Archive for January, 2009

That Great Klein (1996) Paper

| Peter Klein |

No, not this one. I’m talking about Ben Klein’s 1996 Economic Inquiry paper, “Why Would Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” It’s from a special issue honoring Armen Alchian, the entire contents of which are worth reading. Klein’s paper extends the Klein, Crawford, and Alchian (1978) model by explaining why, in equilibrium, holdups can occur, even if parties are farsighted. The basic story — that parties deliberately leave “gaps” in their contracts because the marginal costs of filling in the gaps exceed the marginal benefits — is closer in spirit to neoclassical economics than is Williamson’s Carnegie-style appeal to bounded rationality. Writes Klein:

[In an uncertain world where complete contractual specification is costly, transactors use incomplete contracts that deliberately do not take account of every contingency. As a result, transactors knowingly leave themselves open to the possibility of hold-ups.

The costs associated with contractual specification that lead transactors to use incomplete and imperfect contracts involve much more than the narrow transaction costs of writing down responses to additional  contingencies. In addition to these extra “ink costs,” complete contractual specification entails wasteful search and negotiation costs associated with discovering and negotiating prespecified contractual responses to all potential contingencies. Because most future events can be accommodated at lower cost after the relevant information is revealed, much of this activity involves largely redistributive rent dissipation with little or no allocative benefit. Transactors are merely attempting to obtain an informational advantage over their transacting partners, hoping to place themselves in a position where they will be more likely to collect on (and less likely to pay for) hold-ups.  Therefore, rather than attempting to determine all of the many events that might occur during the life of a contractual relationship and writing a prespecified response to each, the gains from exchange are increased by the use of incomplete contracts.

Transactors also use incomplete contracts because writing something down to be enforced by the court creates rigidity. Since contract terms are necessarily imperfect, once something is written down transactors can engage in a hold-up by rigidly enforcing these imperfect contract terms, even if the literal terms are contrary to the intent of the contracting parties (p. 447). (more…)

21 January 2009 at 5:36 pm 5 comments

Robert Burns and Adam Smith

| Peter Klein |

I’m sure you’re all busy this week preparing your Burns Supper. I’ll be celebrating on Sunday, of course, the 250th anniversary of Burns’s birth (this Burns, not this one). To honor the occasion Gavin Kennedy has written about the influence on Burns of Adam Smith, whose Theory of Moral Sentiments Burns knew well. Reflecting on the famous lines from Burns’s “Poem About a Louse” — O wad some Pow’r the giftie gie us / To see oursels as ithers see us! — Gavin notes that

Burns’s poem is a way into Smith’s “impartial spectator.” Both men would have agreed that “to see oursels as ithers see us” expresses their different perspectives; Burns, pessimistically, reminding us of human frailty and its consequences, and Smith, optimistically, mapping how humans develop and maintain their moral senses. Smith, contrary to the poet’s assertion, says we do have the power “to see oursels as ithers see us” and he explains how. We have this power, if we wish to use it, from what we may crudely describe as akin to a conscience (though it was much more) in a weak resistance to self-deceit.

Smith is explicit and his stance inspired Burns’s verse:

. . . self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life. If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable. We could not otherwise endure the sight. (TMS III.4.6)

20 January 2009 at 11:31 pm 2 comments

More Evidence Against the QWERTY Effect

| Peter Klein |

Via MR, an experimental study on path dependence finds that subjects do not get stuck using second-best technologies, even in the presence of network effects:

In this paper, we offer new evidence regarding the economic importance of QWERTY type outcomes. We use laboratory experiments to study platform competition. Experiments have several advantages in studying platform competition: the identity of the inferior platform is clearly defined; the degree to which a platform has a “head start” is controlled; and the “life cycle” of platform competition is reproducible. So far as we are aware, we are the first to study QWERTY in the lab.

We can easily summarize our results: Somehow, the market always manages to solve the QWERTY problem. In sixty iterations of dynamic platform competition, our subjects never got stuck on the inferior platform — even when it enjoyed a substantial first-mover advantage.

For more on path dependence, network effects, and QWERTY see thisthis, and this. The more I learn about so-called QWERTY effects the more I’m convinced that they have no economic significance (and even less policy signficance).

19 January 2009 at 4:02 pm 1 comment

How To Write a Term Paper and Get an F

| Peter Klein |

While Googling for some entrepreneurship references I stumbled upon this entry from one of those term-paper download sites. The site is called Unfortunately, whoever created the site neglected to check the content of the papers because this one, which happens to be in one of my research areas of interest, is pretty bad. Sample passage: “We must first debunk the idea, advocated by Knight and Mises, of the entrepreneur as risk-bearer (Peter Swoboda, 1984). Aside from making every stock market participant an entrepreneur, this definition simply does not describe actual entrepreneurs and must be discredited.” Um, OK. Aside from misunderstanding the distinction between risk and uncertainty — which, after all, is supposed to be Knight’s main contribution — and arguing by begging the question, this reads like, well, a high-school term paper. But maybe that’s the point — when you plagiarize, it should look authentic.

19 January 2009 at 12:52 pm Leave a comment

More on Open-Source Peer Review

| Peter Klein |

untitled1I’ve thought about setting up an academic version of the Fail Blog where scholars could post copies of rejected manuscripts, nasty referee reports and editor’s letters, and — of course — favorite student papers. But some current experiments in open-source  peer review (a topic we’ve covered before) may do the trick. For example, this biology journal is making all submitted manuscripts and referee reports visible to the public:

Publication of research findings is very important to scientists. But scientists tend only to know about how things work at a scientific journal through personal experience and hearsay. By making the evaluation of manuscripts visible to everyone, The EMBO Journal aims to encourage constructive referee and author argumentation. Younger scientists will gain valuable insight into how to publish their research findings as well as how to deal with critique.

I’m not sure how anonymity will be preserved, and some potential authors and reviewers will likely shy away from participating. A very interesting experiment, to be sure. Here’s a wikipedia entry on the open-source peer-review movement more generally.

16 January 2009 at 9:41 am 9 comments

Kirzner on Kirzner

| Peter Klein |

In a recent paper I wrote that much of the contemporary entrepreneurship literature on opportunity identification

misses . . . the point of Kirzner’s metaphor of entrepreneurial alertness: namely that it is only a metaphor. Kirzner’s aim is not to characterize entrepreneurship per se, but to explain the tendency for markets to clear. In the Kirznerian system, opportunities are (exogenous) arbitrage opportunities and nothing more. Entrepreneurship itself serves a purely instrumental function; it is the means by which Kirzner explains market clearing.

Some readers have challenged me on this point. In my defense, I call upon none other than Israel Kirzner, whose newest paper, “The Alert and Creative Entrepreneur: A Clarification,” appears in the February 2009 issue of Small Business Economics (working-paper version here). Kirzner seeks to clarify the nature of his classic contribution, concerned that he has been misinterpreted by friend and foe alike. Writes Kirzner: 

[M]y own work has nothing to say about the secrets of successful entrepreneurship. My work has explored, not the nature of the talents needed for entrepreneurial success, not any guidelines to be followed by would-be successful entrepreneurs, but, instead, the nature of the market process set in motion by the entrepreneurial decisions (both successful and unsuccessful ones!). . . . This paper seeks (a) to identify more carefully the sense in which my work on entrepreneurial theory does not throw light on the substantive sources of successful entrepreneurship, (b) to argue that a number of (sympathetic) reviewers of my work have somehow failed to recognize this limitation in the scope of my work (and that these scholars have therefore misunderstood certain aspects of my theoretical system), (c) to show that, despite all of the above, my understanding of the market process (as set in motion by entrepreneurial decisions) can, in a significant sense, provide a theoretical underpinning for public policy in regard to entrepreneurship.

Kirzner devotes the bulk of his attention to the contrast between Kirznerian and Schumpeterian entrerpreneurship, while my paper focuses on the differences between Kirzner and Knight. Still, I’m gratified that Kirzner appears to view today’s applied entrepreneurship literature, in relation to his own work, the same way I do.

14 January 2009 at 11:42 pm 1 comment

Getting Serious about Economic Stimulus

| Peter Klein |

Why not?

WASHINGTON – President-Elect Barack Obama called on Congress to quickly pass a new fiscal stimulus package that would provide nearly $100,000 trazillion gaquillion frijillion in an effort to revive the U.S. economy, which some experts believe has entered a recession.

Sadly, some ethics-free Republican hacks fail to see the wisdom of the plan, which also includes:

  • $43 nurpillion for job training
  • $89 bibblydefrillion for community reinvestment
  • $505 frappakrillion for infrastructure and public works
  • $732 hominavillion for health care and education
  • $986 giggitysquillion for Goldman Sachs

Majority Leader Harry Reid is said to be optimistic about the bill’s chances, as the Senate “has already adopted legislation increasing the national debt ceiling to $4,000 pigglywigglyjibbityjabbityfrippityfroppitybadaboomillion.” Nobel Laureate Paul Krugman approves but worries the plan “doesn’t go far enough.”

14 January 2009 at 6:08 pm 4 comments

New Foss Thought Piece

| Nicolai Foss |

I blatantly confess that I enjoy writing what are known in academic putdown-ese as “essays” or “thought pieces,” that is, “conceptual” papers that do not construct a theoretical model, and/or engage in empirical analysis. My most recent product in this genre is inelegantly titled, “Alternative Research Strategies in the Knowledge Movement: From Macro Bias to Micro-Foundations and Multi-level Explanation.” It is an invited paper for European Management Review (the other invited contributors are David Teece, Bronwyn Hall and Will Mitchell). Mail me at if you want a copy. Here is the abstract:

The emergence over the last two decades or so of “knowledge” as an important part of the explanatory structure of management research is an intellectual breakthrough that is comparable in terms of its transforming impact to the behavioral revolution of the 1960s. A veritable “knowledge movement” has emerged that spans several fields in management. I take stock on alternative research strategies with that movement, distinguishing between “capabilities first,” “networks first,” and “individuals first” strategies. Reasons are given why more research attention need to be allocated to the latter strategy if the knowledge movement is to continue making progress, but that the aim should ultimately be to reach towards multi-level research that combines aggregate constructs with top-down processes and bottom-up processes.

14 January 2009 at 6:47 am 1 comment

The DeLong Hall of Honor

| Peter Klein |

Brad DeLong continues to be one of the stupidest smart people around. When the House failed to pass the $700 billion bailout the first time back in September, and the stock market fell by $1.3 trillion, Brad estimated the true cost of the bailout at $100 billion (ha!), added $2 trillion in lost wages from its failure to pass, and accused House Republicans of having a required benefit-cost ratio of 30-to-1. Of course, the bailout bill passed a week later, and the stock market fell by another $1.2 trillion. Oops! In general, there’s no economic policy issue that Brad can’t spin into a childlike morality play pitting noble, enlightened Democrats against vile, stupid Republicans.

His latest post in this vein, characterizes all economists who publicly oppose Obama’s proposed stimulus plan “ethics-free Republican hacks.” Most of the individuals quoted aren’t actually Republicans, but never mind. You Go, Girl! When I saw that my colleague Mike Sykuta made the list, I was jealous, and upset that I hadn’t written anything specifically opposing the stimulus. So, Brad, I want you to know that I reject the stimulus plan, and the sophomoric Keynesian reasoning behind it, lock, stock, and barrel. Will you please include me in your next Hall of Shame? (BTW I am not now, and have never been, a Republican.)

Update: See also Boudreaux and Horwitz and their commentators.

13 January 2009 at 12:05 pm 4 comments

Students: Consider Renting, not Buying, Your Books

| Peter Klein |

Chegg is the Netflix of college textbooks. Get your book in the mail, along with a prepaid return address label, don’t write in it too much, and send it back once the semester is over. I took a quick look and the savings appear to be substantial for brand-new books, modest otherwise (because there are robust secondary markets for used textbooks). The newest edition of a book I assigned last semester is $127 new from Amazon, $72 for a one-semester rental from Chegg. I wonder if the books come in those cute little red mailing sleeves? (Via cnet).

13 January 2009 at 11:31 am 6 comments

Professorship in Strategy and International Management

| Nicolai Foss |

The Center for Strategic Management and Globalization at the Copenhagen Business School invites applications for this professorship.

Contact me at if you want more info. The deadline is February 1.

12 January 2009 at 7:54 am Leave a comment

Hart and Holmström on Firm Scope

| Peter Klein |

One drawback of the Grossman-Hart-Moore “property rights approach” to the firm is that it isn’t really a theory of the firm per se, but a theory of which individuals should own which assets. Key organizational issues such as firm scope, delegation, monitoring, information sharing, and other coordination problems do not figure prominently in this approach (though there are plenty of formal theory papers dealing with internal organization by people like Radner, Tirole, Gibbons, Garicano, and Hart himself).

A new paper by Hart and Bengt Holmström extends the GHM model by incorporating intra-firm coordination. In this approach the value of the firm depends not only on the allocation of residual rights of control, but also on operating decisions of the firm’s subunits, decisions that may or may not be in synch. The central office of an integrated firm can internalize these externalities, but at the cost of reducing division managers’ private benefits. Here’s the abstract:

The existing literature on firms, based on incomplete contracts and property rights, emphasizes that the ownership of assets — and thereby firm boundaries — is determined in such a way as to encourage relationship-specific investments by the appropriate parties. It is generally accepted that this approach applies to owner-managed firms better than to large companies. In this paper, we attempt to broaden the scope of the property rights approach by developing a simple model with three key ingredients: (a) decision rights can be transferred ex ante through ownership, (b) managers (and possibly workers) enjoy private benefits that are non-transferable, and (c) owners can divert a firm’s profit. In our basic model decisions are ex post non-contractible; in an extension we use the idea that contracts are reference points to relax this assumption. We show that firm boundaries  matter. Nonintegrated firms fail to account for the external effects that their decisions have on other firms. An integrated firm can internalize such externalities, but it does not put enough weight on the private benefits of managers and workers. We explore this tradeoff in a model that focuses on the difficulties companies face in cooperating through the market if the benefits from cooperation are unevenly divided; therefore, they may sometimes end up merging. We show that the assumption that contracts are reference points introduces a friction that permits an analysis of delegation.

You can comment here or at the Harvard Corporate Governance Blog.

12 January 2009 at 12:36 am Leave a comment

Philosophy Bites

| Peter Klein |

Philosophy Bites is a philosophy podcast site run by David Edmunds (co-author of Wittgenstein’s Poker) and Nigel Warburton. The political philosophy section is quite good (and features our friend Chandran Kukathas a couple of times). Via 3quarks.

9 January 2009 at 11:55 pm 1 comment

New Book on Knowledge Governance

| Nicolai Foss |

I and various other people, notably Prof. Anna Grandori (U. Bocconi), who came up with the term, have been pushing the notion of “knowledge governance” over the last five years or so.

The organizing knowledge governance idea is that processes of knowledge use, creation, retention, integration, and sharing can be influenced towards desired levels through the deployment of administrative apparatus. “Knowledge governance” signifies that this field is taken up with the interplay between knowledge processes and organizational processes. It represents the coalescing of a number of parallel developments, such as the convergence of organizational economics (i.e., transaction cost economics, property rights theory and agency theory) and the knowledge-based view in strategic management, and the emerging interface between knowledge management and perspectives from organization theory and organizational behavior. Here is a Primer on knowledge governance.

0199235929With Professor Snejina Michailova of the University of Auckland, I have edited Knowledge Governance: Processes and Perspectives, which was published this week by Oxford University Press. It features a number key contributors to the emerging knowledge governance field, including Anna Grandori, Jackson Nickerson, Todd Zenger, Linda Argote, and Teppo Felin. (more…)

9 January 2009 at 7:22 am 1 comment

Wernerfelt (1984)

| Nicolai Foss |

Birger Wernerfelt’s 1984 paper in the Strategic Management Journal, “A Resource-based Theory of the Firm,” is conventionally considered one of the founding contributions to the RBV, on par with Jay Barney’s 1986 and 1991 papers. The paper has more than 6,000 hits on Google Scholar (which probably translates into more than a thousand on Web of Science), while Barney’s 1991 paper has more than 10,000. Although the underlying conceptualization of the firm is similar, the papers address different dependent variables, namely diversification and growth (Wernerfelt) and sustained competitive advantage (Barney) (a point missed by those who indiscriminately cite both papers, usually in the context of competitive advantage).

In a recent paper in Organization Studies,The Development of the Resource-based View: Reflections from Birger Wernerfelt,” Andy Lockett, Rory P. O’Shea, and Mike Wright draw on conversations with Wernerfelt to tell the story of the 1984 paper. (more…)

8 January 2009 at 8:28 am Leave a comment

Geek Article of the Day

rlogo| Peter Klein |

The NY Times profiles R, the open-source stat programming language that’s increasingly popular among quants.

7 January 2009 at 1:18 pm 1 comment

Sociology Finally Beats Economics!

| Peter Klein |

A new study by Les Krantz ranks 200 U.S. occupations by environment, income, employment outlook, physical demands and stress. Sociologist comes in at #8, while economist ranks only #11. (The top five are mathematician, actuary, statistician, biologist, and software engineer, while the five worst are lumberjack, dairy farmer, taxi driver, seaman, and EMT.) Yes, I’m sure within-job heterogeneity is an issue. My colleague Mike Cook, who sent me the link, suggests that sociology must be a low-stress profession.

7 January 2009 at 11:29 am 4 comments

Darth Vader on Leadership

| Peter Klein |

The Dark Lord’s leadership secrets, sure to become a staple of future MBA courses:

  1. Use fear.
  2. Don’t tolerate dissent.
  3. Punish incompetence.
  4. Deal exclusively on your terms.
  5. Use loyalty judiciously.
  6. Always look for talent.
  7. Know that power is what matters.
  8. Get out there and lead. [Remember the end of Episode IV: Vader ended up better than Grand Moff Tarkin.]
  9. Finally, always remember that an elaborate, far-reaching plan, which relies on people reacting exactly how you plan for them to react, is always better than a simple plan.

Full story here (via Art). Can’t wait for the book.

6 January 2009 at 10:33 pm 2 comments

Skidelsky on Ferguson

| Peter Klein |

Thanks to Humberto Barreto for forwarding Robert Skidelsky’s review of Niall Ferguson’s The Ascent of Money: A Financial History of the World from the New York Review of Books. Here’s Ferguson talking about the book on NPR. There are plenty of reviews by journalists as well. I haven’t read the book but this review by former O&M guest blogger David Gordon makes me wonder if it’s worth the effort.

6 January 2009 at 1:10 am Leave a comment

Interview with Richard Rumelt

ita_stst071| Peter Klein |

This interview with UCLA strategy giant Dick Rumelt appeared in the McKinsey Quarterly in November 2007 (free registration required). My old classmate Dan Lovallo is one of the interviewers. I’m sure Steve Postrel, David Hoopes, and others from the UCLA crowd can provide some Rumelt stories.

5 January 2009 at 10:15 am 1 comment

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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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