Author Archive
Top 3 Boundary Implications
| Lasse Lien |
Top 3 lists are popular, the financial crisis is a hot topic, and this is Organizations and Markets. Combine all three and you get my top 3 list of implications of the financial crisis/recession for firm boundaries:
1. Increased horizontal specialization (de-diversification)
2. Increased vertical specialization
3. Increased concentration (increased size)
Is this roughly right? If not, provide us with your own list.
Incentives Burlesque
| Lasse Lien |
Speaking of incentives, here is an anecdote you probably don’t need to know. In Norway prostitution is illegal, but the ban has until recently been only on the seller side. Now, new legislation has also made buying illegal. Since this most likely will destroy much of the market, one political party (actually a member of the government coalition) suggested that the government pay severance packages to prostitutes that are forced out of business. My question is why only prostitutes? Shouldn’t all criminals that are forced to change careers because of government action be duly compensated?
Peter Joins NHH
| Lasse Lien |
After a long and painstaking negotiation process, Peter has finally agreed to become an adjunct professor at the Norwegian School of Economics and Business Administration (NHH). The celebrations have kept me from blogging much lately.
With Nicolai in a 50% position, yours truly 100%, and now Peter 20%, I think NHH can now boast of being a (if not the) leading O&M business school. And to Dick: You can run, but you cannot hide. . . .
Towards Beyond
| Lasse Lien |
We all know that there is an enormous amount of papers published under the title “Beyond . . . (insert whatever)” and “Towards . . . (insert whatever).” On the theory that using these words in the title almost ensures publication (I admit sampling on the dependent variable here), I have decided to take this to the limit in a series of four papers.
The first one will have the snappy title: “Towards Beyond.” The second: “Beyond Towards.” The third: “Towards Towards.” And finally, the most ambitious one: “Beyond Beyond.” I only have the titles so far, so I am interested in coauthors who can fill in the rest. But given these great titles I consider this a trivial task, and insist that I get to be first author.
Undisputed Knowledge
| Lasse Lien |
Someone recently had the nerve to ask me for examples of undisputed knowledge generated from the social sciences. I.e., things we “know” that are both uncontroversial and does not require a lot of assumptions that are themselves in dispute (or not always true). . . .
I must admit that it was surprisingly (embarrassingly) difficult to come up with something that would qualify a strict interpretation of these criteria. Drawing a blank and under pressure to save face, I suggested that perhaps there would be universal agreement that there is nothing we can universally agree on. But then I realized that this would be an example of the liars paradox. I mean, it’s a logical impossibility that we can all agree that we cannot agree on anything.
So I guess my heroic defense of the social sciences boiled down to the claim that we can agree on only one thing, which unfortunately is a logical impossibility. . . .
Want to Understand the Financial Crisis?
| Lasse Lien |
This clip will tell you what you need to know.
HT: Erik Døving
Dead Founders
| Lasse Lien |
Here is a link to a very nice paper in the somewhat morbid empirical tradition of using death as a natural experiment. Hans K. Hvide looks at the value of the founder to a newly established firm by examining the performance effects of founder death (or the death of a member of the founding team). Using several empirical tests and an impressive battery of robustness checks, he concludes that the negative impact of founder death is almost unnoticeable on all the classic performance variables. Apparently the importance of the founder is as a discoverer of opportunities and an initiator. As a manger the founder appears to be quite substitutable (on average).
Strong-Man Economics
| Lasse Lien |
Here is an interesting paper from the NBER working paper series. Bolton, Brunnermeier and Veldkamp show that it can be optimal for organizations to hire an irrational manager. Irrational in the sense that the manager is less likely to revise strategy as new information becomes available (i.e. is resolute).
The basic setup is that in the first stage the manager receives a signal about the state of the environment and formulates an initial strategy. In the second stage the organizational members act, deciding how closely the will align their actions to the proposed strategy. The actions of individual members are chosen given their knowledge about the manager’s type and a private signal about the environment. The latter may lead them to anticipate a revision of the strategy. In the third stage the manager receives a second signal about the state of the environment, and in the fourth and final stage the leader decides on the final strategy and payoffs are realized.
The essence of the argument is that the less likely the manager is to revise strategy, the better the coordination of the individual members actions. So there is a time-consistency problem that is reduced when a manager is resolute in the sense of not updating as much as optimal adaptation would suggest, and this is known by followers. The paper also supplies interesting discussions of what happens if the leader can commit to not revising strategy (instead of being a resolute “type”), and the cost of resoluteness if the manager can learn from followers.
One can always quibble about the assumptions made in game-theoretic models. An example here would be the assumption that there is no coordination problem after the manager announces his/her final strategy, only in the period between the initial strategy announcement, and the arrival of the second signal about the environment. But definitely a good read, which nicely captures the trade-off between coordination and adaptation. Hereby recommended (the paper, that is, not the hiring of irrational managers or politicians).
Ig Nobel
| Lasse Lien |
The Ig Nobel for economics has been awarded for 2008. The winners are:
Geoffrey Miller, Joshua Tybur, and Brent Jordan of the University of New Mexico, USA, for discovering that a professional lap dancer’s ovulatory cycle affects her tip earnings.
It’s tempting to pose the classic question: Could the direction of causality be an issure here?
Reference: “Ovulatory Cycle Effects on Tip Earnings by Lap Dancers: Economic Evidence for Human Estrus?” Geoffrey Miller, Joshua M. Tybur, Brent D. Jordan, Evolution and Human Behavior, vol. 28, 2007, pp. 375-81.
Klein Bottle
| Lasse Lien |
Behold, below, the Klein Bottle.
It’s described in mathematical topology as a bottle with no distinct inside or outside. Just one side. Strictly speaking, it can only be constructed in four spatial dimensions, but in our three-dimensional world it might be useful for constructing witty remarks for Peter.
It’s also possible to construct a handsome Klein bottle hat, something the gentleman to the right has done. I don’t know about other O&M readers, but I am surely getting one.
Something Useful for the Weekend
| Lasse Lien |
Maybe you’re going to a dinner party this weekend, and maybe you’re worrying that the conversation with the person (of the opposite sex) seated next to you is going to dry up. If so, O&M offers a solution. Read the paper whose abstract appears below beforehand, and just as conversation is starting to cool down, give a quick summary of it. That should bring the heat back up.
We examine why developed societies are monogamous while rich men throughout history have typically practiced polygyny. Wealth inequality naturally produces multiple wives for rich men in a standard model of the marriage market. However, we demonstrate that higher female inequality in the marriage market reduces polygyny. Moreover, we show that female inequality increases in the process of development as women are valued more for the quality of their children than for the quantity. Consequently, male inequality generates inequality in the number of wives per man in traditional societies, but manifests itself as inequality in the quality of wives in developed societies.
Another potential use of the paper is to give it to your spouse if he or she complaints too much. I.e. make the point that if you are low quality, then he or she is likely to be low quality too, so he or she would be better off praising you.
The full reference is: Gould, Eric D., Omer Moav, and Avi Simhon. 2008. “The Mystery of Monogamy,” American Economic Review, 98(1): 333–57. The paper can be found here.
Unpopular Economics
| Lasse Lien |
The Norwegian Directorate for Roads recently published a report concluding that politicians should scrap a plan to make roads safer for kids walking or riding bikes to school. The argument is that the investment required per life saved is too high compared with other measures that will primarily save the lives of grown-ups. The directorate bravely chose to publish this recommendation just four days before school starts.
While their cost/benefit analysis shows beyond reasonable doubt that this conclusion is consistent with maximizing national economic welfare, I don’t think I’ll brag about being an economist at the PTA meeting this evening.
Substitutes in Creating Complementarities
| Lasse Lien |
I have just been reading the Porter and Siggelkow paper in the most recent issue of Academy of Mgmt. Perspectives. The paper summarizes the status of the “complementarity/NK-modelling/activity systems” perspective in competitive strategy. I am anything but an expert in this theory, but I thought I would share one reflection, mainly because it allows me to use the fancy title above.
As many O&M readers will know, a main take-away from this perspective is that an activity system with strong complementarities may enjoy protection against imitation. Some choices in an activity system will presumably be unobservable for outsiders, and getting everything right at once is less likely the more linkages there are between activities. Furthermore, the penalty for failing to get everything right increases with the strength of the complementarities.
My problem is that more and stronger complementarities should presumably speed up learning, because there are more and stronger feedback mechanisms putting pressure to move each activity in the beneficial direction. An increasing number of complementary activities presumably imply that each individual activity is encouraged to move in the “right” direction by many other activities, and stronger complementarities imply stronger pressure from each of them.
So while many and strong complementarities reduce the likelihood of perfect imitation and increase the penalty for imperfection, the rapid learning produced by an improved feedback mechanism may conceivably make the road to perfection rather short. Couldn’t these effects conceivably cancel each other out, or the latter effect even dominate the former? Or in other words — forgive the pun — aren’t these two mechanisms (precise imitation and rapid learning) substitutes in the pursuit of complementarity?
Our Own Buzz
| Lasse Lien |
While we are (eagerly) awaiting the definition of beaconicity, here’s what the standard scientific jargon really means (original source unknown):
“IT HAS LONG BEEN KNOWN” — I didn’t look up the original reference.
“A DEFINITE TREND IS EVIDENT” — The data are practically meaningless.
“WHILE IT HAS NOT BEEN POSSIBLE TO PROVIDE DEFINITE ANSWERS TO THE QUESTIONS” — An unsuccessful experiment, but i still hope to get it published.
“THREE OF THE SAMPLES WERE CHOSEN FOR DETAILED STUDY” — The other results didn’t make any sense.
“TYPICAL RESULTS ARE SHOWN” — This is the prettiest graph.
“THESE RESULTS WILL BE IN A SUBSEQUENT REPORT” — I might get around to this sometime, if pushed/funded.
“THE MOST RELIABLE RESULTS ARE OBTAINED BY JONES” — He was my graduate student; his grade depended on this. (more…)
Vertical Is the New Horizontal
| Lasse Lien |
Unrelated horizontal diversification is widely seen as smoking-gun evidence of agency problems, and heavily sanctioned by capital markets, boards, media, etc. Consequently, we don’t see much blatant conglomeration anymore. But if you are a manger with a strong desire to build an empire, or more generally grow at “all costs,” what do you do?
My conjecture is that unjustified vertical integration is increasingly taking the place of unjustified horizontal diversification as an expression of such tendencies. Why? Simply because the penalties (i.e. the costs) of growing via the latter have increased, which presumably creates a tendency to substitute towards the former.
Admittedly, I don’t have much data to support this, but I do seem to recall that Fan & Lang (2000) found a strong positive link between verticality and the diversification discount. Less scientifically, I have tourist sampled the link between vertical integration and government ownership in my home country (Norway). There seems to be a strong positive correlation between public ownership and vertical integration, but no obvious correlation with horizontal diversification.
CCSM: Reflections on Day One
| Lasse Lien |
Nicolai recently accused me of being overly positive, and he also committed me to providing real-time reports from the CCSM. So here goes my attempt to display my dark side.
We started out Tuesday with Jay Barney identifying Nicolai’s advantage as his sauce (a TCE sauce, presumably) and advising that the sauce should be bottled (see below). Next the CEO of Lego asked us what would be missed if we — or our organizations — died tomorrow. This produced some unorthodox facial expressions among a lot of the academics present, myself included. Next Peter Lorange of IMD advised businesses to keep things simple, followed by José Santos arguing that firms should become meta-national. I’m not going to take sides, but neither being or becoming meta-national strikes me as particularly simple. This was followed by an over lunch talk by the US Ambassador, a session I couldn’t attend due to neurosis about my own presentation.
We moved on to a discussion of the scientific progress in strategic management. The presentations here ranged from arguing that by way of analogy we are moving beyond the stage of the standard model of particle physics (the R2 of the standard model is so large that it would take a page or so to write down the number), to Peter Abel telling us that knowledge accumulation in strategic management is not significantly different from zero. We then went into paper sessions, were in my opinion we proved both of these assessments wrong. I cannot summarize all the papers presented in the session, but my feeling is that the average quality of the papers presented was at least as high as in the bigger conferences, such as AoM and SMS, but with a much lower variance. So there goes my attempt to come across as negative. . . .
How Long Is Long, and How Short Is Short?
| Lasse Lien |
Are spells of market leadership long or short? A Chandlerian will argue that they tend to be long, while a Schumpeterian will argue that they tend to be short. But what is long and what is short? This is a special case of a fairly frequent problem in empirical research, in which the ability to decide is limited by the lack of a clear benchmark. In a forthcoming AER paper John Sutton addresses this problem in a way that seems potentially useful in many situations with similar characteristics (testing the RBV is but one example).
What Sutton does is define a benchmark which is neither long or short. How? Essentially he compares the length of actual market leadership spells to what one would expect if market share changes followed a random walk (given the initial market share gap and a measure of the industry specific volatility in market shares). This benchmark is neither long or short in the (more…)
Volleyball and Equilibrium
| Lasse Lien |
What exactly is the role of equilibrium in the competitive process? Believe it or not, I have found the answer. It plays the same role as gravity does in a volleyball match.
Think about it! The ball is continuously bounced in ways that direct it towards new states of rest (new equilibriums), but it hardly ever settles down in any of these, because it is subject to new bounces, sending it towards yet another equilibrium. Moreover, about half the time the ball is moving opposite of what gravity would dictate, i.e. it is moving upwards, but unless it is bounced again it will start falling downwards and settle in the position gravity dictates (operating on the last bounce). Of course, this never occurs because the ball is continuously bounced. So a theory of gravity alone would not provide a good prediction of where the ball is, nor where it is headed, or even how the game got started. But mind you, think about how absurd it would be to try to understand a game of volleyball without any notion of gravity!
Your Favorite Anomalies
| Lasse Lien |
Anomalies are a key engine of scientific progress, so say Kuhn and Clayton Christensen, among others. Anomalies should accordingly be celebrated and distributed. In this spirit I offer what I consider to be a great example of an anomaly (and please submit your own favorites, or comment on the one below). This one is lifted from a recent AER paper by DellaVigna and Malmendier.
How do consumers choose from a menu of contracts? We analyze a novel dataset from three U.S. health clubs with information on both the contractual choice and the day-to-day attendance decisions of 7,752 members over three years. The observed consumer behavior is difficult to reconcile with standard preferences and beliefs. First, members who choose a contract with a flat monthly fee of over $70 attend on average 4.3 times per month. They pay a price per expected visit of more than $17, even though they could pay $10 per visit using a 10-visit pass. On average, these users forgo savings of $600 during their membership. Second, consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year.
So is this an anomaly, or is it just me?
The Envelope Paradox
| Lasse Lien |
Here’s something to annoy you over the weekend. If you already know the envelope paradox, don’t read on. If you do not, and you are a bit of a nerd, I guarantee you’ll be facinated. The following version of the paradox is cynically stolen from Amos Storkey’s homepage.
You are taking part in a game show. The host introduces you to two envelopes. He explains carefully that you will get to choose one of the envelopes, and keep the money that it contains. He makes sure you understand that each envelope contains a cheque for a different sum of money, and that in fact, one contains twice as much as the other. The only problem is that you don’t know which is which.
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