Author Archive

Thanks to O&M

| David Gerard |

I would like to thank Peter and the O&M bloggers for giving me some space here over the past few months. Blogging certainly has its challenges, such as finding something interesting to say, taking the trouble to write it down, and actually having a point. Or at least one of those three. Unfortunately, I haven’t been as prolific as I might have been on these fronts, nor have I been able to foment a syllabus exchange on organizations, industrial organizations, organizational economics, etc. . . . I hope to get another chance to contribute later on.

21 April 2009 at 10:46 am 1 comment

Passing the Hat for Jon Stewart’s Mother

| David Gerard |

No doubt you have all seen or at least heard of the bloodletting of CNBC’s Jim Cramer at the hands of Jon Stewart. Stewart took Cramer to task for the financial “journalists'” role as cheerleaders rather than as investigative reporters leading up to the financial meltdown.

What seems to be lost in the discussion is the fate of Mr. Stewart’s poor mother.

Mr. Stewart: My mother is 75. And she bought into the idea that long-term investing is the way to go. And guess what?

Mr. Cramer: It didn’t work.

Although I think it is a bit premature to malign the viability of equities and long term investing, I found it even more distressing was that Mr. Stewart’s mother doesn’t seem to have access to any competent financial advice. I would hope that the host of a popular television show would have sufficient financial resources to hook his mother up with a financial planner. Or, she might have stayed in-house and asked her son who is the “head of U.S. Markets and Global Technology at NYSE Euronext.”

Well, I am willing to help out by imparting a bit of my investment knowledge (actually, all my investment knowledge) that I picked up in graduate school to the cause.

(1) It’s tough to beat the market. Most funds don’t beat a simple index fund, so buy a simple index fund.

(2) Stocks tend to be more volatile than bonds. There is a bigger upside, yes, but there is also a bigger potential downside. As you hit your golden years, consider rebalancing to reduce your portfolio risk.

If you have any further questions, please consult the comments.

14 March 2009 at 2:53 pm 4 comments

The Adults Are In Charge

| David Gerard |

adults-in2 A common refrain heralding the arrival of a new Administration is that “the adults are in charge now.” The expression came to mind when I saw that this classic Calvin and Hobbes strip was making the internet rounds.

I certainly don’t envy the adults these days.

10 March 2009 at 4:05 pm 1 comment

Global (Daylight) Savings Glut?

| David Gerard |

I almost hate to bring this up given the levels of scorn and derision I was subjected to over this (and that was just from my friends), but a few years ago Paul Fischbeck and I used our traffic safety website to look at the change in risks and fatalities surrounding daylight savings time. There weren’t any obvious changes for drivers and vehicle occupants, but there did appear to be some dramatic changes in pedestrian risks (e.g., deaths per trip). For the “Spring” forward, we observed considerably lower risks during the evening rush offset by elevated morning risks.

Because we observed pedestrian risk numbers spike during the time change and then return to trend, we attributed the effect to people adjusting to the time change. This conjecture is consistent with some published research that looked at this question. Our basic message (we thought) was to “look both ways or you might get run over,” and thought we might get some good Samaritan points along with the people who remind you to change your fire alarm batteries.

Instead, what we found was that the time change is quite the lightning rod for controversy, over energy savings, traffic fatalities, depression, heart attacks, and many other societal ills. As a policy matter, however, we received feedback from across the spectrum. These are some of the tamer selections:

I am a professional working adult, actually a senior, and I as well as hundreds of others, would like to have our clocks left alone. All of us do not enjoy driving to and from work in darkness. The psychological effects are more than depressing as I am sure you are aware. — Muriel

Thank you both for helping our cities to understand that people should come before cars. — Steve

Now do a study about the dangers of children waiting for school buses in the dark. My elementary school age child was leaving the house in the dark at 7am to get her bus until daylight savings time ended this week. — Sylvia

I am not sure what to conclude from all of this. I have no idea what a benefit-cost analysis of the alternatives would look like, but we certainly learned there are more dimensions of the policy issue than we imagined. As a political economy story, the status quo does not appear to be completely locked in.  A few years back, the federal government pushed back the return to standard time until after Halloween in order to reduce the risk of vehicular trick-or-treating incidents.

Perhaps in November I will be able to shed some additional light on the issue.

9 March 2009 at 8:38 pm 2 comments

Pittsburgh School Superintendent Tackles Absenteeism

| David Gerard |

Those of you that think that a football is round might not be aware that the Super Bowl is taking place this Sunday, where my hometown Pittsburgh Steelers will face the Arizona Cardinals. Every year brings its own story lines, and among the many questions surrounding this year’s game is: what is your favorite public-choice explanation for why Pittsburgh schools are opening late on Monday?

The Pittsburgh Public Schools will operate on a two-hour delay Monday because of the Super Bowl, Superintendent Mark Roosevelt said today. Noting that Sunday’s big game means a “late night,” Mr. Roosevelt said the delay should cut down on student and staff absenteeism.

Of course, not all work places are observing the delay, so this will create a few headaches for working parents who don’t happen to be teachers or staff in the Pittsburgh public school system. Perhaps Superintendent Roosevelt thinks parents will already have headaches Monday morning, so the incremental costs will be low.

29 January 2009 at 9:43 pm 2 comments

Burying the Carbon Issue

| David Gerard |

As noted here, a “small” chunk of the House stimulus package is earmarked for carbon capture and sequestration (CCS) demonstration projects. For a coal-fired electric power plant, CCS entails the separation of the carbon dioxide during the combustion stage, compression into a fluid, and injection into a deep (> 1 km) geological formation where it will remain indefinitely.

Regardless of one’s views on global climate change or the government’s role in addressing it, it seems pretty clear that policy makers are moving us toward a carbon-constrained world. The rationale for CCS in such a world is straightforward. Unlike conventional pollutants, today’s carbon emissions will remain in the atmosphere for close to 100 years. Stabilizing atmospheric CO2 concentrations at current levels will require extraordinary (perhaps 80%+) reductions from current emissions levels. However, carbon or no carbon, it is highly improbable that we can meet our projected energy needs (at least in the near term) without continued reliance on fossil energy sources.

I am involved with the CCSReg project that is developing recommendations for the development of a regulatory framework for CCS if the US legislates reductions in carbon emissions. Earlier this month, we issued an interim report with several preliminary recommendations, including putting money toward demonstration projects (summary).

The potential regulatory issues range from identifying and mitigating environmental and safety risks to addressing public acceptance issues associated with the NUMBY (not under my back yard) syndrome. The property rights issue might interest many in this audience, as it is not clear who owns the underground pore space (if anyone), or how much these owners should be compensated for having CO2 filling it up (if anything). This could be resolved on a state-by-state basis, though many potential sequestration sites are located in multiple states. (more…)

29 January 2009 at 7:50 pm 1 comment

What Drives Traffic Fatality Risks?

| David Gerard |

Does the inclement weather have you worried about sliding off the road to an icy death? If so, I’ve got some good news for you. On a per-mile driven basis (or per-trip or per-minute traveled), winter is actually the least likely time to get killed behind the wheel. Summer drivers have a risk of 1.24 fatalities per 100 million miles driven compared with 1.01 during the winter. For males behind the wheel of an SUV, those summer and winter numbers are 1.39 and 0.87, respectively.

That’s what we discovered when we teamed with the AAA Foundation for Traffic Safety to develop TrafficSTATS — an interactive website that merges traffic fatality and personal travel information to generate risk estimates. The site generates risk estimates for combinations of age, day of week, month of the year, gender, hour of the day, drivers, passengers, and vehicle types. Did you know that a man behind the wheel is 80% more likely to get killed than a woman? Or that 16-20 year-old drivers have about the same fatality risk as 75-84 year-olds?

Although our estimates are a simple ratio generated by merging federal fatalities and personal travel behavior databases, we believe that our risk estimates frame risk in a far superior fashion than using fatalities or other risk proxies. For example, one common metric is deaths per registered vehicle. By this measure it looks like SUVs are more dangerous than cars. Adjusting for the fact that SUVs are driven more miles and carry more passengers than cars do provides a much different picture — SUVs are a lot safer (0.85 SUV and 1.02 passenger car fatalities per 100 million passenger miles traveled). Not only that, we also found that even the rollover risk for SUVs and cars are virtually the same for 25-50 year old drivers, and the divergence in rollover risks stems predominantly from high fatality risks for young and old drivers (PowerPoint and paper).

One caveat, the site was developed with MS tools and works best in Internet Explorer. What was that post about path dependence? Aaack.

26 January 2009 at 1:50 pm 2 comments

High-Powered Incentives

| David Gerard |

As I pack my bags for the American Economic Association meetings this weekend in San Francisco, I am reminded of a recent New Yorker article on the impacts of medical marijuana legalization. This is probably a rather mundane topic for you left-coasters, but here in Pennsylvania where we can’t even buy beer in grocery stores, it is a pretty exotic concept.

The article highlights a number of ways in which legalization foments organizational change, and also gives some anecdotal evidence on sharecropping terms, suggesting different terms for indoor and outdoor operations.

The easiest way to make this kind of small indoor scene work is to live in someone else’s house and nurture the plants in exchange for a third or half the profits, and that is how the Kid would be spending her time for the next two months.

On the outdoor side, however, this description of the “Humboldt Slide” suggests that landlords appear more willing to change the contracting terms:

“You start at this really great percentage, and you’re buddy-buddy and everything’s great,” Emily said. As the harvest approaches, growers inevitably begin to run out of money and get greedy, and the sharecroppers lose whatever leverage they had earlier in the growing cycle, when their daily attention was necessary for the young plants to survive. Emily’s wage the previous year was initially set at a third of the value of the plants that she harvested. Later, her boss “slid” her percentage to a sixth, meaning that she owned only a dozen of the eighty plants that she grew that season.

The explanation is that the laborers have no legal recourse, so the landlord is free to rewrite contracts as he pleases, but then wouldn’t we expect a slide in the case of the indoor operations as well?

I welcome suggestions for more systematic treatments for effects of the California legalization. One effect that I don’t expect is for it to have much of an impact on the average sobriety level at this weekend’s conference.

31 December 2008 at 2:42 pm 2 comments

A Hostage Situation in Pittsburgh?

| David Gerard |

upmc4I would like to thank Peter for inviting me to guest blog, as I have been a fan of Organizations & Markets for some time. I spent the better part of the past year developing courses that emphasized organizations, entrepreneurship, and innovation. O&M has been an invaluable resource, whether to “borrow” slides from Richard Langlois,  or to get ideas for classroom topics.

I am writing from the “Steel City” of Pittsburgh, though the steel industry has largely fled the region. For evidence of that we need to look no further than our skyline (which we can now see because there is less smog), where the University of Pittsburgh Medical Center’s UPMC logo is now emblazoned atop the US Steel Tower. Health care accounts for about 15% of the region’s workforce.

Aside from being a case-study in post-industrialization, UPMC is also an interesting point of departure for exploration of some fundamental organizational questions.  One that leaps to mind: Are non-profits where the real money is? Last year, UPMC generated $6 billion in revenue and cleared more than $600 million in “non-profit.”

A more traditional organizations question is the question of organization boundaries, and the tortured negotiations between UPMC and Highmark illustrate concepts such as transaction costs (hint for the exam: if it takes 3+ years to strike a deal, transaction costs may be high), vertical integration versus arm’s-length contracting, market power, bilateral dependency, credible commitment, and the hostage model. Indeed, the linchpin of the deal was Highmark kicking in for the construction of the new Children’s Hospital:

Highmark and UPMC have had a good working relationship since 2002, when the two companies signed a landmark 10-year deal. UPMC won a contract with its best customer, and hundreds of millions in loans and grants from Highmark so UPMC could build a new Children’s Hospital in Lawrenceville. Highmark, meanwhile, was guaranteed access to the wide UPMC network for a decade.

Having students explain why Highmark built a hospital rather than simply writing a check turned out to be a pretty good exam question.

The Pittsburgh Post Gazette ran a nice five-part series on the growth of UPMC growth and its phenomenal role in medical innovation. Despite the is long-term agreement, UPMC and Highmark are at odds over a proposed merger between Highmark and Independence Blue Cross. The federal authorities granted antitrust clearance, but Pennsylvania regulators won’t rule on the matter until next month. The state’s hesitation to give the green light gave Senator Specter and federal regulators time to reexamine the matter, and this might be a case to follow to see how the new Administration exercises its antitrust authority.

29 December 2008 at 10:26 pm 1 comment


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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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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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