Archive for July, 2008

Journals and Social Networks

| Peter Klein |

Isn’t this a little much for nerdy academics?

As a registered user with Cambridge Journals Online (CJO) you may be interested to read about the latest additions we have made to the site. . . .

Users can now bookmark links from journal homepages and article abstracts using social bookmarking services, such as del.icio.us, Digg.com and Reddit.com enabling them to save web pages they want to remember or share. 

What’s next, a Twitter feed for Peter’s daily research activities? [02:30pm July 10, 2008 from CoolProf: Just updated footnote 12.]

11 July 2008 at 8:13 am 2 comments

Airlines Go Medieval

| Dick Langlois |

Like me, you’ve probably received more than one email today from U. S. air carriers, signed by the CEOs of all the major players, blaming the increase in fuel prices on — you guessed it — speculators. They direct you to a website at which you can send a pre-fab letter to your legislator. Here’s what the site says:

The oil price bubble is unfairly taxing American families and restricting our nation’s economic potential. While everyone is aware that supply and demand constraints contribute to price increases, there’s another force at work that, like gravity, is invisible yet powerful. This force is rampant speculation.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil even though they have no intention of using the product. As unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.  

Apparently, fear of secretive foreigners plays as well in the age of The Da Vinci Code as it did in the age of da Vinci. I invite you to do what I did: use their system to send a message contrary to what the airlines wish you to say. Here is what I said. Feel free to cut and paste.

The airlines are bombarding you with letters about the depredations of speculators. Because speculation seems arcane and mysterious to those untrained in economics, it has been an easy target since ancient times. Economists understand — and I imagine the airlines actually do as well — that speculation is in fact an efficient response to uncertainty. High fuel prices result from real supply and demand shocks as well as from uncertainty about the future of oil supply and demand. That uncertainty is a real economic phenomenon, and it can’t be wished away. By asking you to “stop” speculation, the airlines are really just asking you to transfer income to them and away from others. I find it particularly ironic that among the signatories of the letter was the chairman of Southwest Airlines, which for years has successfully speculated in fuel prices. Southwest never asked you to intervene when they benefited from long-term fuel contracts at below-spot-market prices. Don’t listen to them now.

10 July 2008 at 12:58 pm 4 comments

More on the Economic Organization of Law Firms

| Peter Klein |

As a follow up to these comments about the organizational structure of professional-services firms, law firms in particular, note Tom Ulen’s remarks on some recent trends, e.g., the growing importance of specialized, niche firms that provide specific services to corporate clients on a short-term basis.

10 July 2008 at 8:07 am Leave a comment

An Even Better Procrastinator’s Clock

| Peter Klein |

I blogged previously on an alarm clock designed for procrastinators and people with time-inconsistent preferences. It runs up to 15 minutes fast but in a random pattern so you don’t know how fast it really is. Here’s an even better clock: if you don’t wake up it starts dialing numbers randomly chosen from your phone’s contact list, annoying the living s__ t out of your friends until you turn it off. As Engadget notes, this is brilliance — “pure, sadistic, barbarous brilliance.”

9 July 2008 at 8:25 am Leave a comment

The Ecconomics of Organizing Economists

| Peter Klein |

Most regulatory agencies are staffed by a mix of attorneys and economists. Members of these groups do not always play well together. How, then, should such an agency be organized — functionally, putting the economists in a single unit, reporting to a chief economist, or divisionally, spreading the economists throughout divisions organized by legal issue, industry sector, geographic region, etc. and having them report to an attorney in charge of each division? An interesting application of the U-form versus M-form problem posed by Chandler (1962).

An analysis of organizational structure at US and European competition agencies by Luke Froeb, Paul Pautler, and Lars-Hendrik Roller (via Dan Sokol) finds that

the main advantage of a functional organization is higher quality economic analysis while the disadvantage is that the analysis may not be focused on legal questions of concern, and is less easily communicated to the ultimate decision makers. Likewise, the advantages of a divisional organization are decentralized, and faster, decision making; however, the quality of the economic analysis is likely to be lower and can result in less information reaching the ultimate decision makers.

Froeb, Pautler, and Roller suggest that hybrid forms, such as (a) functional organizations with strong horizontal links between economists and attorneys or (b) divisional organizations with strong vertical links between economists and attorneys, and managers trained in both law and economics, are best.

My own experience at the CEA confirms the importance of both the vertical and horizontal links. We economists were organized into a focused unit for major projects like the Economic Report of the President but were also assigned to ad hoc, inter-Agency teams working on specific policy issues (I dealt with spectrum auctions, the pricing of air traffic control, and foreign ownership of domestic telecom assets, among other things). I was typically the lone economist (though hardly the nerdiest member) on each team.

8 July 2008 at 9:43 am Leave a comment

Russ Coff Guest Blogging at orgtheory.net

| Peter Klein |

Russ Coff, whose work is popular in these parts, is guest blogging over at orgtheory.net. Look for some good stuff in the coming weeks.

Update: Here’s his first post.

7 July 2008 at 11:51 am Leave a comment

More on the File Sharing Contretemps

| Peter Klein |

Stan Liebowitz has posted another comment on the JPE file sharing controversy. Stan ups the ante by including, as appendices, a synopsis of the controversy, copies of correspondence between himself and the authors of the original article, and copies of the JPE referee reports and editor Steve Levitt’s rejection letter. Readers outside of academia may enjoy this rare window into the arcane world of peer review. (Via Craig Newmark.)

Question: If the authors of the original paper, Oberholzer-Gee and Strumpf, published their response to Stan, would we refer to it as OS/2?

Update: Stan reminds me to emphasize that the negative referee report from the JPE, the basis of Levitt’s rejection decision, was, in fact, written by Oberholzer-Gee and Strumpf. In other words, there is an OS/2, and you can read it as one of Stan’s appendices. The core of Stan’s paper is a detailed reply to OS/2, arguing that they don’t have a legitimate response to the critiques in his original comment.

7 July 2008 at 11:31 am 1 comment

Stop Using Military Buzzwords Too

| Dick Langlois |

It seems that, like the British Local Government Association, the US military is keen to get its people to stop using buzzwords, at least according to this February 2007 “Army Doctrine Update” I happened to see posted on a bulletin board in the Brazilian military academy where the Schumpeter Society Conference was meeting. Here are some highlights.

  • Know the difference between maneuver and movement (we don’t maneuver networks; we move them).
  • Battlespace is no longer a joint or Army term. Use “operational environment.”
  • Use “civil considerations” (the C in METT-TC), not “human terrain.”
  • Don’t use “red zone” at all; the term is “close combat.”
  • Do not use “kinetic” and “nonkinetic” to describe operations, actions, activities, tasks, or targets. Use “lethal” and “nonlethal.”

 Or perhaps the point is that they want people to use the right buzzwords.

5 July 2008 at 4:54 pm 3 comments

Notes from the Schumpeter Society Conference

| Dick Langlois |

I’m in Rio De Janeiro, where the biennial conference of the International Joseph A. Schumpeter Society has just finished up. I was involved in, among other things, a plenary session on the first day with Dick Nelson and Carliss Baldwin on “Varieties of Knowledge in the Economy.” The session was organized by Peter Murmann, who promises to post the slides and notes eventually on his very interesting website.

At the conference banquet last night — in the elegant Copacabana Palace Hotel — the Schumpeter Prize was split among three recipients. One was Tom McCraw for Prophet of Innovation, his biography of Schumpeter, which Peter blogged about some time ago. (See also my review.) Another was Martin Fransman for The New ICT Ecosystem: Implications for Europe, the latest of Martin’s many interesting books on ICT industry structure and government policy. In his acceptance remarks, Martin mentioned the picture of Schumpeter that had adorned the office wall of his first (and perhaps most influential) economics teacher, Ludwig Lachmann, at the University of the Witwatersrand in South Africa. The third recipient(s) were Mario Amendola and Jean-Luc Gaffard for a book I’ve have not yet seen.

The conference was set in a beautiful part of Rio called Urca, right on the water and surrounded by giant jutting granite hills. The area houses not only some older parts of the Federal University of Rio but also a compound of military facilities and academies. There is also an edifice called the Instituto Benjamin Constant, a school for the blind, which is apparently not named, however, for the eighteenth-century Swiss liberal thinker but for a nineteenth-century army officer who was the leading Brazilian adherent to the positivism of Auguste Comte.

5 July 2008 at 4:28 pm Leave a comment

IRB in the Movies

| Peter Klein |

Took my son to see The Incredible Hulk today. Best scene (paraphrasing from memory):

Bad guy Emil Blonsky, demanding at gunpoint for nerdy science professor to inject him with Bruce Banner’s radiation-infected blood: “Make me like him!”

Professor: “It’s extremely dangerous. You don’t know what it could do to you!”

Blonsky grabs professor by the throat and hoists him over his head.

Professor: “I didn’t say I wouldn’t do it. I just need informed consent.”

4 July 2008 at 3:43 pm 2 comments

The Puzzle of the Publicly Held Private-Equity Firm

| Peter Klein |

Like many observers, I was puzzled by last year’s IPO of the Blackstone Group, one of the nation’s largest private-equity firms. After all, the ability of PE firms to restructure and improve poorly performing companies owes a lot to their isolation from the day-to-day pressures of satisfying public investors. PE firms already face potential agency conflicts between their general partners and the managers of their portfolio companies, and between their general and limited partners; why add agency problems between the partners and public shareholders? Has the credit squeeze raised the cost of debt finance that much?

Today’s WSJ reports that KKR, which considered going public last year but pulled out, is again pondering an IPO:

The storied corporate-buyout firm has quietly and aggressively hired a battery of executives in recent months, creating an organization chart that looks remarkably similar to that of a public company. It has brought on a general counsel, a public-affairs chief, a chief compliance officer, a chief technology officer, a chief talent officer and a chief human-resources officer. . . .

[P]eople close to KKR acknowledge that it is still keen on becoming a public company and a raft of recent shifts, including the hiring spree, speak to a broader change at the firm and how it views its business.

Perhaps the publicly held PE firm is best described as a new hybrid form, an organization that combines the governance advantages of private equity with the lower capital costs of the publicly traded corporation. Or does it combine the worst features of both?

3 July 2008 at 2:02 pm Leave a comment

Award-Winning CEOs

| Peter Klein |

They make more money, sit on more boards, write more books, and have lower golf handicaps than CEOs of similarly performing firms who haven’t won awards (e.g. from Business Week). However, according to a new paper by Ulrike Malmendier Geoffrey Tate, their firms perform poorly after they win awards, compared to a matched set of firms headed by rank-and-file CEOs.

Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of “superstars” enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.

The pointer is from Justin Lahart, who blogs for the WSJ.

3 July 2008 at 11:35 am 1 comment

IRBs and Social-Science Research

| Peter Klein |

Most US research universities have an Institutional Review Board, or IRB, tasked with supervising “human-subjects” research. Unfortunately, the performance of the typical IRB is nothing short of disastrous, as we’ve noted before. IRB officials are trained to work with the physical and biomedical sciences, and have little knowledge of social-science research, though their mandate usually covers all research done at the university.

The July 2008 issue of Political Science & Politics, published by the American Political Science Association, contains a symposium on “Protecting Human Research Participants, IRBs, and Political Science Redux.” As editor Robert J-P. Hauck notes in his introduction:

By the 1990s, “IRBs had expanded their mission to include all research, not just research funded by the federal government, enhancing their scope of authority while slowing the timeliness of reviews. Similarly, and with the same result, IRBs were evaluating secondary research as well as primary research. Although the federal legislation provided for a nuanced assessment of risk, the distinction between potentially risk-laden research necessitating a full IRB review and research posing minimal or no risk that could be either exempted or given expedited review was disappearing. The length of the review process threatened the beginning or completion of course work and degree programs. IRBs were judging the merits of research projects rather than the risks involved. This trend was especially problematic because representation on many IRBs was skewed toward biological and behavioral scientists often unfamiliar with the methods and fields of political science and the other social sciences. And the list went on.

In the years that followed there have been several efforts to reform human subject regulation. . . . In the face of these and other efforts, are IRBs better able to effectively and efficiently protect human subjects in social science research?

Judging from the comments of the symposium authors, the answer is no. Now as in the past, IRBs have no consistently applied metric for measuring risk and corresponding levels of IRB review. Mitchell Seligson, Felice Levine and Paula Skedsvold, and Dvora Yanow and Peregrine Schwartz-Shea confirm that the review process has not and perhaps cannot accommodate survey methods and ethnographic and field research. The pace of the IRB review process continues to hinder undergraduate and graduate empirical research. IRBs’ rigid interpretations of requirements produce logically inconsistent directives such as when researchers are told to destroy data they diligently collected and anticipated sharing in order to protect research subjects’ anonymity (Seligson 2008; Yanow and Schwartz-Shea 2008; and Levine and Skedsvold 2008).

The pointer is from Zachary Schrag, who promises to comment on each article in the symposium.

2 July 2008 at 9:53 am 1 comment

Greif Responds to Edwards and Ogilvie

| Peter Klein |

I blogged earlier on Jeremy Edwards and Sheilagh Ogilvie’s provocative claim that Avner Greif misread the Geniza documents in constructing his influential account of the emergence of long-distance trade. Edwards and Ogilvie claim that formal law, not norms and custom, governed the behavior of the Maghribi traders.

Greif has prepared a formal response, now available on SSRN. Here’s the abstract:

Edwards and Ogilvie (2008) dispute the empirical basis for the view (Greif, e.g., 1989, 1994, 2006) that multilateral reputation mechanism mitigated agency problems among the eleventh-century Maghribi traders. Specifically, they assert that the relations among merchants and agents were law-based. This paper refutes this assertion and vindicates the position that the legal system had a marginal role in mitigating agency problems in long-distance trade in this historical era. The claim that merchants’ relations with their overseas agents were law-based is wrong.

The evidence presented here is based on quantitative analyses of the corpuses containing the hundreds of documents on which the literature relies and a careful review of the documents and the literature Edwards and Ogilvie cite. Their assertion is shown to be based on unrepresentative and irrelevant examples, an inaccurate description of the literature, and a consistent misreading of the few sources they consulted. This paper thereby reaffirms the empirical basis for the multilateral reputation view. Indeed, this empirical basis is stronger than originally perceived. In addition, this paper sheds light on the roles of the legal system and reputation mechanism during this period.

1 July 2008 at 11:27 am 2 comments

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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).
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