Archive for June, 2007

More on Terrorism and Incentives

| Peter Klein |

In a recent post on intrinsic and extrinsic motivation I referred to Robert Pape’s analysis of suicide bombings and his conclusion, supported by substantial empirical evidence, that the specific pattern of contemporary suicide attacks cannot be explained by the attackers’ general belief systems (such as religious ideology) but by particular tactical objectives. Suicide bombers, in other words, economize on scarce means to achieve specific ends and adjust their behavior in response to the incentives they face.

For instance: What group is responsible for the most suicide bombings? Al-Qaeda? Hamas? Hezbollah? No, it’s the Tamil Tigers, a secular nationalist group fighting for an independent state in northern and eastern Sri Lanka. Tamil attackers are motivated not by visions of 40 virgins, but by the belief that such attacks are their only effective weapon against a better-armed foe.

For more on these questions check out this NBER working paper by Efraim Benmelech and Claude Berrebi, “Attack Assignments in Terror Organizations and the Productivity of Suicide Bombers.” Benmelech and Berrebi analyze a detailed dataset on the personal characteristics of Palestinian suicide bombers and find that older and more educated suicide bombers are systematically assigned to more important targets. Older and more educated bombers are less likely to fail in their missions and more likely to cause significant damage when they succeed. The authors take this as evidence that terrorist organizations behave “rationally,” in the economist’s usual sense of that term.

20 June 2007 at 11:10 pm 3 comments

Dissing the IRB

| Peter Klein |

Most academic social-science researchers would rather calculate regression coefficients by hand than deal with their university’s Institutional Review Board. IRBs were created to protect human subjects in biomedical research (by requiring informed consent, for instance) but are now empowered to supervise research in the social sciences and humanities, all of which is classified as “human subjects” research. (An IRB official once told me I had to get IRB permission — by filling out numerous forms — before using accounting data from Compustat on publicly traded companies. These companies are staffed by human beings, after all.)

IRB skeptics may enjoy Todd Zywicki’s paper “Institutional Review Boards as Academic Bureaucracies: An Economic and Experiential Analysis,” which places the blame not on IRB personnel, but on the bureaucratic structure of the boards themselves. And don’t miss Zachary Schrag’s IRB blog.

20 June 2007 at 8:26 am 2 comments

Methodological Individualism at the DRUID Conference

| Nicolai Foss |

Today is the second day of the annual conference of the Danish Research Unit for Industrial Economics.  In order to stimulate controversy, and entertain conference delegates between less interesting paper sessions, DRUID organizes debates on motions. 

I participated along with Sid Winter of the Wharton School, Peter Abell of the London School of Economics, and Thorbjørn Knudsen of Southern Denmark University in today’s “DRUID Debate on Methodological Individualism versus Scientific Progress” (sic!!!!!) which involved the following motion:

Let it be resolved that this conference believes that the lack of methodological individualism applied in strategy research seriously limits scientific progress in the field.

Speaking for the motion were Peter and I, speaking against were Sid and Thorbjorn. A vote was taken before the debate.  There were about as many pro as contra votes.  After the debate, which had its rather heated moments, another vote was taken.  And again there about as many pro as contra votes.  Apparently, the debate had — perhaps not surprisingly — not managed to change any beliefs.  The debate was streamed, and should be available on the DRUID site within a couple of weeks.

19 June 2007 at 12:14 pm 5 comments

The Costs of SOX

| Peter Klein |

“Sarbanes-Oxley and Corporate Risk-Taking” by Leonce Bargeron, Kenneth Lehn, and Chad Zutter:

Many policymakers and corporate executives have argued that the Sarbanes-Oxley Act of 2002 (“SOX”) has had a chilling effect on the risktaking behavior of U.S. corporations. This paper empirically examines this proposition. Using a large sample of U.S. and U.K. companies, we find that compared with their U.K. counterparts U.S. firms have significantly reduced their R&D and capital expenditures and significantly increased their cash holdings since SOX. We also find that the equity of U.S. companies has become significantly less risky vis-à-vis U.K. companies since SOX. Finally, using a large sample of U.S. and U.K. initial public offerings (“IPOs”), we find that the likelihood that an IPO was conducted in the U.K. increased significantly after SOX and that this effect was especially high for firms in high R&D industries. Taken together, the results support the view that SOX has had a chilling effect on risk-taking by publicly traded U.S. corporations.

Lehn is a former chief economist at the US Securities and Exchange Commission, a founding editor (along with my former colleagues Jeff Netter and Annette Poulsen) of the Journal of Corporate Finance, and former director of CORI‘s predecessor organization CRCSE (Center for Resarch on Contracts and the Structure of Enterprise).

Here is a nice critique of SOX within a broader regulatory perspective. And check out the Mises Institute’s anti-SOX archive.

19 June 2007 at 12:15 am 1 comment

PhD Candidate Shortage in Accounting

| Peter Klein |

Gary Peters sent me some data about the excess demand for PhD Candidates in accounting at US business schools. A large cohort of senior faculty is due to retire soon and there are too few new PhDs to replace them. The shortage is particularly acute at Tier I universities and within sub-disciplines like tax and auditing. Fewer students appear to be enrolling in PhD programs in accounting and fewer PhD graduates are opting for academic careers (as opposed to careers in consulting).

I’m not aware of a similar deficit in economics (historically there has been a substantial excess supply of PhD candidates) though I haven’t seen any data recently. This paper in the current issue of the Academy of Management Learning and Education (via Brayden) describes a shortage of qualified faculty in other business disciplines.

18 June 2007 at 9:24 pm 18 comments

Formation of Beliefs About Markets

| Peter Klein |

What explains differences in beliefs about social and political institutions across groups? Are such beliefs learned from experience, acquired through rational persuasion, or given exogenously? Empirically, it is difficult to distinguish the effects of location or occupation from selection. Does living in Berkeley, for example, or studying sociology turn people to the Left, or do Lefties congregate in places like Berkeley and in sociology departments?

To gain insight into this problem, suppose you could take two virtually identical groups of people, place them in different institutional environments, and look later for differences in beliefs about market and society. Rafael Di Tella, Sebastian Galiani, and Ernesto Schargrodsky’s paper “The Formation of Beliefs: Evidence From the Allocation of Land Titles to Squatters” (Quarterly Journal of Economics, February 2007) investigates exactly this natural experiment.

We study the formation of beliefs in a squatter settlement in the outskirts of Buenos Aires exploiting a natural experiment that induced an allocation of property rights that is exogenous to the characteristics of the squatters. There are significant differences in the beliefs that squatters with and without land titles declare to hold. Lucky squatters who end up with legal titles report beliefs closer to those that favor the workings of a free market. Examples include materialist and individualist beliefs (such as the belief that money is important for happiness or the belief that one can be successful without the support of a large group). The effects appear large. The value of a (generated) index of “market” beliefs is 20 percent higher for titled squatters than for untitled squatters, in spite of leading otherwise similar lives. Moreover, the effect is sufficiently large so as to make the beliefs of the squatters with legal titles broadly comparable to those of the general Buenos Aires population, in spite of the large differences in the lives they lead.

Thanks to Dan Benjamin for the pointer.

18 June 2007 at 12:01 am 1 comment

Entrepreneurs are Both Born and Made, in the Interactional Sense

| Chihmao Hsieh |

Well, I’ve coddled this paper long enough, perhaps I should begin to set it free amidst that bit of shameless self-promotion. In a manuscript entitled “Cognition and the interaction between traits and training: the entrepreneur is both born and made,” I argue and provide evidence that an individual’s intelligence and the mode by which they train in multiple domains interact to determine the probability of self-employment. Not yet inclined to throw this up on SSRN just yet, but certainly happy to forward along a copy to interested parties (in hopes of receiving comments!). Just email me at hsiehc at umr dot edu… Below is the long abstract. (more…)

17 June 2007 at 5:22 pm 2 comments


| Peter Klein |

Accounting research, like that in other social sciences, has become increasingly quantitative. Mainstream empirical research in accounting is mostly “accountics” — accounting plus econometrics. Not everyone is convinced this is a good idea:

In her Presidential Message to the American Accounting Association (AAA) in August, 2005, Judy Rayburn discussed the issue of the relatively low citation rate of accounting research compared to citation rates for research in finance, management, and marketing. Rayburn concluded that the low citation rate for accounting research was due to a lack of diversity in topics and research methods. In this paper, we provide a review of the AAA’s flagship journal, The Accounting Review (TAR), following its 80 years of publication and describe why some recent AAA leaders believe that significant changes should be made to the journal’s publication and editorial policies. At issue is whether scholarly accounting research is overly focused on mathematical analysis and empirical research, or “accountics” as it has sometimes been called, at the expense of research that benefits the general practice of accountancy and discovery research on more interesting topics. We conclude from our review of TAR that after mostly publishing research about accounting practices for the first 40 years, a sweeping change in editorial policy occurred in the 1960s and 1970s that narrowly defined scholarly research in accounting as that which employs accountics.

This is from a working paper by Jean Heck and Robert Jensen. One consequence of the focus on accountics, they argue, is that accounting researchers know less and less about accounting (e.g., accounting standards, practices, history, policy). Of course, the same criticism is often directed against contemporary research in business economics, management, and other disciplines. Scholars know much about formal modeling and quantitative methods, but little about the economy or the firm. (more…)

15 June 2007 at 10:56 am Leave a comment

The Methods of Management History

| Peter Klein |

Thomas Hobbes (1660/1994:32) observed that “Out of our conception of the past, we make a future.” It behooves us then, as managers and management scholars, to be satisfied that our conceptions of the past are developed in ways that, as far as possible, avoid the problems that would make them less than useful in creating that future.

Despite the importance of this subject, little attention has been given to the question of method/methodology in management history. A recent Google Scholar search found that, while the term “management history” produced 194,000 hits and “method in history” resulted in 674 hits, the terms “methodology in management history,” “method in management history,” “management history methodology,” and”management history method” produced no hits at all.

To address this deficiency the Journal of Management History is seeking contributions for a special issue on “Scholarship in Management History: The Importance of Methodology.” (I assume they know the difference between method and methodology.) Here is the call for papers.

Can readers suggest good books or papers on the methods of management history?

14 June 2007 at 10:50 am Leave a comment

Kauffman Data Symposium

| Peter Klein |

The Kauffman Foundation is sponsoring a symposium on entrepreneurship and innovation data November 2-3 in Kansas City. The website indicates that seating capacity is filled, but proceedings and information on datasets will be available on the site. Mike Sykuta and I will give a presentation on the CORI contracts library.

Innovation manifests itself in different ways, and empirical researchers have used data on patent rates, R&D expenditure, new product introductions, and similar phenomena to measure it. On entrepreneurship data, however, there is far less consensus. In part this results from widely varying conceptions of what entrepreneurship is. Self-employment rates, the number of business startups, the ratio of small firms to large firms, and the like are measurable, but do they correspond to entrepreneurship? If entrepreneurship is alertness, adaptation, innovation, or — my favored concept — judgment, then occupational and structural measures may not capture it very cleanly.

14 June 2007 at 10:21 am Leave a comment

Naming a Nation: Will the Real Wu-Tang Clan Please Stand Up?

| Chihmao Hsieh |

In the USA, the “Wu-Tang clan” refers to a family of Grammy-award-winning rappers formed in the 1990’s. In China, it’s about to refer to, well, just a normal family.

As described in this news report released yesterday by the AFP, today China has roughly 1.3 billion people, and 85% of them are covered by a mere 100 surnames. Ninety-three million people share the surname Wang, while 92 million are called Li and 88 million call themselves Zhang. For comparison, the 2007 estimated population in the United States totals 301 million. (You do the math!) And, as might be expected, the lack of variety in surnames is causing undue confusion in China (kind of like this?).

Thus, according to a recent report by the China Daily as mentioned in that news report, “under a new draft regulation released by the ministry of public security, parents will be able to combine their surnames for their children, a move that could open up 1.28 million new possibilities. (more…)

13 June 2007 at 2:01 am 1 comment

Can Markets Be Designed?

| Peter Klein |

A fundamental distinction between organizations and markets is teleological: organizations are established by specific individuals to achieve specific purposes, while markets emerge, organically, from the bottom up. Carl Menger used the terms “organizations” and “orders” to distinguish these two categories of institutions; Hayek preferred the obscure Greek terms taxis and cosmos. Invoking this distinction does not deny, of course, that there are “organic” elements within firms, or that markets are infused with institutions that are at least partly “designed” (civil law codes, for instance).

What, then, is meant by “market design,” as in designing markets for cadaveric organs, education vouchers, or tradeable emissions permits? Do attempts to do so constitute what Hayek called “constructivist rationalism” or “constructivism,” the belief that we can remake social institutions that have emerged incrementally, over long periods of time, to suit our current whims?

Lynne Kiesling and Mike Giberson have been wrestling with this question over at Knowledge Problem (here and here). How, asks a reader, “does one invoke Hayek in one breath and then speak of ‘designing’ a market in the next while keeping a straight face?” Lynne and Mike offer several responses: (more…)

13 June 2007 at 1:26 am 11 comments

Squeezed Books

| Peter Klein |

Another open-source, wiki-style book abstracting service, similar to WikiSummaries. It’s just getting off the ground; why not add your own content and help make the world a better place?

12 June 2007 at 8:50 am Leave a comment

Tennis Stat of the Day

| Peter Klein |

How dominant is Roger Federer? Rafael Nadal has been #2 in the ATP rankings, behind Federer, for 98 consecutive weeks — the longest anybody has been #2 without reaching #1 in the modern era. (Thanks to NBC for providing the stat during today’s French Open men’s final.)

It’s an interesting metric. What firms have held the #2 spot in their industries (sales, market share, earnings, etc.) the longest without reaching #1? Anybody with Compustat data and a few hours to spare want to crank some numbers for us?

10 June 2007 at 10:44 am 4 comments

Would You Publish Your Dissertation Drafts on the Web?

| Peter Klein |

Academic researchers have long circulated unpublished working papers, first on paper (remember those little yellow NBER working papers?) and now on the web. Of course, opinions differ on when papers should be circulated. Some scholars share their early drafts, hoping to solicit constructive feedback; others prefer to wait for a more mature product, worrying about unpolished writings that live forever in the Google cache.

But would you circulate rough drafts of dissertation chapters online? Advisers, would you encourage your students to do this? (more…)

8 June 2007 at 10:48 pm 6 comments

Plasticity and Asset Specificity

| Peter Klein |

A reader asks what I think of Alchian and Woodward’s concept of “plasticity” and how it relates to Williamson’s notion of asset specificity.

The term was introduced in “The Firm is Dead: Long Live the Firm” (Journal of Economic Literature, 1988), Armen Alchian and Susan Woodward’s thoughtful review of Williamson’s Economic Institutions of Capitalism. They define plasticity as the range of uses to which an asset may be put. “We call resources or investment ‘plastic’ to indicate that there is a wide range of discretionary, legitimate decisions within which the user may choose” (p. 69). In the Barzelian language favored on this blog, plasticity can be interpreted as the number of attributes — realized or potential — that assets possess. Trucks and copy machines are highly plastic. So are R&D labs, in the sense that they can be used to pursue long- or short-term objectives, to satisfy clients’ objectives or to maximize the researchers’ utility, and so on. Steel mills are implastic because they can be used to make steel and little else. (more…)

7 June 2007 at 10:44 pm 7 comments

Private Legal Enforcement in Global Commerce

| Peter Klein |

A new paper by Margaret Blair, Cynthia Williams, and Li-Wen Lin, “Assurance Services as a Substitute for Law in Global Commerce,” describes the market for “assurance services” as private means of enforcing commercial arrangements.

In this article we examine the rapid emergence and expansion of a private-sector compliance and enforcement infrastructure that we believe may increasingly be providing a substitute for public and legal regulatory infrastructure in global commerce, especially in developing countries where rule of law is weak and court systems are absent or inadequate. This infrastructure is provided by a proliferation of performance codes and standards, and a rapidly-growing global army of privately-trained and authorized inspectors and certifiers that we call the “third-party assurance industry.” The growth in the third party assurance business has been phenomenal in the last decade. The business first developed to facilitate making and carrying out private contracts, but in recent years, assurance services are being deployed for purposes that are more appropriately seen as regulatory in nature. Third-party assurance may thus be providing a new institutional structure through which private commercial exchange is being harnessed and regulated for essentially public purposes.

See also Alex Tabarrok on private assurance contracts, which function similarly to enforce contributions to public goods and club goods.

7 June 2007 at 7:37 am 2 comments

Geek News de Jour

| Peter Klein |

Stata 10 ships June 25.

Expect overnight campers and long lines at the university bookstore, like the crazy scene at Best Buy when the Xbox 360 went on sale. (HT: SSSB)

6 June 2007 at 3:42 pm 1 comment

Do We Need a Project Project?

| Steven Postrel |

A peculiar fact about business schools (at least in the USA) is that project management is not part of the regular MBA curriculum. Why is this peculiar? Only because a huge percentage of the work managers do is organized into projects, the success or failure of strategies often rests on the quality of execution of projects, and many of the principles and techniques of good project management are not immediately obvious. But hey, if anyone needs to know about this trivial stuff they can always go to a two-day workshop and get a certificate (probably from an engineering department). (more…)

6 June 2007 at 1:17 am 18 comments

Nurkse at 100

| Peter Klein |

Reader G. V. Varma reminds me that Ragnar Nurkse was born 100 years ago today, June 5. I don’t have anything to add to this earlier post except to share these funky diagrams from Nurkse’s 1935 Review of Economic Studies article on the structure of production. Each is supposed to illustrate a circular process in which fixed capital reproduces itself. (Neither, I’m afraid, will win an award for pedagogy.)

The spout-and-ring diagram is explained as follows: “The ‘ring’ is equivalent in meaning to Dept. I [which produces capital goods] and the ‘spout’ to Dept. II pouring forth its output of consumable goods. The output of Dept. I divides itself as the dotted line: part of it flows back into the ring (to maintain fixed capital in Dept. I itself). This picture, though less informative than the departmental scheme [pictured below] in bringing out the internal exchange relationships of a capitalist economy, may nevertheless be useful in illustrating the circular process of capital reproduction as lying, in a sense, behind the purposive orientation economic activity directed toward the creation of consumable income.”

Hopefully there is a Nurkse specialist out there who can help us make sense of the larger diagram.


5 June 2007 at 1:31 pm 2 comments

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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).

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