest in nanoeconomics — Frey’s interest in psychology has been more concerned with motivational issues. Thus, quite a lot of Frey’s enormous (and enormously impressive) production has been devoted to pushing the boundaries of economics by taking seriously psychology ideas on social comparison processes, intrinsic motivation, etc. His work with Margit Osterloh on the motivational foundations of knowledge sharing in organizations will be familiar to many readers of this blog.
Frey has recently started a new research program, namely research into the function of awards (see here and here). (more…)
John Chapman at AEI
| Peter Klein |
Kudos to my former PhD student John Chapman for landing a prestigious National Research Initiative Fellowship with the American Enterprise Institute. John is working on a book with Glenn Hubbard (official link; fun link) on the history and economic impact of the US private equity sector. For more information about the project contact John.
The October Issue of the AMJ
| Nicolai Foss |
The October issue of the Academy of Management Journal is the best in a very long time. It contains at least three articles that 1) are excellent and 2) should be of direct interest to O&M readers. They are:
- Rekha Krishnan, Xavier Martin and Niels G Noorderhaven. “When Does Trust Matter to Alliance Performance?”. One of the few empirical studies that takes seriously the Williamsonian distinction between behavioral uncertainty and environmental uncertainty.
- Kyle J Mayer and Robert M Salomon. “Capabilities, Contractual Hazards and Governance: Integrating Resource-based and Transaction Cost Perspectives” (WP version here). The latest paper in a small but expanding literature that empirically integrates TCE and RBV. Argues that strong internal technological capabilities may ease outsourcing.
- Stephen J Carson, Anoop Madhok, and Tao Wu. “Uncertainty, Opportunism, and Governance: The Effects of Volatility and Ambiguity on Formal and Relational Contracting.” Clearly distinguishes between the effects of ambiguity and the effects of volatility on opportunism, and compares the effectiveness of relational and contractual governance with respect to constraining opportunism under these two situations. Interesting that Madhok seems to be coming full circle round to TCE.
How Long Is Long, and How Short Is Short?
| Lasse Lien |
Are spells of market leadership long or short? A Chandlerian will argue that they tend to be long, while a Schumpeterian will argue that they tend to be short. But what is long and what is short? This is a special case of a fairly frequent problem in empirical research, in which the ability to decide is limited by the lack of a clear benchmark. In a forthcoming AER paper John Sutton addresses this problem in a way that seems potentially useful in many situations with similar characteristics (testing the RBV is but one example).
What Sutton does is define a benchmark which is neither long or short. How? Essentially he compares the length of actual market leadership spells to what one would expect if market share changes followed a random walk (given the initial market share gap and a measure of the industry specific volatility in market shares). This benchmark is neither long or short in the (more…)
Another Irritating Practice
| Nicolai Foss |
OK — here I go again: Another jeremiad related to the institutions of publishing in the learned journals (for other O&M jeremiads on this subject, see here, here, here, here, and here).
Recently, I received a paper from two very bright assistant professors at one of the top Euro BSchools. They happily informed me that their paper had now been accepted for a top journal, and that, knowing that I took an interest in the issues that the paper dealt with, they were happy to forward the accepted paper to me. (more…)
Is Math More Precise Than Words?
| Peter Klein |
Commentator Michael Greinecker suggests below that mathematics, as a language for expressing economic arguments, is more precise than words. Indeed, Samuelson’s landmark Foundations of Economic Analysis (1947) opens with this statement from J. Willard Gibbs: “Mathematics is a language.” Samuelson felt he had to justify his translation of conventional economic analysis into mathematics — a defense hardly needed today!
As Roger Garrison once noted, mathematics is indeed a language, but so is music:
There is no reason for economists to observe a categorical prohibition against either mathematical formulation or musical expression. The relevant question is: What sort of language — music, mathematics, or, say, English — allows economists best to communicate their ideas? Which language serves the economist without imposing constraints of its own upon his subject matter?
Garrison argues for English (or French, German, Spanish, whatever) on the grounds that mathematics cannot express causality, and economics — here Garrison follows Menger and Mises — is essentially a causal science. (I make this point about Menger here.) That is a subject for another day, however. (more…)
How To Screw Up an Email Negotiation
| Peter Klein |
From WebWorkerDaily, tips on how to screw up an email negotiation. Highly recommended. Generalizes easily to other kinds of email exchanges.
We’ve previously shared some ideas on ruining a PowerPoint presentation (use tiny fonts, a busy background, garish colors, lots of graphics and animation, inconsistent grammar, and read the slides word for word).
Coming soon: How to screw up a blog entry.
An Organizational Routines Bloffer
| Nicolai Foss |
Here is a blog offer: Teppo Felin and I have written “Organizational Routines: Historical Drift, A Course Correction, and Future Directions,” and if you mail me at njf.smg@cbs.dk, I will be happy to send you a copy. Here is the abstract:
Organizational routines and capabilities have become key constructs not only in evolutionary economics, but more recently also in business administration, specifically strategic management. In this essai we discuss the historical origins of the notion of routines, and highlight some of the theoretical and definitional drift associated with the notion of routines over time. In parallel we also explicate some of the underlying theoretical problems of routines (and related concepts); problems such as the lack of clarity on the origins of routines, and the more general need for micro-foundations. We argue that individual-level considerations deserve more attention in extant work — we in effect call for a course–correction in work on organizational routines — and we argue that evolutionary economics and strategic management should aim to build micro-foundations related to understanding the origins of routines.
Badly Needed: Research Into Meetings In Organizations
| Nicolai Foss |
Ahhhh! Today was my last day as member of the Academic Council (or Senate) of the Copenhagen Business School. As Denmark has the most undemocratic university legislation in the world (with the possible exception of North Korea) and the whole university system is socialized, all decision-making power is in actuality concentrated in the hands of the President and the Dean. This means that bodies such as the Academic Council have nada real decision-making competence. Knowing this, the members should be expected to get the meeting done as quick as possible, and go back to serious business, that is, research and teaching. Not so! One endless and essentially pointless debate followed another.
Which makes me wonder: Given that incredible amounts of time in organizations, public as well as private, and often involving absolute key employees, are spent in meetings, why do we see so very little serious (non-pomo) academic research into the phenomenon of meetings in organizations? (more…)
Best Business Movies
| Peter Klein |
The American Enterprise Institute gives us a list of the ten best business movies (via Craig Newmark). “[W]e looked for three qualities: (1) a great movie, (2) a relatively realistic picture of business, and (3) an attitude not openly hostile to capitalism as we know and love it.”
Here are some movies about entrepreneurs. And here is an entire blog about the treatment of capitalism in film.
Levels Issues II — Do Levels Exist?
| Nicolai Foss |
As I indicated in my earlier post on levels issues in social science research, I am confused by these and I suspect that many others are also confused. Perhaps this merely reflects my lamentable lack of serious philosophical training, and it is therefore with very considerable hesitation that I venture into issues of ontology, explanation, and causation that pertain to levels of analysis. (In fact, the following to some extent has the character of a bleg).
Do levels of analysis exist? Well, obviously levels of analysis only exist in our models. Still, there may be some stuff reality that is “like” our analytical levels. If so, is there some kind of mapping from the levels of analysis of our theoretical accounts to the levels (conceivably) existing in social reality? Or, are levels (of analysis) “merely” methodological devices — features of our model — that are not necessarily mirrorred by anything in reality? (more…)
You Know You’re Nobody If. . .
| Peter Klein |
. . . your entry gets booted off Wikipedia.
(I’m sure there is a serious lesson here about distributed knowledge, the voluntary enforcement of social norms, crowdsourcing, open-source programming, rational ignorance, or something. No time to think about it, though; gotta write my own Wikipedia entry.)
Management Theory and the Social Sciences
| Peter Klein |
The theme for the 2007 meeting of the European Academy of Management (Paris, 16-19 May) is “Current Management Thinking: Drawing from Social Sciences and Humanities to Address Contemporary Challenges.”
Researchers in management are invited to join us in Paris to reflect on the roots of Management, both as a scientific discipline and as a practice. In particular, Management’s focus on organisational performance is one of the critical underpinnings that transform the discipline’s borrowings from established social sciences into an autonomous field of academic investigation. This raises questions about the degree of subordination vs. emancipation of Management vis-à-vis the basic disciplines from which it draws.
Of course, the relationship between management theory and its core academic disciplines — economics, sociology, and psychology, primarily, but also history, philosophy, and political science — are key themes of this blog.
Here is the call for papers. Submissions are due 2 January 2007.
The Collected Works of Armen Alchian
| Nicolai Foss |
It has been said that “Armen Alchian’s output may be sparse and informal, but it has been among the most influential.” Still, his “virtuoso work on neoclassical price theory” has been sufficiently voluminous that his collected works run 1,620 pages!
The two volumes that contain all these pages were published in November by Liberty Fund at the ridiculously low price of $15 for the set. Over the years Liberty Fund has published an unbelievable amount of true classics in economics, law, history, philosophy and classical liberal scholarship in general at absolute bargain prices. (more…)
Who Really Cares?
| Nicolai Foss |
Danish party politics is essentially all a variation on one basic theme. Thus, we have extreme left social democrats, less lefty social democrats, middle-of-the-road social democrats, and conservative social democrats. The conservatism of the latter, currently in power, lies in their wish to keep the total tax burden at its current level (which given the recently announced Swedish tax cuts will make Denmark the World leader in income taxation). The other social democrats essentially wish to let the tax burden increase, and few see any problems with a marginal tax rate that goes into the 70s and beyond. All in the name of equality, of course.
Recently, the minister of social affairs made a major faux pas that upset virtually everyone. She argued that economic equality should not be seen as an independent policy goal. Her political life barely survived the media turmoil that immediately arose. The predictable “jungle law,” “heartless market mentality,””egoistic conservatism,” etc. labels were applied to the minister’s apostasy. The moral outrage was immense.
Enter Arthur C. Brook’s Who Really Cares? The Surprising Truth About Compassionate Conservatism which I am reading at the moment. It amounts to a frontal, data-based attack on the ideology that underlies redistributionism, that is,”in lieu of statist redestribution, nobody would really care for the poor, and most certainly not conservatives and libertarians.” (more…)
Economics of Multiple Voting Shares
| Peter Klein |
During the 1920s, the phenomenon of multiple voting shares expanded all over France and the world. This contributed significantly to the separation of ownership and control emphasized by Berle and Means (1932), and very much discussed by the foreign contemporaries. As is the case today, some argued that the reinforcement of the power of majority shareholders facilitated their firms’ development, while others emphasized the high agency costs that might result from managers’ and major shareholders’ absolute control. In this paper, we present detailed data on the development of multiple voting shares in France in the 1920s. We reword the arguments of the authors writing during the interwar period by using an interpretative framework of recent concepts in corporate finance and corporate governance. We test two alternative views from our data on the Stock Market performances: the “agency view,” in which the concentration of control did not affect the performances of firms issuing multiple voting shares, and the “timing view,” in which the issuing of these shares was favoured by the long bull market of the 1920s.
The paper is Muriel Petit-Konczyk, “Big Changes in Ownership Structures: Multiple Voting Shares in Interwar France,” Working Paper, ESA Lille2 University, 2006. Via EH.Net Abstracts.
Kleins in the News
| Peter Klein |
As noted previously, Ronald Coase has serious disagreements with UCLA economist Benjamin Klein. A few years ago, Coase and I had an extended, and pleasant, conversation about his work. He concluded by announcing, with evident satisfaction: “I see all Kleins are not alike.”
Indeed, I tend to disassociate myself from some Kleins, but am enthusiastic about others, such as George Mason University economist Daniel Klein. Dan has done outstanding research on the ideological profile of university professors. Dan’s work is challenged in the current issue of Public Opinion Quarterly by sociologists John F. Zipp and Rudy Fenwick, who deny the existence of “liberal bias” in the academy. Dan and Charlotta Stern have written a reply, currently under review at the same journal. Here’s the abstract:
In a recent Public Opinion Quarterly article “Is the Academy a Liberal Hegemony?,” John Zipp and Rudy Fenwick pit themselves against “right-wing activists and scholars,” citing our scholarship (Klein and Stern 2005a; Klein and Western 2005). Here we analyze Zipp and Fenwick’s characterization of our research and find it faulty in three important respects. We then turn to their “liberal v. conservative” findings and show they concord with our analysis. If one feels that it is a problem that humanities and social science faculty at four-year colleges and universities are vastly predominantly Democratic voters, mostly with what may called establishment-left or progressive views, then such concerns should not be allayed by Zipp and Fenwick’s article.
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