Author Archive
Moral Hazard
| Peter Klein |
Ten-year-old child wants a mobile phone. Parent buys a basic, inexpensive model with a pay-as-you-go plan. Child loses phone.
Parent: “You see, I thought that might happen, which is why I got you a cheap phone that’s easily replaceable and not one of those fancy, expensive ones you’re always asking for.”
Child: “But if I had a fancy one, I would have been more careful not to lose it.”
The Beauty of Entrepreneurship
| Peter Klein |
Entrepreneurship is exciting, important, dynamic, unpredictable, creative, the “driving force” of the market economy, in Mises’s words. But is it beautiful? Yes, writes Evan Osborne in the new issue of the excellent Independent Review:
Commerce deserves a place next to literature, poetry, painting, music, and other conventional forms of art as an arena for human expression and a potential source of beauty. To expand the limits of human possibilities, entrepreneurs attempt to create value by rearranging scarce resources, and the methods they employ in these endeavors exhibit such dimensions of beauty as proportion, symmetry, and harmony.
The online edition of the article, “Commerce is Beautiful,” is behind a six-month moving wall but you can read the working-paper version here. It’s worth nothing that mathematics, another field not normally associated with the fine arts, also uses aesthetic terms like elegant, deep, austere, and beautiful to describe its achievements.
This Could Have Been Worse
| Peter Klein |
From PhD Comics, via Fabio. Part of an this week’s series poking fun at the professoriate.
Conference Announcement: The Practice and Theory of Entrepreneurship
| Peter Klein |
The University of Missouri’s McQuinn Center for Entrepreneurial Leadership announces its 2008 conference, “Entrepreneurship: Where Practice and Theory Meet,” 6-7 November in St. Louis:
A conference bringing together practitioners and researchers to discuss current research and share best practices for creating successful new ventures and vibrant economies (with a special focus on rural entrepreneurship). The conference will highlight the Appalachian Regional Commission’s 10-Year Entrepreneurship Initiative, the W.K. Kellogg Foundation’s Entrepreneurship Development Systems in Rural America Program, and recent community initiatives.
Speakers include Elaine Edgcomb (Aspen Institute), Deb Markley (Rural Policy Research Institute), and John Potter (OECD). The conference is sponsored by the McQuinn Center, ExCEED / University of Missouri Extension, the Rural Policy Research Institute, and the Federal Reserve Banks of St. Louis and Kansas City. Further details including registration information, accomodations, etc. are available at the McQuinn Center website. Contact Ken Schneeberger for more information.
Our Own Buzz, Continued
| Peter Klein |
Lasse’s post reminded me of the classic “What the Professor Really Means.” Students, take note. Graduate students, study this carefully for its pedagogical wisdom.
NIE Guidebook
| Peter Klein |
The long-awaited New Institutional Economics: A Guidebook is due out this September from Cambridge University Press. Editors Eric Brousseau and Jean-Michel Glachant assembled an all-star team including Oliver Williamson, Paul Joskow, John Nye, Gary Libecap, Lee Alston, Pablo Spiller, Benito Arruñada, Stéphane Saussier, Jackson Nickerson, Brian Silverman, Joanne Oxley, Mike Sykuta, Mike Cook, and many others — even Foss and Klein. You can pre-order yours today — the hardback’s a whopping $140 but the paperback’s only $59.
Here’s the official CUP page and here’s an information page put together by Eric Brousseau. It should be a valuable reference for years to come.
The Long Tail, Serial-Killer Edition
| Peter Klein |
Visiting my Mom this past weekend I found an item in the local paper about Kelly Robinson and Dan Norder, a happy couple who met at a Jack the Ripper conference. That’s right, they’re fellow Ripperologists. They’re even hosting this year’s Ripper conference, 10-12 October in Knoxville, Tennessee. For every interest or hobby there’s a group or club, and in the new economy they’re all on the web. (I shouldn’t give Kelly and Dan too hard a time; after all, I met my wife at an Austrian economics conference.)
By the way, in case you missed it, the current issue of HBR features Anita Elberse’s critique of the Long-Tail phenomenon. Yes, she argues, the web has given us many niche markets, but almost all the money is being made at the left-hand side of the distribution. Here are Chris Anderson’s response and Elberse’s rejoinder.
Resort-Town Pricing
| Peter Klein |
Like other members of the O&M community in the Northern Hemisphere I’m enjoying the lazy days of summer. This week I’ve been on an extended-family vacation in Destin, Florida — heart of the “Redneck Riviera” — reading mindless fiction, drinking piña coladas, and showing off my Body by InBev. One thing that surprises me is that prices at the local grocery store, and the local Wal-Mart (sorry, Walmart >|<), are no higher than the prices back home, even though the price elasticity of demand is surely lower. Why don’t resort-town stores price like stores in airports or at ski resorts? Demand isn’t quite that inelastic, but presumably less elastic than demand in year-round communities. Likewise, one would expect Walmart prices to be significantly lower in retirement communities or other areas populated by price-sensitive shoppers.
I asked my colleague Emek Basker, a Walmart expert, and she says that while there’s plenty of anecdotal evidence of variation in price (and product selection) across Walmart stores, she doesn’t know any empirical studies explaining these differences systematically in terms of price elasticities, income, labor costs, etc. Anybody know of such studies?
File Sharing Controversy: The Chronicle Weighs In
| Peter Klein |
The Chronicle of Higher Education provides a useful summary of the OS-Liebowitz debate on file sharing we’ve been following for a while (thanks to David Glenn for the tip). I like this description of the original piece by Oberholzer-Gee and Strumpf:
The paper seemed like a model piece of empirical social science for the Freakonomics era. Unusual data source analyzed with “instrumental variables”? Check. Counterintuitive conclusion? Check. Implications for hot-button policy debate? Check. The scholars filed an amicus brief in defense of file-sharing companies in the U.S. Supreme Court’s Metro-Goldwyn-Mayer Studios Inc. v. Grokster case in 2005. When a revised version of their working paper appeared in the February 2007 issue of the Journal of Political Economy, it was the lead article.
And people think editorial decisions are made on purely scientific grounds. . . . Anyway, the article includes valuable background information and some interesting details. Strumpf suggests that Liebowitz is pressing the issue so zealously because Liebowitz’s center at UT-Dallas receives funding from the RIAA and “other commercial interests,” a charge I find shockingly inappropriate and unprofessional. (Anyone who knows Liebowitz can attest to his zeal on a number of unpopular issues, such as his defense of QWERTY and his attack on the Boston Fed study of mortgage discrimination.)
I don’t know the primary sources well but one gets the definite impression that Oberholzer-Gee and Strumpf are being less-than-fully candid about their work. Their defenses against various critics (not only Liebowitz) seem weak and unconvincing. Overall, this episode reminds me of the Card-Kreuger controversy over the minimum wage: an empirical paper finds the opposite of what everyone expects and makes a big splash, but the authors don’t have a solid explanation for their findings, there are questions about the data and methods, and specialists aren’t convinced by the results. My conjecture is that in this case, like the minimum-wage episode, the spashy result will not stand the test of time.
Opportunities and Entrepreneurship Research: A Critique
| Peter Klein |
The notion of economic “opportunities,” and their discovery or creation, is one of the core concepts of contemporary entrepreneurship research. But the use of opportunities as the unit of analysis poses several problems. The opportunity-discovery or opportunity-recognition perspective tends to treat economic opportunities as objective phenomena, while, under Knightian uncertainty, profit opportunities are always subjective, existing only in the imagination of economic actors. In an alternative view that Nicolai and I have elaborated in several papers, entrepreneurship is best understood not as perception, but as action, the investment of resources under uncertainty in anticipation of uncertain rewards.
In a new paper, “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” I critique the opportunity-discovery perspective in more detail. In particular, I argue that the literature has misunderstood Israel Kirzner’s concept of “discovery,” the theoretical basis of much of the research on opportunity discovery. Kirzner’s explanandum is not entrepreneurship per se, but equilibration. He invokes the entrepreneur, and his “alertness” to exogenously determined profit opportunities, as a metaphor, to explain the tendency of markets to clear. It is not meant as a positive account of the entrepreneurial function, but rather an instrumental explanation of the market process. Hence a research program based on operationalizing “opportunities,” exploring thow they can be “discovered without search,” and so on, is unlikely to bear fruit.
The paper is forthcoming in the Strategic Entrepreneurship Journal. Comments welcome. Abstract below the fold. (more…)
Pirrong on Speculation
| Peter Klein |
Following up Dick’s post on speculation, Craig Pirrong had a nice piece in Friday’s WSJ providng more details on oil markets. Notes Craig:
The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices — most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.
More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.
The pointer is from Mike Giberson, who provides more information and links to Craig’s (brilliantly named) blog, Streetwise Professor. Craig testified Friday on oil-market speculation before the US House Agriculture Committee; you can read his remarks here. And for a classic paen to speculation more generally, see Victor Niederhoffer’s classic “The Speculator as Hero.”
Note to graduate students: If you haven’t read Craig’s classic papers on bulk shipping, introducing the concept of “temporal specificity,” your education is incomplete. Check ’em out:
Pirrong, Stephen C. 1992. “An Application of Core Theory to the Study of Ocean Shipping Markets.” Journal of Law and Economics 35: 89–131.
Pirrong, Stephen C. 1993. “Contracting Practices in Bulk Shipping Markets: A Transactions Cost Explanation.” Journal of Law and Economics 36: 937–76.
Technology and Firm Size and Organization
| Peter Klein |
As a New Economy skeptic (1, 2, 3, 4) I worry about sweeping claims that information technology has rendered obsolete the large, vertically integrated, publicly held corporation and its managerial hierarchy. Such claims suffer from two problems: First, they tend to be thinly documented — evidence on the economy-wide distribution of organizational forms is largely fragmentary and anecdotal. Second, they usually exaggerate what’s new about those changes that we can document. As I wrote in my review of Yochai Benkler’s The Wealth of Networks:
Benkler proposes social production as an alternative to the traditional organizational modes of “market” and “hierarchy,” to use Oliver Williamson’s terminology. Indeed, open-source production differs in important ways from spot-market interaction and production within the private firm. But here, as elsewhere, Benkler tends to overstate the novelty of social production. Firms, for example, have long employed internal markets, delegated decision rights throughout the organization, formed themselves into networks, clusters, and alliances, and otherwise taken advantage of openness and collaboration. There exists a variety of organizational forms that proliferate within the matrix of private property rights. Peer production is not new; the relevant question concerns the magnitude of the changes.
Here, the book suffers from a problem common to others in this genre. Benkler provides a wealth of anecdotes to illustrate the revolutionary nature of the new economy but little information on magnitudes. How new? How large? How much? Cooperative, social production itself is hardly novel, as any reader of “I, Pencil,” can attest. Before the web page, there was the pamphlet; before the Internet, the telegraph; before the Yahoo directory, the phone book; before the personal computer, electric service, the refrigerator, the washing machine, the telephone, and the VCR. In short, such breathlessly touted phenomena as network effects, the rapid diffusion of technological innovation, and highly valued intangible assets are not really really new. (Tom Standage’s history of the telegraph and its own revolutionary impact, The Victorian Internet [New York: Walker & Company, 1998], is well worth reading in this regard.)
A new paper by Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo, “Technological Revolutions and the Evolution of Industrial Structures: Assessing the Impact of New Technologies upon the Size and Boundaries of Firms,” looks at the empirical evidence more systematically and concludes that the effect of information technology on firm size and organization is real, but modest: (more…)
Journals and Social Networks
| Peter Klein |
Isn’t this a little much for nerdy academics?
As a registered user with Cambridge Journals Online (CJO) you may be interested to read about the latest additions we have made to the site. . . .
Users can now bookmark links from journal homepages and article abstracts using social bookmarking services, such as del.icio.us, Digg.com and Reddit.com enabling them to save web pages they want to remember or share.
What’s next, a Twitter feed for Peter’s daily research activities? [02:30pm July 10, 2008 from CoolProf: Just updated footnote 12.]
More on the Economic Organization of Law Firms
| Peter Klein |
As a follow up to these comments about the organizational structure of professional-services firms, law firms in particular, note Tom Ulen’s remarks on some recent trends, e.g., the growing importance of specialized, niche firms that provide specific services to corporate clients on a short-term basis.
An Even Better Procrastinator’s Clock
| Peter Klein |
I blogged previously on an alarm clock designed for procrastinators and people with time-inconsistent preferences. It runs up to 15 minutes fast but in a random pattern so you don’t know how fast it really is. Here’s an even better clock: if you don’t wake up it starts dialing numbers randomly chosen from your phone’s contact list, annoying the living s__ t out of your friends until you turn it off. As Engadget notes, this is brilliance — “pure, sadistic, barbarous brilliance.”
The Ecconomics of Organizing Economists
| Peter Klein |
Most regulatory agencies are staffed by a mix of attorneys and economists. Members of these groups do not always play well together. How, then, should such an agency be organized — functionally, putting the economists in a single unit, reporting to a chief economist, or divisionally, spreading the economists throughout divisions organized by legal issue, industry sector, geographic region, etc. and having them report to an attorney in charge of each division? An interesting application of the U-form versus M-form problem posed by Chandler (1962).
An analysis of organizational structure at US and European competition agencies by Luke Froeb, Paul Pautler, and Lars-Hendrik Roller (via Dan Sokol) finds that
the main advantage of a functional organization is higher quality economic analysis while the disadvantage is that the analysis may not be focused on legal questions of concern, and is less easily communicated to the ultimate decision makers. Likewise, the advantages of a divisional organization are decentralized, and faster, decision making; however, the quality of the economic analysis is likely to be lower and can result in less information reaching the ultimate decision makers.
Froeb, Pautler, and Roller suggest that hybrid forms, such as (a) functional organizations with strong horizontal links between economists and attorneys or (b) divisional organizations with strong vertical links between economists and attorneys, and managers trained in both law and economics, are best.
My own experience at the CEA confirms the importance of both the vertical and horizontal links. We economists were organized into a focused unit for major projects like the Economic Report of the President but were also assigned to ad hoc, inter-Agency teams working on specific policy issues (I dealt with spectrum auctions, the pricing of air traffic control, and foreign ownership of domestic telecom assets, among other things). I was typically the lone economist (though hardly the nerdiest member) on each team.
Russ Coff Guest Blogging at orgtheory.net
| Peter Klein |
Russ Coff, whose work is popular in these parts, is guest blogging over at orgtheory.net. Look for some good stuff in the coming weeks.
Update: Here’s his first post.
More on the File Sharing Contretemps
| Peter Klein |
Stan Liebowitz has posted another comment on the JPE file sharing controversy. Stan ups the ante by including, as appendices, a synopsis of the controversy, copies of correspondence between himself and the authors of the original article, and copies of the JPE referee reports and editor Steve Levitt’s rejection letter. Readers outside of academia may enjoy this rare window into the arcane world of peer review. (Via Craig Newmark.)
Question: If the authors of the original paper, Oberholzer-Gee and Strumpf, published their response to Stan, would we refer to it as OS/2?
Update: Stan reminds me to emphasize that the negative referee report from the JPE, the basis of Levitt’s rejection decision, was, in fact, written by Oberholzer-Gee and Strumpf. In other words, there is an OS/2, and you can read it as one of Stan’s appendices. The core of Stan’s paper is a detailed reply to OS/2, arguing that they don’t have a legitimate response to the critiques in his original comment.
IRB in the Movies
| Peter Klein |
Took my son to see The Incredible Hulk today. Best scene (paraphrasing from memory):
Bad guy Emil Blonsky, demanding at gunpoint for nerdy science professor to inject him with Bruce Banner’s radiation-infected blood: “Make me like him!”
Professor: “It’s extremely dangerous. You don’t know what it could do to you!”
Blonsky grabs professor by the throat and hoists him over his head.
Professor: “I didn’t say I wouldn’t do it. I just need informed consent.”
The Puzzle of the Publicly Held Private-Equity Firm
| Peter Klein |
Like many observers, I was puzzled by last year’s IPO of the Blackstone Group, one of the nation’s largest private-equity firms. After all, the ability of PE firms to restructure and improve poorly performing companies owes a lot to their isolation from the day-to-day pressures of satisfying public investors. PE firms already face potential agency conflicts between their general partners and the managers of their portfolio companies, and between their general and limited partners; why add agency problems between the partners and public shareholders? Has the credit squeeze raised the cost of debt finance that much?
Today’s WSJ reports that KKR, which considered going public last year but pulled out, is again pondering an IPO:
The storied corporate-buyout firm has quietly and aggressively hired a battery of executives in recent months, creating an organization chart that looks remarkably similar to that of a public company. It has brought on a general counsel, a public-affairs chief, a chief compliance officer, a chief technology officer, a chief talent officer and a chief human-resources officer. . . .
[P]eople close to KKR acknowledge that it is still keen on becoming a public company and a raft of recent shifts, including the hiring spree, speak to a broader change at the firm and how it views its business.
Perhaps the publicly held PE firm is best described as a new hybrid form, an organization that combines the governance advantages of private equity with the lower capital costs of the publicly traded corporation. Or does it combine the worst features of both?
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