Posts filed under ‘Institutions’
PAL Team on Microfinance
| Peter Klein |
As a microfinance skeptic I was particularly interested in the new paper from the J-PAL team of Banerjee, Duflo, Glennerster, and Kinnan, “The Miracle of Microfinance? Evidence from a Randomized Evaluation.” Despite the pedestrian abstract, the findings are pretty significant:
To date there have been no randomized trials examining the impact of microcredit. Using such a design, 52 of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not. We show that the intervention increased total MFI borrowing, and study the effects on new business starts, investment, and consumption. Households with an existing business at the time of the program invest in durable goods, and their profi ts increase. Households with high propensity to become business owners see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners see nondurable spending increase. We find no impact on measures of health, education, or women’s decision-making.
Ryan Hahn puts it this way: The verdict is in on microfinance. . . . And it’s not pretty.” He means that microfinance does appear to have a positive marginal effect on business formation and expansion, but the effect is modest and does not (at least within a 15-18-month timeframe) have any discernible effect on well-being.
Research Workshop on Institutions and Organizations
| Peter Klein |
The IV Research Workshop on Institutions and Organizations takes place at Insper (formerly Ibmec) São Paulo 5-6 October 2009. Lee Alston and David Stark are keynoting. There are panels on “Judicial Norms and Development,” “New Theories of the Firm,” and “Social Capital and Organization.” There’s an open call for papers, with abstracts due 20 July.
I attended the 2007 version and enjoyed it very much.
A Second Act for the CAFE Standards
| Peter Klein |
From former guest blogger David Gerard:
As you have no doubt learned, President Obama and Governor Schwarzenegger have teamed up for a healthy bump in the federal Corporate Average Fuel Economy (CAFE) standards, forcing automakers to boost their fleet averages to 35 miles per gallon by 2016. The announcement will dismay many economists, who for many, many reasons have advocated steeper gasoline taxes instead. Lester Lave and I argued that that there were some solid reasons to support some form of CAFE standards in conjunction with higher gasoline taxes. On pragmatic grounds, the CAFE standards have enjoyed public support and gas taxes decidedly have not, so CAFE has carried the day.
The original CAFE measures did not do much in terms of pushing the envelope of vehicle technology, as a change in consumer tastes toward more fuel efficient vehicles in the late 1970s. As a result, the standards were met by altering the mix of vehicles sold, not by any radical improvements in technology. It wasn’t until the early 1980s when oil prices tanked that the CAFE became a serious binding constraint. In contrast, the CAFE standards announced Monday are very aggressive. However, setting the standard is only the first part of the story. The real action takes place during the second act. What happens as the deadline approaches if firms are unable to meet the stricter standards? (more…)
Headline of the Day
| Peter Klein |
Sandy Ikeda gets the prize for his blog entry on the Obama Administration’s decision not to auction landing slots at NYC airports: “Coase, but No Cigar.”
I wasn’t nearly as clever when I wrote about this problem a while back. I’m still wondering about the question I posed then: Is the political resistance to using prices to allocate scarce resources best explained by public-choice concerns, or by ignorance of how the price mechanism works?
Take My Joke, Please
| Peter Klein |
Like other boring professors, I try to liven up my lectures and after-dinner speeches with a few jokes. Naturally, this effort is plagued by radical uncertainty. And of course I steal the jokes. Indeed, I maintain a computer file of one-liners and funny stories — none original — for possible future use. Then again, as Fabio notes, many stand-up comedians are known as prodigious copiers. Milton Berle once said another comedian made him laugh so hard, “I nearly dropped my pencil.”
Good thing I’m not a professional comedian. According to this paper by Dotan Oliar and Christopher Jon Sprigman, the community of stand-up comedians is characterized by strong social norms that take the place of formal rules in enforcing “ownership” of jokes. A complex system of norms has emerged over the last half-century that “regulates issues such as authorship, ownership, transfer of rights, exceptions to informal ownership claims and the imposition of sanctions on norms violators. Under the norms system, the level of investment in original material has increased substantially.” Presumably the community of professional comedians satisfies the Ellickson requirements of being a small, well-defined, close-knit group. Lucky for me I’m not in it. (HT: orgtheory commentator Johann.)
Vive la Révolution!
| Peter Klein |
So says the all-star team of Acemoglu, Cantoni, Johnson, and Robinson in “The Consequences of Radical Reform: The French Revolution.” Check it out:
The French Revolution of 1789 had a momentous impact on neighboring countries. The French Revolutionary armies during the 1790s and later under Napoleon invaded and controlled large parts of Europe. Together with invasion came various radical institutional changes. French invasion removed the legal and economic barriers that had protected the nobility, clergy, guilds, and urban oligarchies and established the principle of equality before the law. The evidence suggests that areas that were occupied by the French and that underwent radical institutional reform experienced more rapid urbanization and economic growth, especially after 1850. There is no evidence of a negative effect of French invasion. Our interpretation is that the Revolution destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth. The evidence does not provide any support for several other views, most notably, that evolved institutions are inherently superior to those ‘designed’; that institutions must be ‘appropriate’ and cannot be ‘transplanted’; and that the civil code and other French institutions have adverse economic effects.
Think of this as a fixed-effects model estimating the within-country effect of legal origin; what happens when a society’s institutional (particularly, legal) environment changes suddenly and unexpectedly? If a common-law country is invaded and occupied by a civil-law country, what happens to financial-market development? An interesting counterpoint to the cross-sectional studies that are the norm in this field.
Peters Against Aggregation
| Peter Klein |
When I saw the title of Brayden’s post, “Don’t Give Up on Aggregation Yet, Peter,” I thought he’d been reading my macroeconomics posts. Alas, Brayden, prefers meatier fare, such as this post by Barnard College sociologist Peter Levin. Levin is worried about the aggregation of knowledge represented by the open-source, wikified, crowdsourcing movement about which people are all, well, atwitter. (We’ve expressed more than a few reservations about this stuff ourselves.) His main concern, if I understand correctly, is the possibility of information cascades. However, much of the cascades literature deals not with the wisdom of crowds, but the wisdom of experts (tulip-bulb traders, mortgage-backed securities underwriters, etc.). The more expertise decision-makers grant to their peers, the more likely they — in the face of uncertainty — will interpret their peers’ (ostensibly expert) opinions as reliable indicators of underlying reality, and hence the greater the likelihood of cascades.
Brayden takes a different tack, arguing that aggregation mechanisms can be designed to mitigate the chance of outliers biasing the results. I think Brayden is right but am not sure his comments address the underlying mechanism — the microfoundations, to use a certain co-blogger’s favorite term — that Levin is worried about.
SecondMarket
| Peter Klein |
Props to Molly Burress for pointing me to this article in today’s NYT on SecondMarket, a website that acts as a market-maker for illiquid assets. According to the Times SecondMarket is developing secondary markets for restricted public equities, bankruptcy claims, mortgage-backed securities, collateralized debt obligations, and other non-marketed financial claims. As the Times points out, the weak IPO market of the last few years has made VCs reluctant to invest in early-stage ventures; by giving VCs an additional exit option, SecondMarket may increase the flow of venture funding.
Not addressed in the article: If SecondMarket succeeds, and grows, and begins to impose disclosure requirements on the companies whose (now-liquid) assets are traded, will private equity lose its purported advantrages over public equity, in the Jensen (1989) sense?
IRBs Gone Wild
| Peter Klein |
We’ve noted before the strange behavior of university Institutional Review Boards. My own campus has a particularly prickly IRB, the result of an unpleasant incident a few years back involving the medical school. So, even social-science researchers must receive IRB training and have individual research projects — yes, every research project that involves “human subjects,” which includes research using secondary data — approved by the campus IRB.
My certification expired recently and I took an online test today to be re-certified. Some of you may find the questions interesting. Here is a selection. Keep in mind these are questions for an economist wishing to do research in economics and management, not for a pharmacologist or epidemiologist. (more…)
Open Innovation: Not So New
| Peter Klein |
The new issue of the always-interesting Industrial and Corporate Change features a paper by the always-interesting David Mowery, “Plus Ca Change: Industrial R&D in the Third Industrial Revolution.” Picking up this blog’s theme that Very Little Is New Under the Sun (OK, not explicitly), Mowery argues that the much-touted New Econonmy concept of “open innovation” is not, in fact, completely new, but an incremental change from previous R&D practices:
The structure of industrial R&D has undergone considerable change since 1985, particularly in the United States. But rather than creating an entirely novel system, this restructuring has revived important elements of the industrial research system of the United States in the late 19th and early 20th centuries. In particular, many of the elements of the Open Innovation approach to R&D management are visible in this earlier period. This article surveys the development of industrial R&D in the United States during the postwar period. In addition to emphasizing continuity rather than discontinuity, this discussion of the development of US industrial R&D during the Third Industrial Revolution stresses the extent to which industrial R&D in the United States, no less than in other nations, is embedded in a broader institutional context. My discussion also highlights the extent to which its development has been characterized by considerable path dependency.
Public Entrepreneurship
| Peter Klein |
A surprising aspect of the recent growth in the entrepreneurship literature is the number of papers, projects, courses, centers, etc. studying entrepreneurship in non-market settings: “social entrepreneurship,” “cultural entrepreneurship,” “environmental entrepreneurship,” and so on. At my own university students can take entrepreneurship courses not only in the Colleges of Business or Engineering but in the College of Agriculture, the School of Natural Resources, the College of Journalism, and even the School of Social Work. (One of my colleagues organized a conference last year aimed at cattle ranchers seeking to market their, um, byproducts as fertilizer, with the classic title: “Manure Entrepreneurship: Turning Brown into Green.”
Translating concepts, theories, and research methods from the entrepreneurship literature to non-market settings raises challenging issue, however. How is entrepreneurship defined? What corresponds to entrepreneurial profit and loss? What is the entrepreneur’s objective function? Are there competitive processes that select for the better entrepreneurs? None of the classic writers on entrepreneurship — Cantillon, Say, Schumpeter, Knight, Mises, Kirzner — wrote explicitly on entrepreneurship in non-market settings, as far as I am aware. Mises, in fact, distinguishes sharply between “profit management” (or entrepreneurial management) and “bureaucratic management,” identifying the former with initiative, responsibility, creativity, and novelty and the latter with rule-following within strict guidelines (see Bureaucracy, 1944, and chapter 15, section 10 of Human Action, 1949). (more…)
The Economics of Prehistory
| Dick Langlois |
Greg Dow at Simon Fraser is organizing a conference this summer on “Early Economic Developments.”
This conference is a meeting for scholars interested in economic aspects of prehistoric events. The organizers welcome proposals for papers on topics at the boundaries among economics, archaeology, and anthropology. Topics can include economic prehistory, the economics of human biological evolution; pre-industrial economic history; and the evolution of economic, social, and political institutions.
Looks interesting. Abstract deadline is April 15, which I guess isn’t tax day in Canada.
The Danish Mortgage System to the Rescue?
| Nicolai Foss |
As many O&M readers will remember, George Soros recommended a “Danish fix” for the US mortgage crisis. The American Enterprise Institute is sponsoring a whole-day event today on the related, if more cautious, topic, “Can Elements of the Danish Mortgage System Fix Mortgage Securitization?” Here is the wiki on the Danish mortgage system.
Railway Gauges and Path Dependency
| Dick Langlois |
You’ve all read the viral email asserting that the railroad gauge we have today — and, in some versions, the size of the space shuttle fuel tanks, which had to be transported by rail — is a direct result of the wheel gauge of Roman chariots. Not surprisingly, the real story is more complex, and many gauges coexisted (and to some extent continue to coexist) in the U.S. and around the world. My former colleague Doug Puffert tells this story in full detail in his new book, Tracks across Continents, which has just appeared from the University of Chicago Press. The book is a useful addition to the catalog of case studies of path-dependent technology.
The book came out of Doug’s thesis at Stanford, where he worked with Paul David and Brian Arthur. He was a visitor at UConn in the 1988-89 academic year. I can still remember his seminar presentations, which involved simulating the evolution of railways on a Macintosh of the era. (One thing you probably won’t learn in Doug’s official bio is that, before coming to UConn, he won a car on Wheel of Fortune. I always tell students about this when I teach the QWERTY story — a student of Paul David who really knew his letter frequencies.)
The Political Economy of Vertical Integration
| Peter Klein |
An understudied area in the organizations literature is the effect of organizational form on lobbying, rent-seeking, tax-rate arbitrage, and similar kinds of political behavior. The accounting literature on transfer pricing looks at the ability of vertically integrated multinationals to shift income between tax jurisdictions to reduce the overall tax burden, and regulators have expressed concerns about diversified multinationals putting downward pressure on environmental and labor regulations (by threatening to withdraw production from countries with high tax or regulatory burdens). Of course we know that as industries mature, firms are more likely to open lobbying offices in state or national capitols. But, in general, we know little about how firms organize to take advantage of political processes and institutions.
Joseph Fan, Jun Huang, Randall Morck, and Bernard Yeung have a new NBER paper on vertical integreation in China showing that vertical integration in highly interventionist environments may be aimed not at reducing transaction costs, protecting relationship-specific investments, and the like, but at rent-seeking and the pursuit of other forms of political privilege. Abstract:
Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.
New McKinsey Videos
| Peter Klein |
Acumen Fund founder and CEO Jacqueline Novogratz shares stories of social-sector entrepreneurship in an excerpt from her new book, The Blue Sweater. A video interview with the author takes you behind the book.
Google’s chief economist says executives in wired organizations need a sharper understanding of how technology empowers innovation.
Tarun Khanna says their common optimistic entrepreneurialism makes them a formidable force.
Ah, Democracy!
| Peter Klein |
I learned this week from Doug French that Dissident Books has published a new edition of H. L. Mencken’s classic and extremely politically incorrect Notes on Democracy. Who but Mencken could write that the common man “is not actually happy when free; he is uncomfortable, a bit alarmed, and intolerably lonely. He longs for the warm, reassuring smell of the herd, and is willing to take the herdsman with it.” As for democratically elected politicians, Mencken reminds us how quickly all those sappy paeans to the people’s will evaporate when a “crisis,” real or imagined, is on the horizon. “All the great tribunes of democracy, on such occasions, convert themselves, by a process as simple as taking a deep breath, into despots of an almost fabulous ferocity. Lincoln, Roosevelt and Wilson come instantly to mind.”
This was on my mind when I read (via Kathryn Muratore) about a new study appearing in Science finding that children looking at pictures of political candidates correctly pick the eventual winner 64% of the time. Apparently we are hard-wired to prefer pretty faces, even when supposedly choosing based on policy views, ideology, “the issues,” etc . So much for the rational voter.
Reducing Transaction Costs in Government Procurement
| Mike Sykuta |
Lest anyone think I (or, by association, O&M) am just a disgruntled Obama-basher, let me applaud the Administration’s announcement today of its intent to overhaul the ways in which the government contracts for goods and services, particularly in the Department of Defense. I suspect the collective “we” are all in favor of identifying methods and processes that will reduce transaction costs (and overall costs) in government procurement programs.
On this point, there is economic research that should help guide the Administration’s deliberations. To wit, William Rogerson provides a pretty thorough assessment of the economic incentives in defense procurement (JEP, 1994) and has a follow-up article on the optimal structure of fixed-priced cost reimbursement contracts (AER, 2003). Bajari and Tadelis (RAND J., 2001) provide a study of incentives versus transaction costs in procurement contracts. Although focused on private-sector construction, their findings are likely relevant to government procurement as well. Important lesson: cost-plus is not necessarily bad.
Blue Eagle Redux
| Peter Klein |
Assuming this is not a joke, Obama has unveiled a new stimulus-plan logo. Projects funded by the American Recovery and Reinvestment Act — primarily roads and bridges, I presume — will sport this handsome emblem. It lacks the 1930s-era fascist style of the NRA’s Blue Eagle but is much in the same spirit. Will those who maintain these roads and bridges be fined for failing to display the logo? (Business owners without a Blue Eagle could be fined up to $500 — more than $8,000 in today’s dollars — and get six months in jail.) Will consumers be encouraged to bycott those without the colorful insignia?
Jason Taylor and I have written that the Blue Eagle may be more important than economic historians have realized. In the early days of the NRA it seems to have played a strong cartel-enforcement role. Eventually business owners and consumers learned that NRA officials were not punishing cartel violations and the Blue Eagle began to disappear from store windows and newspaper advertisements. Our analysis is game-theoretic, but I’m sure our friends from that other discipline would proffer a different explanation based on institutional legitimacy and that stuff.
Funding Higher Education
| Dick Langlois |
Inspired by Peter’s post about salaries at private universities, I thought I would write a bit about public universities, notably my own. It was big news in Connecticut this week when Jim Calhoun, our head basketball coach, got nasty with a self-styled activist who attacked him at a post-game press conference. The activist, who had gotten in on a photographer’s press pass, wanted to know how Calhoun could justify his $1.6 million salary at a time of massive state deficits. Calhoun pointed out that, essentially because of him, the basketball program is a big profit maker for the University: it apparently brings in on the order of $12 million and costs about $6 million. The controversy arose because of the less-than-genteel way in which Calhoun made his case, prompting Governor Jodi Rell to issue a rebuke.
It turns out that Calhoun is not only the highest-paid University employee, he is the highest-paid State employee. (See here for a roster of the top state salaries.) The next two on the list are football coach Randy Edsall ($1.38 million) and women’s basketball coach Geno Auriemma ($1.31 million). The next three are physicians at the UConn Health Center — in the same specialties noted in the Chronicle article Peter cites: reproductive medicine, dermatology, and neurosurgery. (Basketball may not be brain surgery, but Calhoun won his 800th career game on Wednesday, and Auriemma’s team is a juggernaut likely headed for another undefeated season and a national championship.) UConn president Mike Hogan is seventh on the list. (There is an old story about the university president who was asked how he felt about making less money than the football coach: “he’s had a better year than I have,” was the answer.) (more…)
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