Archive for December, 2010

Top Posts of 2010

| Peter Klein |

Our most popular post published in 2010:

Thanks to all our readers, commenters, linkers, lurkers, secret admirers, public admirers, etc. for a great 2010!

31 December 2010 at 2:46 pm 1 comment

Google Tries Selective Intervention?

| Peter Klein |

Can a large firm do everything a collection of small firms can do, and more? If not, how do we understand the limits to organization? Arrow focused on the information structure inside firms. I favor Mises’s economic calculation argument. Williamson’s preferred explanation for the limits to the firm is the impossibility of selective intervention — the idea that higher-level managers cannot credibly commit to leave lower-level managers alone, except when such selective intervention would generate joint gains. Williamson’s argument is not, however, universally embraced (or even understood the same way — see the comments to Nicolai’s post).

Google apparently sees things Williamson’s way and has formulated an explicit policy on “autonomous units” designed to address the problem. Such units “have the freedom to run like independent startups with almost no approvals needed from HQ, ” reports TechCrunch. “For these divisions, Google is essentially a holding company that provides back end services like legal, providing office space and organizing travel, but everything else is up to the pseudo-startup.” Can it work? Insiders are doubtful. The TechCrunch reporter even frames Williamson’s thesis in this folksy way:

There’s a lie that companies and entrepreneurs tell themselves in order to commit to an acquisition.

Oh, we’re not going to change anything! We’re just going to give you more resources to do what you’ve been doing even better!

Yeah! They bought us for a reason, why would they ruin things?

It usually works for a little while, but big company bureaucracy– whether it’s HR, politics or just endless meetings– almost always creeps in. It’s a law of nature: Big companies just need certain processes to run and entrepreneurs hate those processes because they stifle nimble innovation.

30 December 2010 at 2:00 pm 1 comment

Coordination Problems in the Theory of the Firm

| Nicolai Foss |

Many textbooks (e.g., this one or this one) begin by noting that there are two fundamental problems of economic organization, namely the coordination problem and the motivation problem — and then devote 95% of the space to the latter problem. (In a paper published in 1993 (but written in 1989), I proposed that extant theories of the firm could be understood as taking either a PD (-like) game or a coordination game as the fundamental underlying structure of interaction. In my reading, capabilities theories were about coordination problems, while mainstream organization economics fundamentally started from PD-like situations; this paper develops the argument a little bit).

Important work has been done on coordination problems in the context of the theory of the firm by Colin Camerer and Mark Knez (e.g., here), Phanish Puranam and Ranjay Gulati (here), Luis Garicano (e.g., here), Birger Wernerfelt (e.g., here), and, of course, co-blogger Dick Langlois (check his CV here on O&M — most of his stuff on economic organization is about coordination). One could also make the point that large parts of traditional organizational design theory (of the information processing/contingency variety, including Marschak & Radner’s team theory) are really about coordination problems rather than motivation problems. Dick Langlois has long argued that Coase (1937) is fundamentally about coordination rather than motivation.  

This is definetely something; however, compared to the enormous outpouring of work on motivation problems, it is fair to say that coordination problems are neglected, although there are reasons to suppose that they are quite important: There are plenty of examples of highly motivated people utterly failing with respect to organizing and coordinating.

I just came across an excellent paper, “Coordination Neglect: How Lay Theories of Organizing Complicate Coordination in Organization,” that deals with a number of obstacles to coordination rooted in heuristics (“lay theories”) that individuals apply, for example, when setting up a division of labour in an organization. Notably, individuals systematically neglect task interdependencies. They also fail to communicate sufficiently because of knowledge bias and they are poor at translating problems for others. There are plenty of useful illustrations and anecdotes in the paper, making it excellent as a companion to a traditional motivation/incentive-focused textbook in a theory of the firm class. Highly recommended!

28 December 2010 at 11:49 am 21 comments

The Economist on Coase at 100

| Peter Klein |

The new Economist celebrates Ronald Coase’s 100th birthday (this coming Wednesday) with a short piece on “The Nature of the Firm” (1937), the founding document of modern organizational economics (16,379 Google Scholar cites). (Thanks to Avi for the pointer.) It’s nice to see the theory of the firm get its props, and the first few paragraphs do a good job summarizing the paper. But the (anonymous) author has misread the modern literature, first in setting up an artificial conflict between Coase’s transaction-cost approach and the resource-based approach to the firm and, second, by missing the depth and nuance of Coase’s own research program.

On the first point: Much recent work tries to reconcile transaction cost economics (TCE) and the resource-based view (RBV) (e.g., Silverman, 1999; Foss and Langlois, 1999;  Tsang, 2000Madhok, 2002; Foss and Foss, 2005), pointing out that the two theories are, in important ways, complementary. Put simply: TCE and RBV start with different explananda. The RBV asks which resources will be combined in which ways to produce which outputs, while TCE asks how this activity will be organized (market, hierarchy, or hybrid). RBV offers a theory of competitive advantage, while TCE focuses on boundaries and governance. Second, the Economist writer confuses Coase with the (Coase-inspired) transaction cost approach of Williamson (1971, 1975, 1979) and Klein, Crawford, and Alchian (1978): (more…)

27 December 2010 at 12:19 am 11 comments

Happy Holidays

| Peter Klein |

Warmest holiday wishes from the gang at O&M. We’re too lazy — I mean, too busy researching, writing, lecturing, etc. — to come up with a new holiday post, so we’ll just bask in the glories of past seasonal posts. To wit:

23 December 2010 at 12:57 pm 2 comments

Democracy and Credible Commitment in Universities

| Nicolai Foss |

In 2003, Denmark enacted what is the easily the least democratic university legislation in the world (the North Korean one may be less democratic). Essentially, faculty voting rights are now limited to selecting members of an “academic council” which mainly serves as a quality check on candidates for evaluation committees and as a body that offers advice to the university president and the deans. A board of directors (with a majority of external members) appoints the president, the president appoints the dean, and the dean appoints department heads.

This truly major change was partly motivated by the various inefficiencies of the earlier, much more democratic conditions. However, as autocratic systems also have well-known inefficiencies, the question is whether Denmark let the governance pendulum swing too much toward the opposite end. My colleague Henrik Lando directed my attention to a truly excellent paper by O&M guest blogger Scott Masten that is directly relevant to the understanding of this issue. (more…)

22 December 2010 at 9:54 am 4 comments

Razors, Blades, and Bugattis

| Peter Klein |

I learn from Car and Driver that the tires for the new Bugatti Veyron 16.4 Super Sport run $42,000 a set, last only 10,000 miles, and require a $69,000 wheel replacement after the third tire change. Is Bugatti playing razors and blades? (The real strategy, not the apocryphal one.) Um, nope, this Veyron itself costs $2,426,904. That’s one damn fine razor!

21 December 2010 at 10:49 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).