Archive for March, 2008

Jeffrey Pfeffer in the Lion’s Den

| Nicolai Foss |

Management theory heavy-weight and über-econ-basher Jeffrey Pfeffer (cf. these posts) makes an appeareance in the Fall 2007 issue of . . . the Journal of Economic Perspectives — admittedly a rather “open” journal, but still one of the house journals of the American Economic Association.  (more…)

31 March 2008 at 2:02 pm 4 comments

Newspapers as Coasian Firms

| Peter Klein |

The hunter-gatherer model of journalism is no longer sufficient. Citizens can do their own hunting and gathering on the Internet. What they need is somebody to add value to that information by processing it — digesting it, organizing it, making it usable.

This is why we still need newspapers — or something like them. Ronald Coase, the British economist, once asked why we need business firms. Why can’t all their activities be coordinated by individuals contracting with one another instead of working in a bureaucratic, command-and-control environment? The answer, he said, is transaction costs. If a manager had to negotiate with a free-lancer for every task, the cost in time would be unbearably high.

Searching for information on the Internet involves something like transaction costs because we have so many varied sources to evaluate. We need somebody we trust to organize them for us. That can be the task of the new journalism.

That’s from the retirement speech of UNC journalism professor

31 March 2008 at 8:43 am 2 comments

Mizzou J-School Centenary

| Peter Klein |

My colleague Steve Weinberg‘s new book on John D. Rockefeller and Ida Tarbell, Taking on the Trust, is reviewed in today’s Wall Street Journal. You can read an exerpt here (may be gated for non-subscribers). Steve has another new book, A Journalism of Humanity: A Candid History of the World’s First Journalism School, about the University of Missouri’s J-School, which is celebrating its centenary this year. As explained in the book the journalism school, like the first programs in business administration at Wharton, Tuck, HBS, and elsewhere, struggled to gain acceptance as a legitimate academic program and to escape the “trade-school” stigma.

While vocational programs in law and medicine have long been accepted as legitimate parts of the Academy, and engineering, agriculture, and architecture have been welcomed since at least the late 19th century (in the US, after the Morrill Act), business and journalism have faced particular difficulties becoming integrated into the academic mainstream. Actually, journalism today is even more of an outsider than business  administration; for example, while many B-school faculty hold PhDs in economics, sociology, psychology, or other “traditional” disciplines, many J-school professors do not hold PhDs at all, with most being former industry professionals, more like B-school clinical professors. Those of you interested in the history and current problems of business schools might learn something from the experiences of journalism and other professional schools.

28 March 2008 at 2:46 pm Leave a comment

The Make-or-Buy Decision: Corporate Lawyer Edition

| Peter Klein |

What are our Lawyers made of?
What are our Lawyers made of?
Of Causes and fees, demurrers and pleas,
Learned Brother and lots of pother,
Counsel and jury with very wise looks,
Flaw in the indictment and statue books,
Such are our Lawyers made of,
Such are our Lawyers made of.

That’s one answer. It ain’t sugar and spice and everything nice, that’s for sure. Whatever lawyers are made of, should firms make them in-house, or hire ones made by somebody else? Steven Schwarcz addresses this question in a new paper, “To Make or to Buy: In-House Lawyering and Value Creation” (Journal of Corporation Law, Winter 2008). Schwarcz notes that large firms have been shifting much of their transactional work from outside law firms to in-house lawyers. Analysis of survey data suggests that information costs and scale and scope economies are the most important drivers of this trend. Asset specificity seems to play a less important role, mainly because reputation effects are sufficient to mitigate opportunistic behavior by outside law firms. A very interesting paper on the make-or-buy decision.

28 March 2008 at 11:35 am Leave a comment

Riding Off Into the Sunset. . . .

| Steve Phelan |

Dear colleagues, this post represents my 22nd and final post as a guest blogger on O&M. Over the last four months I have learned a lot about blogs and successful blogging. For instance, the average post on O&M gets seen/read by about 70 people in the first 48 hours. Of these, perhaps only 5% will comment on a post. But blog posts have an incredibly “long tail”. The top posts on O&M average 3,000 or more views, with the top post over 7,000 views (see physics envy if you wish to add to the count). As a result of this long tail of posts, O&M receives about 1,000 hits per day! (more…)

27 March 2008 at 5:20 pm 6 comments

Shared Governance: Benefits and Costs

| Peter Klein |

Back in grad school I was regularly hectored by a fellow student about joining the Association of Graduate Student Employees (AGSE), our local collective-bargaining association. Despite his attempt to stigmatize me as a free rider, I never joined. I didn’t think I agreed with the organizations goals, and I was sure I didn’t want to be associated with AGSE’s parent organization, the United Auto Workers (go figure). One year there was even a strike, which I found silly (I scabbed).

This semester I’m getting repeated invitations to join the American Association of University Professors (AAUP). Again, I hesitate. Of course, as an American university professor, I’m happy to see more power, prestige, and perquisites go to American university professors (OK, specifically, to me). But the AAUP has a strange agenda. Its mission includes not only protecting academic freedom and defending the role of the university in public life, but also preserving shared governance. Having spent many years in university settings, I’m convinced that shared governance is grossly inefficient, at least most of the time. There can be benefits, of course, to offset these costs, as is the case with worker-owned cooperatives and other non-standard forms of organization. But one searches the AAUP’s website in vain for any analysis or evidence on shared governance. What are the benefits and costs, relative to other feasible organizational forms? Why should professors defend this peculiar institution? (more…)

27 March 2008 at 9:45 am 4 comments

The Real March Madness

| Peter Klein |

Have you filled out your bailout bracket?


27 March 2008 at 8:59 am Leave a comment

Maybe Sociology Is Worth Something After All

| Peter Klein |

This passage from yesterday’s WSJ front-pager on Sheraton’s attempt to upgrade its image should delight Brayden and the Boys:

[Sheraton’s Hoyt] Harper, whose father was a psychologist, says he takes an inclusive approach to negotiating with [franchisees]. Instead of issuing blanket instructions, he has brought in major Sheraton owners, such as Host, early on in the design process to get their input and help tweak the final plan. This means that Starwood must endure a lot of criticism from its hotel owners and that the owners must endure criticism from Starwood. “My sociology major was much more appropriate for this job than my business degree,” he says.

On a more serious note, the article contains interesting general information about the hotel industry and the dominant franchise model. It should have mentioned Francine Lafontaine’s work on franchising, particularly this recent paper (with Renata Kosova and Rozenn Perrigot) on the hotel industry and a chain’s choice to own or franchise particular units.

26 March 2008 at 4:26 pm 1 comment

A Picture Is Worth a Thousand Bullet Points

| Peter Klein |

An alert reader directs me to slide 241 of the slide pack for Dick Langlois’s Economics of Organization course. Click the image below for a look. Dick seems to be raising the point that Williamson’s TCE (as well as other theories of economic organization) pays insufficient attention to the processes by which firms reach their “optimal” organizational structures. TCE holds that firms try to minimize (or should minimize) the sum of production and transaction costs. But do firms actually do this? Do they make mistakes? Do they experiment and learn? Is the selection environment strong enough that inefficient organizational choices are quickly eliminated, or do inefficiencies persist? (The problem is particularly important for empirical literature on organizational form — see pp. 440-42 of this paper.) Or, can we assume, with Dr. Pangloss, that whatever is, is optimal?

oew_candide.jpgTo illustrate the point, Dick includes a photo of Williamson giving a seminar, with some additional background art — an etching from Candide — added to the frame. If you’re not paying attention you might think the etching is part of the original. I give Dick points for cleverness, but my anonymous correspondent finds the illustration a bit too subliminal. What do you think?

26 March 2008 at 11:17 am 4 comments

Intelligence Doping

| Peter Klein |

Posner and Becker weigh in on “intelligence doping,” using drugs to increase cognitive performance (see our earlier remarks here). Both argue, on utilitarian grounds, against regulating Provigil and similar stimulants. I bet they’d go for the new Snickers bar too.

26 March 2008 at 9:15 am Leave a comment

No Country for Old Probability Theorists

| Peter Klein |

I finally got around to seeing No Country for Old Men, which I enjoyed despite unrealistically high expectations (movies too suffer from the winner’s curse). Javier Bardem’s Anton Chigurh surely belongs with Darth Vader, Hannibal Lecter, Dr. Christian Szell, Nurse Ratched, and Max Cady on the list of all-time great movie villains. The movie is in one sense a meditation on the role of chance in human affairs, so naturally I started thinking about risk, uncertainty, choice, delegation, and other issues near and dear to our organizational hearts. 

Chigurh, the cold-blooded killer, likes to flip a coin before deciding whether to kill someone, forcing the victim to call the toss. This reminded me that risk and Knightian uncertainty aren’t mutually exclusive determinants of economic outcomes. Entrepreneurs choose to invest in risky projects, but project selection itself reflects the bearing of Knightian uncertainty. Richard von Mises gives the example of champagne bottles that burst while in storage with predictable frequencies. The champagne producer can quantify the risks associated with bottling and storage. But the choice of producing one variety or another, hiring one type of laborer or another, and even being in the champagne business at all, involves another kind of uncertainty, one that cannot be described with mathematical precision. The decision to enter the champagne business involves Knightian uncertainty, but once that decision has been made, some of the variation in outcome can be characterized as probabilistic risk. Think of it in terms of mixed strategies; the specific move is random, but the decision to play a mixed strategy is not. Likewise, Chigurh can hardly claim that his victims’ deaths are random. A coin flip determines their fate, but he chooses to flip the coin — and that choice cannot be explained by a known probability distribution. (more…)

25 March 2008 at 12:04 pm 10 comments

Does Performance Cause Organizational Form?

| Peter Klein |

There is a large literature on the performance effects of organizational form. Obviously, for the strategist, getting organizational form right is important only if it leads to superior performance. Of course, the empirical literature recognizes that organizational form, governance, strategy, and other key decision variables are at least partly endogenous. Still, the causal arrows are usually thought to run from strategy to performance.

Ben Hermalin was at Missouri this week to present his paper, “Firm Value and Corporate Governance: Does the Former Determine the Latter?”, which argues that good governance can be the result, not the cause, of good performance. He constructs a model in which the benefits of getting governance right are, on the margin, increasing in the value of the firm’s investment opportunities. Better-performing firms have better opportunities and hence more to gain from designing governance structures that align managers’ incentives with owners. The model is based on an agency framework and applies specifically to managerial governance, but the general problem would seem to apply to a variety of organizational problems and contexts. (more…)

21 March 2008 at 9:35 am 4 comments

Private Equity and Innovation

| Peter Klein |

LBOs do not reduce patent activity, and the quality of patents may actually increase following a “going-private” transaction, according to a new paper by Morten Sorensen, Per Strömberg, and Josh Lerner.

A long-standing controversy is whether LBOs relieve managers from short-term pressures of dispersed shareholders, or whether LBO funds themselves are driven by short-term profit motives and sacrifice long-term growth to boost short-term performance. We investigate 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity. We find no evidence that LBOs decrease these activities. Relying on standard measures of patent quality, we find that patents applied for by firms in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and prominent areas of companies’ innovative portfolios.

I very much like this kind of work even though I’m a patent skeptic (1, 2, 3, 4).

20 March 2008 at 2:45 pm 2 comments

Numbers Don’t Lie — Or Do They?

| Peter Klein |

Quantitative analysis leads to superior decision making, says Ian Ayres in Supercrunchers. Enthusiasts for expert systems are skeptical of “intuitive” reasoning. And most contemporary social scientists can’t conceive of a world without econometrics, sociometrics, psychometrics, and fill-in-the-blank-ometrics. Even management scholars are getting into the act. Of course, quantitative analysis is only as good as the assumptions that go into it. And economists such as Knight and Mises maintain that some kinds of human decision-making defy quantification and systematization and are fundamentally qualitative, or verstehende (explaining why some entrepreneurs earn profits while others make losses).

Wharton’s Gavin Cassar studies nascent entrepreneurs (defined here as firm founders) and finds, surprisingly, that those who use common accounting practices such as budgeting, sales forecasting, and financial planning are more likely to overestimate future performance than those who rely on qualitative, intuitive projections. “[T]hose individuals who adopt an inside view to forecasting, through the use of plans and financial projections, will exhibit greater ex-ante bias in their expectations. Consistent with inside view adoption causing over-optimism in expectations, I find that the preparation of projected financial statements results in more overly-optimistic venture sale forecasts.” In other words, quantitative analysis may exacerbate, rather than mitigate, cognitive bias. Worth a read (and see this summary in Knowledge@Wharton).

19 March 2008 at 9:44 pm 1 comment

A New Explanation for Scholarly Productivity

| Peter Klein |

I always suspected it: scholarly productivity is inversely related to — beer. That’s the finding of a new study of Czech ornithologists, as summarized in yesterday’s N.Y. Times (thanks to Brian McCann for the heads-up). The more beer a scientist drinks, the less likely he is to publish or to have his work cited. Apparently this is a cross-sectional result, without fixed effects or instrumental variables, so there is little information on causality. Perhaps unsuccessful Czech scientists tend to drown their sorrows at the local pub (no doubt drinking their copycat Budvar). Personally, I am more likely to grab a brew to celebrate the occasional citation, so I’d expect the correlation (under reverse causality) to run the other way. And what about these rats?

19 March 2008 at 9:47 am 5 comments

Economics and the Rule of Law

| Peter Klein |

This week’s Economist features a summary of recent economic controversies about the rule of law (thanks to Fabio Chaddad for the pointer). There is near-universal consensus among specialists in economic history and economic growth that the legal rules — and institutions more generally — “matter,” though the precise mechanisms are in dispute, and aspects of the institutional environment such as the quality of legal rules are difficult to measure consistently across societies and over time. We’ve touched on the closely related “legal origins” debate before. As with that controversy, the arguments in this one have become more subtle and complex in the last decade. As the Economist notes:

[A]s an economic concept the rule of law has had a turbulent history. It emerged almost abruptly during the 1990s from the dual collapses of Asian currencies and former Soviet economies. For a short time, it seemed to provide the answer to problems of development from Azerbaijan to Zimbabwe, until some well-directed criticism dimmed its star. Since then it has re-established itself as a central concept in understanding how countries grow rich — but not as the panacea it once looked like.

The Economist piece focuses on the distinction between “thick” and “thin” understandings of the rule of law. (more…)

18 March 2008 at 9:37 am Leave a comment

Fed Intervention Policy

| Steve Phelan |

Greg Mankiw reports that Myron Scholes has a novel idea to fix the credit crisis – rather than simply guaranteeing to underwrite asset losses (as they have with the JP Morgan/Bear Stearns ) Scholes proposes that the Fed takes senior equity and debt positions in a distressed bank thereby improving the capital adequacy ratio, and thus preventing a credit freeze which would damage the real economy. I like it – what do YOU think?

17 March 2008 at 4:44 am 2 comments

Debt Bites Back

| Steve Phelan |

A nice cartoon presentation of the debt crisis by the Wasington Post that you might want to use in your classes.

Two questions:

1) Is the story essentially correct or is it overly damning?

2) What are the organizational implications of this story – for institution and policy building?

We can only assume that all sorts of “corrective” measures will be planned and taken in the immediate future. I believe we should be getting involved in the debate by honing our theoretical position. We are watching economic history in the making.

17 March 2008 at 3:57 am Leave a comment

Hayekian Knowledge Arguments: An Epistemic Fallacy?

| Nicolai Foss |

A small handful of papers have become highly influential in economics as well as in management and organization research. One such paper is Friedrich Hayek’s 1945 essay, “The Use of Knowledge in Society,” a paper that emerged in the context of the debate on the viability and efficiency of planned resource allocation on the societal level (i.e., socialism) that raged among academic economists in (particularly) the inter-war period. Hayek famously argued that planning confronts inherent knowledge-based constraints, and these constraints are certainly binding at a scale of activity that makes comprehensive overall management/planning of economy-wide resource allocation deeply inefficient. Many modern management thinkers have echoed this argument, arguing that “traditional” authority relations are increasingly challenged by the (increasingly) dispersed nature of knowledge.

However, at least when applied to authority in firms the Hayekian knowledge argument arguably misconstrues the nature of managerial authority, because it is based on an epistemic fallacy. (more…)

14 March 2008 at 7:52 am 7 comments

Jay Barney to Become Honorary Doctor at CBS

| Nicolai Foss |

At a ceremony on April 4., a honorary doctorate will be bestowed upon Professor Jay B Barney by the Copenhagen Business School. Jay will be in excellent company; earlier honorary doctors at CBS include Oliver Williamson and James March. (more…)

14 March 2008 at 7:20 am 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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