Archive for January, 2011

What an Arrow-Debreu Contract Might Look Like

| Peter Klein |

A visual reminder why real-world contracts are typically incomplete, giving rise to interesting problems of ex ante incentive alignment and ex post governance.

31 January 2011 at 3:46 pm 1 comment

Scientific Misconduct in Management Research

| Nicolai Foss |

Fraudulent behavior in research is the ultimate academic gossip. It is hardly surprising that our post on Thomas Basbøll’s claim that management theory heavyweight Karl Weick has engaged in plagiarism (here) was one of O&M’s most popular posts in 2010. One of my own papers was once directly copied. All that was changed was the front page. In one of those strange coincidences, the journal editor asked my co-author to review the paper. The plagiarist was a consultant, not an academic, so it is possible that the case had no consequences for him.

How prevalent is scientific misconduct in management research? And how strongly should we care? After all, what gets published in the management journals does not have the same direct impact as what gets published in the medicine journals, or what the UN’s Intergovernmental Climate Panel utters. While management research may not cure cancer, it likely has considerable impact on resource allocation, and therefore on what is available for curing cancer. Moreover, there are strong externalities: A reputation for “bad science” in one field or discipline may easily spill over to other fields and disciplines. Hence, misconduct should be regarded with as severely in management research as in other fields and disciplines.

With respect to the incidence of fraudulent research behavior, rather little is known. While fraud in, particularly, medicine tends to draw major headlines in the press, I cannot recall anything similar in the case of management research. It seems unlikely that management researchers should be significantly more honest than researchers in medicine, so our lack of knowledge in this seems troublesome. In “Management Science on the Credibility Bubble: Cardinal Sins and Various Misdemeanors,” recently published in the Academy of Management Learning and Education, Arthur G. Bedeian, Shannon G. Taylor, and Alan N. Miller present evidence that research misconduct is quite a prevalent phenomenon. Briefly, they collected data from faculty in 104 PhD-granting management departments in the US. Questions identified “eleven different types of questionable research conduct, including data fabrication, data falsification, plagiarism, inappropriately accepting or assigning authorship credit, and publishing the same data or results in two or more publications.” 

Some of Bedeian et al.’s examples of “questionable research conduct” seem somewhat open to interpretation and questioning (e.g., “developing ‘ins’ with journal editors” — in fact, the initiative for such “ins” often emerge from the editor side; “published the same data or results in two or more publications” — presumably, there is nothing necessarily wrong with publishing “the same data … in two or more publications”), and the procedure of asking faculty to indicate their “knowledge of faculty engaging in” research misconduct is questionable, as different faculty may relate to the same episode of research misconduct (they acknowledge this problem). Still, the numbers are quite striking. More than 70% reports knowledge of cases of not giving due credit to originators of ideas (i.e., plagiarism). Even more report knowledge of data manipulation, although only (?) 27% report knowledge of outright data fabrication.

30 January 2011 at 10:30 am 6 comments

Entrepreneurship Nobel to Steven Klepper

| Nicolai Foss |

The Global Award for Entrepreneurship Research may not quite be the real thing, but it is Swedish, highly prestiguous, and 100k Euro is still quite a bit of money. The Prize is administered and financed by the Research Institute of Industrial Economics, the Swedish Foundation for Small Business Research, and the Swedish Agency for Economic and Regional Growth. Earlier recipients include Joshn Lerner, David Audretsch, Scott Shane, William Baumol, and Israel Kirzner.

O&M congratulates the Prize Committee for an excellent choice and CMU Professor Steven Klepper for receiving the Prize. Klepper’s work is rigorous, yet highly realistic and relevant. It takes process, heterogeneity, and entrepreneurship seriously, and demonstrates that such research is capable of being published in the very best economics journals. Here is the Committe’s motivation for the choice of Klepper:

Steven Klepper has made significant contributions to our understanding of the role of new firm entry in innovation and economic growth. His work is theoretical and integrative, firmly rooted in empirical observation of historical innovative processes, focusing on explaining “empirical regularities.” Klepper’s work integrates elements of traditional neoclassical models with evolutionary theory, bridging some of the gaps between neoclassical and evolutionary theory and between entrepreneurship research and mainstream economics.

In looking at the evolution of industries, Klepper explores regularities in the time paths of entry of new producers, exit of incumbent firms, industry output and price, and the rate of product and process innovation. To explain these regularities, he develops theories that feature differences in firm capabilities and the advantages of large firms in appropriating the returns from their innovative efforts. The theories are also used to explain differences in firms’ innovative efforts, the composition of their innovative effort and their innovative success.

His work is founded on systematic longitudinal empirical analyses requiring massive, detailed, and painstaking collections and analyses of historical data on firm entry, exit, size, location, distribution networks, and technological choices. The focus is on the function of new firms in industrial growth as well as the background and heritage of new entrants, particularly as reflected in spinoffs from existing firms.

29 January 2011 at 3:05 am 4 comments

The Confusing “Business Model” Construct

| Nicolai Foss |

The discourse of both practicing managers and management scholars abounds with concepts and jargon that sound fine, and surely refer to something real and important, but are used in a hopelessly imprecise manner and have all sorts of different, often conflicting, meaning attached to them. Examples of yesteryear include “value creation,” “competitive advantage,” and “value proposition” — “yesteryear”, because reasonable clarity has gradually been achieved with respect to their meaning.

Another example, where lack of clarity unfortunately persists, is that of “business models” — which refers to, for example, “bricks and clicks business models” (which is mainly about integrating online and offline presence), “collective business models” (which is mainly about pooling resources across firms), “cutting out the middleman” (which is, well, you guessed it), “franchising” (which is a particular contractual arrangement for handling distribution), “freemium” (offering free basic services and expensive premium services” etc., etc. (examples are from the wiki on the subject). So, business models are about internet distribution, the contractual form of distribution, resource sharing, cutting out middlemen, differentiation policies, etc. It is not clear what unites all this, except, perhaps, a basic concern with the consumer/customer side of value creation and appropriation (and even that doesn’t hold for all conceptions). Moreover, some argue that building a business model is subordinate to formulating a strategy, while others (e.g., Teece) argue that strategies are on a lower level than business models.

Obviously, attempts to reduce all this confusion are highly laudauble. Two recent such attempts deserve mention here. One is an excellent paper, “The Business Model: Theoretical Roots, Recent Developments, and Future Research,” by Christoph Zott, Raphael Amit, and Lorenzo Massa. Among other things they argue that the business model is a meaningful unit of analysis, and should be understood as a firm-centric, yet boundary-spanning activity system supported by a logic of value creation and appropriation. The second attempt is a special issue of Long Range Planning on the subject, with contributions from such luminaries as David Teece, Raphael Amit, Rita McGrath, Muhammad Yunus, Yves Doz, Michael Tushman and many others. I have only read the Teece paper, but look forward to reading the rest. Teece (in “Business Models, Business Strategy, and Innovation”) begins by arguing the “concept of a business model lacks theoretical grounding in economics or in business studies,” goes on to offer his own definition, supplies several examples, discusses the conceptual differences between business models and business strategies and ends by linking the business model constructs to his earlier work on how the organization of the innovation process influences the appropriation of value from innovation. Like so many articles in LRP, this paper will be excellent for the classroom.

28 January 2011 at 3:04 pm 4 comments

Academic Discourse – Math Edition

| Lasse Lien |

(01-27) 05:04 PST San Fernando, Calif. (AP) —

A California university professor has been charged with peeing on a colleague’s campus office door.

Prosecutors charged 43-year-old Tihomir Petrov, a math professor at California State University, Northridge, with two misdemeanor counts of urinating in a public place. Arraignment is scheduled Thursday in Los Angeles County Superior Court in San Fernando.

Investigators say a dispute between Petrov and another math professor was the motive.

The Los Angeles Times says Petrov was captured on videotape urinating on the door of another professor’s office on the San Fernando Valley campus. School officials had rigged the camera after discovering puddles of what they thought was urine at the professor’s door.

27 January 2011 at 5:53 pm 7 comments

In Defense of Big Words

| Peter Klein |

A cardinal rule of clear communication is never to use a long, obscure word or phrase when a shorter, more common one will do. Orwell thought this was of Brobdingnagian importance — sorry, a big deal — and Hemingway famously rebutted Faulkner’s critique of his writing style by pitying

Poor Faulkner. Does he really think big emotions come from big words? He thinks I don’t know the ten-dollar words. I know them all right. But there are older and simpler and better words, and those are the ones I use.

Mencken, referring to the Danish linguist Otto Jespersen, says “[t]he prevalence of very short words in English, and the syntactial law which enables it to dispense with the definite article in many constructions . . . are further marks of vigor and clarity.” And of course we can all name scholars, even whole fields and genres, marked by particularly murky and obscure prose. (Question: Does academic jargon reform pass the remediableness criterion? LOL.)

However, according to a group of MIT linguists, as reported in Nature (via Azra Raza), big words often contain more information than their shorter counterparts, and word choice is mostly a function of information content:

For many years, linguists have tended to believe that the length of a word was associated with how often it was used, and that short words are used more frequently than long ones. This association was first proposed in the 1930s by the Harvard linguist George Kingsley Zipf.

Zipf believed that the relationship between word length and frequency of use stemmed from an impulse to minimize the time and effort needed for speaking and writing, as it means we use more short words than long ones. But Steven Piantadosi and colleagues at the Massachusetts Institute of Technology in Cambridge say that, to convey a given amount of information, it is more efficient to shorten the least informative — and therefore the most predictable — words, rather than the most frequent ones. . . .

But after analyzing word use in 11 different European languages, Piantadosi and colleagues found that word length was more closely correlated with their information content than with how often they are used.

26 January 2011 at 11:44 pm 7 comments

Managing Innovation

| Peter Klein |

My old classmate Hank Chesbrough offers some thoughts on managing innovation in HBR’s Conversation Blog. Previous decades brought us systems analysis, PERT, TQM, supply chain management, and open innovation. What’s next? Hank’s predictions:

First, management innovation will become more collaborative. Opening up the innovation process will not stop with accessing external ideas and sharing internal ideas. Rather, it will evolve into a more iterative, interactive process across the boundaries of companies, as communities of interested participants work together to create new innovations. . . .

Second, business model innovation will become as important as technological innovation. . . . Third, we will need to master the art and science of innovating in services-led economies. Most of what we know about managing innovation comes from the study of products and technologies. Yet the world’s top advanced economies today derive most of their GDP from services rather than products or agriculture.

26 January 2011 at 12:54 am Leave a comment

Kirznerian versus Knightian Entrepreneurs in Film

| Peter Klein |

Kirzner’s entrepreneur is a pure discoverer who owns no capital. Knight’s entrepreneur is an uncertainty-bearing, resource owner with skin in the game. So who do you think is the real entrepreneur, Jerry Lundegaard or Wade Gustafson?

Bonus: my favorite scene from Miller’s Crossing, useful to illustrate the differences between action (emphasized by Knight) and cognition (emphasized by Kirzner):  (more…)

25 January 2011 at 8:35 am 4 comments

My New Favorite Journal

| Peter Klein |

It’s the Journal of Universal Rejection (HT: Joshua Gans). From the journal’s website:

The founding principle of the Journal of Universal Rejection (JofUR) is rejection. Universal rejection. That is to say, all submissions, regardless of quality, will be rejected. Despite that apparent drawback, here are a number of reasons you may choose to submit to the JofUR:

  • You can send your manuscript here without suffering waves of anxiety regarding the eventual fate of your submission.
  • You know with 100% certainty that it will not be accepted for publication.
  • There are no page-fees.
  • You may claim to have submitted to the most prestigious journal (judged by acceptance rate).
  • The JofUR is one-of-a-kind. Merely submitting work to it may be considered a badge of honor.
  • You retain complete rights to your work, and are free to resubmit to other journals even before our review process is complete.
  • Decisions are often (though not always) rendered within hours of submission.

If I submit a paper titled “The Ubiquity of Knightian Uncertainty,” would that constitute a performative contradiction?

22 January 2011 at 11:29 pm 2 comments

Finally — a Field Experiment!

| Lasse Lien |

Field experiments represent a killer combination of a causal design and external validity — the best of both the classical (laboratory) experiment and the natural experiment. Unfortunately, field experiments in strategy,  management, organizational economics, etc. are often prohibitively costly, morally questionable, or both. But sometimes a field experiment is feasible, and when it is, it tends to stand out as particularly interesting.

This paper illustrates this point quite well, IMHO. The paper is a field experiment on the not entirely trivial question: Does Management Matter?

21 January 2011 at 2:47 pm 1 comment

ISNIE Annual Conference, Stanford University, June 16–18

| Scott Masten |

The 15th Annual Conference of the International Society for New Institutional Economics will be held this year at Stanford University on June 16-18. The conference is being organized by President-Elect Barry Weingast, and my inside, not-yet-public information is that the conference will have two very interesting keynotes. The ISNIE website has the just-released Call for Papers.


21 January 2011 at 10:46 am Leave a comment

Organizing for Synergies

| Peter Klein |

Thanks for Mike S. for the pointer to this paper (published version here, ungated version here):

Organizing for Synergies
Wouter Dessein, Luis Garicano, and Robert Gertner

Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We first show that organizations endogenously create an incentive conflict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive conflict. Our analysis generates testable implications for the likely success of mergers and for the organizational structure and incentives inside multidivisional firms.

This is an understudied topic in organizational design, I think. The large literature on the M-form, going back to Chandler and Williamson and flourishing in the 1970s and 1980s, compared functional to business-unit managers across organizations, but said much less about mixing them within organizations. The modern internal capital markets literature focuses on information problems between division heads and the central office, and conflicts over resources among division heads, but not the issues raised here by Dessein, Garicano, and Gertner. The vertical integration literature, as well, tends to treat firm-wide support services as peripheral to the incentive conflicts between vertically related divisions.

20 January 2011 at 11:05 pm Leave a comment

Economic Growth Quote of the Day

| Peter Klein |

The path of economic progress is strewn with the wreckage of failures. Every business man knows this, but few economists seem to have taken note of it. In most of the theories currently in fashion economic progress is apparently regarded as the more or less automatic outcome of capital investment, “autonomous” or otherwise. Perhaps we should not be surprised at this fact: mechanistic theories are bound to produce results which look automatic.

— Ludwig Lachmann, Capital and Its Structure (1956), pp. 36-37.

20 January 2011 at 10:05 am 1 comment

Famous Figure Omission

| Scott Masten |

My inbox today contained an advertisement for a new Elgar publication: Famous Figures and Diagrams in Economics:

I’m sure that everyone in the O&M-isphere will agree that such a volume is incomplete without (more…)

19 January 2011 at 2:57 pm 3 comments

Unrelated Diversification, circa 1971

| Peter Klein |

A funny (to me) New Yorker cartoon about diversification, appearing at the height of the conglomerate merger wave of the late 1960s and early 1970s. Click to enlarge. (I’ve been looking for this for a while; found it when cleaning out an old file cabinet.)

19 January 2011 at 11:44 am 4 comments

The Value of Steve Jobs

| Peter Klein |

As you have likely heard, Steve Jobs is taking an indeterminate leave of absence from Apple to deal with his continuing health problems. How will this affect Apple? How important is one person — albeit the founder and CEO — to a diversified multinational company with tens of thousands of employees? Apple’s stock slipped slightly on the news of Jobs’ leave (down 2.3 percent today, the first trading day after the announcement), but Jobs’s health problems are well known and Apple’s stock price presumably already included a discount reflecting the possibility he’d step down. To estimate the value of a particular employee to the firm in this way, we need an unanticipated departure, one that isn’t a response to poor performance and isn’t expected in advance.

Sure, enough, there’s an app for that — I mean, there’s a literature on that. An influential 1985 paper by Bruce Johnson, Robert Magee, Nandu Nagarajan, and Harry Newman looked at stock-price reactions to CEO deaths by plane crash, finding positive announcement effects for founders and negative announcement effects for professional managers. (One way to handle the founder-succession problem!) Macabre, I know, but nonetheless a clever way to deal with endogeneity. Naturally, this paper spawned a follow-up literature. Rather than cite the papers myself, I’ll just block quote a paper by Bang Dang Nguyen and Kasper Meisner Nielsen presented at last week’s AEA meeting, “What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?” and you can chase down the references on your own: (more…)

18 January 2011 at 11:31 pm 9 comments

Guilt by Association?

| Peter Klein |

You may know that we have a Twitter feed, @orgsandmarkets. Twitter recently added a recommendation feature, “Similar to,” showing feeds its software judges similar to a given feed. See below what Twitter deems similar to O&M. I don’t mind being associated with Mark Thoma, who seems like a good guy even though I usually disagree with him, but that other one? I’m offended!

18 January 2011 at 1:29 am 3 comments

University Restructuring, Agricultural Economics Edition

| Peter Klein |

The current issue of AAEA Exchange, the newsletter of the Agricultural and Applied Economics Association (formerly American Agricultural Economics Association), features three perspectives on the long-term viability of maintaining separate departments of economics and agricultural economics. (Much of the discussion would apply to business economics departments too.) Ron Mittelhammer of Washington State argues for consolidation, Ken Foster of Purdue for keeping separate departments, and Rob King of Minnesota for the transformation of agricultural economics departments to applied economics departments.

The issues are organizational and strategic and familiar to O&M readers. Mittelhammer emphasizes tangible resources and a shared intellectual heritage and downplays accumulated routines and capabilities, organizational culture, etc.:

Arguably above all other rationale, mergers are also warranted because, fundamentally, economics is economics. Agricultural economics is a field of economics, not some other paradigm of economics, and is no more distinct from its parent discipline than other fields such as labor economics, international economics, health economics. . . .

Too often of late, it appears that the last ditch attempt at justifying the separation of economic units degenerates to the issue of faculty personalities, the correlated issue of seemingly unbridgeable differences in “professional cultures,” and the fear of open faculty warfare that might be ignited by a merger, rather than the existence of truly distinct and defensible differences in the methodologies used to do economic analysis in agricultural and applied, versus the “other” economics disciplines. (more…)

17 January 2011 at 8:40 am 2 comments

Economics of Wikipedia

| Peter Klein |

Wikipedia turns ten today, as you’ve no doubt heard. Most Wikipedia content is recycled, so let me honor the subject by recycling an old O&M post: “Hayek and Wikipedia.” The relationship between the Wikipedia model and Hayek’s concept of dispersed, tacit knowledge, exploited through decentralized decision-making, is perhaps to obvious to note, but consider it noted. See also this Reason piece which emphasizes the Hayek connection. (Of course, in Hayek’s model, information is communicated and actions coordinated through changes in market prices, a feature absent from systems like Wikipedia.) You may also amuse yourself with other old O&M posts about tacit knowledge.

15 January 2011 at 11:47 am 1 comment

The Internet, circa 1972

| Peter Klein |

Very cool 1972 ARPANET diagram, via Gizmodo, which notes: “It’s pretty amazing to think that this smattering of cables turned into the bizarre, twisted, incredibly complex nebula of porn, parody, knowledge hatred, joy, and cat videos we now adore.”

I imagine the network effects (or, if you like, network externalities) were substantial, despite the small number of nodes. (But these guys were way behind the Victorians.)

For semi-informed musings about the origins of the Internet, and what this implies for organizations and markets, look here.

14 January 2011 at 1:37 pm 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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