Posts filed under ‘– Klein –’
The Chicago School of Antitrust
| Peter Klein |
Josh Wright of GMU Law and Truth on the Market was on our campus this afternoon to present his paper “The Roberts Court and the Chicago School of Antitrust: The 2006 Term and Beyond” (thanks to Thom for hosting). The paper provides a nice overview of the evolution of antitrust theory and practice over the last several decades. Josh describes three historical phases of antitrust thinking: the Harvard approach (Bain’s structure-conduct-performance paradigm), the Chicago approach, and the modern “post-Chicago” approach (based on game-theoretic industrial organization).
Josh defines “Chicago” broadly to include not only Demsetz, Peltzman, B. Klein, Bork, Posner, and Easterbrook but also Williamson and others who in the 1970s and 1980s challenged the conventional wisdom that deviations from perfect competition (resale price maintenance, exclusive dealing, block booking, and the like) are per se anticompetitive. I think this is a reasonable taxonomy (though Williamson would be horrified to be included as a Chicagoan). Note that this definition rejects the caricature of Chicago economists as laissez-faire ideologues (indeed, Chicagoans are viewed by Austrians as wishy-washy interventionists on competition policy [1, 2]). Instead, it defines the Chicago approach as the “rigorous application of price theory,” “the centrality of empiricism,” and the “emphasis on the social cost of legal errors in the design of antitrust” (as emphasized by Easterbrook). (more…)
Hayek, Habermas, and the Blogosphere
| Peter Klein |
Cass Sunstein asks if the blogosphere is more like Hayek’s spontaneous market order or Habermas’s noisy “bourgeois public sphere,” concluding that it isn’t quite either:
The rise of the blogosphere raises important questions about the elicitation and aggregation of information, and about democracy itself. Do blogs allow people to check information and correct errors? Can we understand the blogosphere as operating as a kind of marketplace for information along Hayekian terms? Or is it a vast public meeting of the kind that Jurgen Habermas describes? In this article, I argue that the blogosphere cannot be understood as a Hayekian means for gathering dispersed knowledge because it lacks any equivalent of the price system. I also argue that forces of polarization characterize the blogosphere as they do other social interactions, making it an unlikely venue for Habermasian deliberation, and perhaps leading to the creation of information cocoons. I conclude by briefly canvassing partial responses to the problem of polarization.
The paper is in the January 2008 issue of Public Choice, a special issue edited by Daniel Drezner and Henry Farrell on the social and political aspects of blogging. (Thanks to Greg Ransom for the link.)
Is Britney Inefficent?
| Peter Klein |
My colleague Thom Lambert has a nice piece on Britney Spears over at Truth on the Market. Yes, really. Thom asks whether Britney’s popularity, which seems unrelated to intrinsic merit, is due to network effects — people are interested in her because other people are interested in her, and so on — leading us down an irreversible path toward Britneymania. Paul David, call your office! Britney, Thom suggests, may be like the QWERTY keyboard — grossly inefficient but hard to replace.
I like Thom’s analysis but think he should go further in exploring the welfare implications. Paul David’s fable of the inefficient typewriter keyboard has been pretty well demolished by Liebowitz and Margolis, among others; perhaps with Britney we finally have an example of market failure due to network effects! Then again, it’s hard to predict, ex ante, which promising young artists will achieve long-term success; given imperfect knowledge, there is always room for ex post regret, which doesn’t necessarily imply inefficiency. Moreover, if Britneymania isn’t remediable, to use Oliver Williamson’s term, then it’s not inefficient. Finally, what’s the alternative? Do we want a trade association or, even worse, a Ministry of Culture choosing the next pop diva? We might get the next Oleg Gazmanov.
Choosing a Dissertation Topic
| Peter Klein |
One of my PhD students sent me this (click to enlarge), from PhD Comics. Nothing as fancy as grad skool rulz, but a useful analysis nonetheless.
Porter’s Five Forces, Updated
| Peter Klein |
The current issue of HBR features Porter’s “The Five Competitive Forces That Shape Strategy,” a review and update of his famous framework (via Luke). The revision doesn’t include a sixth force, but Porter does add some refinements and clarifications (e.g., the differences between an industry’s underlying structure and observable attributes like the number of firms, industry growth, etc.), and he includes some discussion of dynamics. There’s also a video. Here’s the introductory blurb:
In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.
There is of course a huge secondary and practitioner literature on the five-forces framework and its applications. (more…)
The Original Corporate Raider
| Peter Klein |
Did you catch Henry Manne’s tribute to Louis E. Wolfson, whom Manne calls “the original corporate raider,” in the 18 Jan WSJ?
[T]he obituaries dutifully acknowledged that he was a serious and valued benefactor of children’s health care, and that he devoted himself in later life to the cause of penal reform. . . . They missed the big story. Wolfson’s contribution to human welfare far exceeded the total value of all private philanthropy in history. He invented the modern hostile tender offer. This invention, which activated and energized the market for corporate control, was the primary cause of the revolutionary restructuring of American industry in the 1970s and ’80s, and the ensuing economic boom.
Before Wolfson’s innovation, executing a “hostile” (i.e., against the wishes of incumbent management) takeover required winning a long and potentially costly proxy contest. Now, potential bidders could appeal directly to shareholders, asking them to “tender” their shares at the offered price, bypassing the incumbent management team altogether. Naturally, this outraged the business establishment — the “powerful corporate elite of the 1960s,” as Manne calls them — and pressure mounted for legislation to restrict hostile takeover offers, leading to the 1968 Williams Act, designed to protect incumbent managers by giving them time to prepare counter-offers and otherwise restricting “raiders.” (more…)
Adoption and Diffusion of Organizational Innovation
| Peter Klein |
Most theories of organizational form are framed in comparative-static, equilibrium terms. What organizational forms — degree of vertical integration, use of incentive pay, assignment of decision rights, and the like — are “optimal” in given circumstances (transactional attributes, industry conditions, legal or political environments)? There are lots of theoretical and empirical studies on these questions. And yet, we know relatively little about how new organizational forms emerge and how existing organizations change. Is change explained best in a comparative-statics framework — some underlying condition changed, leading firms to jump from the previously optimal, equilibrium form to a new, equilibrium form? Or is some kind of experimental, evolutionary, or institutional model required?
A new paper by Lisa Lynch, “The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy,” addresses these questions empirically:
Using a unique longitudinal representative survey of both manufacturing and non-manufacturing businesses in the United States during the 1990’s, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, non-unionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.
See also this paper on the evolution of contractual practices in US agriculture.
Erin Anderson (1955-2007)
| Peter Klein |
Erin Anderson, John H. Loudon Chaired Professor of International Management at INSEAD and one of the pioneers of empirical research in transaction cost economics, died of an inoperable brain tumor this past November. Her papers “Integration of the Sales Force: An Empirical Examination” (Rand Journal of Economics, 1984, with David Schmittlein), “The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis” (Marketing Science, 1985), and “The Multinational Corporation’s Degree of Control Over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation” (JLEO, 1988, with Hubert Gatignon) were extremely influential in the transaction-cost literature. They also showed, importantly, how TCE can be applied not only to backwards integration into component procurement, but also to forwards integration into marketing and distribution. She became one of the leading specialists in management and marketing on vertical integration and entry into foreign markets. Her chapter (with Gatignon) in the Handbook of New Institutional Economics, “Firms and the Creation of New Markets” (draft version here) provides an excellent overview of this work.
Erin was a warm, friendly, and helpful colleague and mentor as well as a fine scholar. Read the tributes at this INSEAD memorial page. I saw her last in April 2006 when she presented her paper “How Internal Transaction Costs Drive Compensation of Managers and Salespeople in Business-to-Business Field Sales” here at CORI. I never imagined it would be our last visit.
Best Book Catalog Cover I Saw Today
| Peter Klein |
Elgar’s 2008 Law catalog has a terrific image on the cover. What better way to capture the essence of lawyering, at least transactional lawyering?
Here’s a fun game: If you were to design covers for the Economics, Management, Sociology, or Political Science catalogs, what would they look like?
This Week’s Sign of the Apocalypse: Naming-Rights Edition
| Peter Klein |
You want your name associated with a university but can’t afford to fund a building, classroom, or endowed professorship. Not to worry, there are other options:
It’s an offer the University of Colorado couldn’t flush away: A Boulder venture capitalist paid $25,000 for the naming rights to a bathroom in the Boulder campus’ ATLAS building.
And so it is that the second-floor men’s bathroom in the high-tech hub now has Brad Feld’s name on it and a plaque with some words of wisdom from the donor: “The best ideas often come at inconvenient times. Don’t ever close your mind to them.” . . .
“I just wanted a plaque outside of the men’s room to inspire people as they walk in to do their business,” Feld said.
Perhaps this should be our next continuing series.
DeLong on Introspection
| Peter Klein |
Brad DeLong sounds almost Misesian in this call for economics PhD students to study economic history:
[Mainstream] Economics is the hyper-positivist of social science disciplines: believing that everything of interest can be reduced to law-like theoretical and empirical propositions modeled after classical mechanics; that what cannot be reliably, repeatedly, quantitatively, and empirically demonstrated does not really exist as knowledge; that the only good social science is a deductive, analytical, model-based, general, experimental science.
But this misses a lot. Because we are people like those whom we study, we have psychological access to our subjects’ internal decision-making processes and motivations at a level that we cannot obtain from market price-quantity data. There is lots of interest that happens once and only once. Natural experiments are rare, and so if we restrict ourselves to positivist tools alone much is underidentified. The individuals’ preferences — the “tastes” part of “tastes and technologies” are not primitive but are themselves the result of long and complex historical, sociological, psychological, and — yes — economic processes. You need thickly-described case studies and anecdotes looking out from people’s insides before you can tell if your statistical results mean what you assert they mean.
Mises argues in Theory and History (1957) that the basic economic categories of means and ends, of preference, contraint, and choice, cannot be understood in purely positivist terms: “Being himself a valuing and acting ego, every man knows the meaning of valuing and acting. He is aware that he is not neutral with regard to the various states of his environment, that he prefers certain states to others, and that he consciously tries, provided the conditions for such interference on his part are given, to substitute a state that he likes better for one he likes less.” In other words, we understand economic activity in a causal, realistic sense, a sense denied to us in our study of the natural world. Moreover, like Brad, Mises argued that the historian must use not only the tools of deductive theory, but a deep understanding or Verstehen, to grasp the meaning of particular historical events. (more…)
Shane Interview in Business Week
| Peter Klein |
Scott Shane is interviewed in today’s Business Week on his new book, The Illusions of Entrepreneurship. The book is a treasure-trove of empirical data on startups, much of which is familiar to specialists but completely unknown in the business press and in popular culture (e.g., that industry explains most of the variation in failure rates). See also this guest post by Scott on Guy Kawasaki’s blog for more on the basic thesis.
Of course, when Scott writes here about the value of entrepreneurship to society defines entrepreneurship narrowly as busines startups, not some broader notion of creativity, innovation, alertness, or (to ride one of this blog’s favorite hobby-horses) judgment.
Data Sharing, When It Might Really Matter
| Peter Klein |
Social scientists aren’t the only ones reluctant to share raw data. Medical researchers are equally touchy about it, even when granting other people access to the data could lead to real breakthroughs. Biostatistician Andrew Vickers writes in yesterday’s Times about his experiences trying to replicate or extend cancer studies:
Not long ago, I asked a respected cancer researcher if he could send me raw data from a trial he had recently published. He refused. Sharing data would make the study team members “uncomfortable,” he said, as I might use this to “cast doubt” on their results. . . .
[W]e wrote to [another research team] and asked whether they would share their data. They refused on the grounds that they might consider a similar analysis at some point in the future. But years have passed, no such analyses have been forthcoming and few patients are benefiting from what could be a very effective drug. . . .
When a colleague and I wanted to analyze the data from a completed breast cancer trial, merely getting permission to speak to the study’s organizing committee required a one-hour phone call with the scientist in charge of the agenda. Only after another one-hour call with the committee itself were we allowed to submit a formal proposal — to which we received no response. . . .
Researchers give all kinds of reasons for refusing to share — concerns about patient confidentiality, appropriate research methods, and so on — but, Vickers concludes, “the real issue here has more to do with status and career than with any loftier considerations. Scientists don’t want to be scooped by their own data, or have someone else challenge their conclusions with a new analysis.”
Thanks to Research on Innovation blog for the lead.
Ken Lay: Not Such a Bad CEO After All?
| Peter Klein |
Jim Brickley combs through the mess of Enron trial materials to examine the behavior and performance of Missouri’s own Ken Lay. His findings may surprise you:
Internal documents released through the Enron litigation allow for a more detailed examination of the activities of top executives than is typically possible. This clinical study of Enron’s Ken Lay highlights the difference between popular opinion on the role and knowledge of CEOs with that suggested by economic theory and evidence. In contrast to popular opinion, the evidence is consistent with the following three hypotheses: 1) Lay performed a role at Enron that is consistent with existing economic theory and evidence, 2) he performed this role with reasonable diligence, and 3) while he was relatively well informed about Enron at a high level, it is unlikely that he would have had detailed information on many of Enron’s transactions — including deals with Fastow’s partnerships. News analysts assert that a positive feature of Lay’s legacy is that CEOs are now spending more time monitoring the details of financial reports and internal controls. This study suggests that the opportunity costs of this change in CEO behavior are higher than these analysts suggest.
On a related note, here is an interview with Gene Fama (via Don Boudreaux) covering principal-agent issues and CEO compensation, as well as efficient-markets theory.
ECHO
| Peter Klein |
Check out ECHO (Exploring and Collecting History Online), a portal to several thousand websites dealing with the history of science, technology, and industry.
Schools of Thought in Behavioral Economics
| Peter Klein |
Gary Lynne sent me John Tomer’s paper from the June 2007 Journal of Socio-Economics, “What is Behavioral Economics?” Tomer summarizes the various strands of behavioral economics and scores each according to “narrowness,” “rigidity,” “intolerance,” “mechanicalness,” “separateness,” and “individualism.” Coverage includes the Carnegie tradition, Katona’s Michigan school, modern experimental economics, Akerlof’s behavioral macro, and more. Tomer defines the field more broadly than I would — he includes evolutionary economics à la Nelson and Winter, for example — but the commentary is insightful.
Kitchen Hierarchy
| Peter Klein |
Before Kitchen Confidential made him a celebrity, Anthony Bourdain was a real chef, working upscale New York kitchens at places like the Supper Club and Sullivan’s. Bourdain’s style is not to everyone’s taste, but he knows how to manage a restaurant crew. A chef, after all, is not primarily an artist, but a manager, facing the same set of organizational challenges — delegation, incentives, monitoring — as any administrator.
I mention this because I recently stumbled upon an interview with Bourdain in the July 2002 Harvard Business Review. Despite several attempts by interviewer Gardiner Morse to get Bourdain to endorse creativity, spontaneity, and empowerment in the kitchen, Bourdain remains an unreconstructed devotee of Escoffier’s “brigade system,” a sort of culinary Taylorism in which each member of the cooking staff has a fixed place in the production chain, a very narrow job description, and an obligation to obey his chef de partie (section leader) and the head chef without question. (more…)
Reflections on LLSV
| Peter Klein |
I meant to blog on the newest LLSV paper (actually LLS, in this case) but never got around to it. LLSV, you’ll recall, inaugurated a stream of empirical research on the financial and economic effects of legal systems (focusing on the differences between common- and civil-law countries). The newest paper clarifies the argument and reflects on ten years of research, discussion, and debate on the role of legal origins.
Fortunately, Daniel Sokol has written some comments on the Conglomerate blog (one of my regular reads, by the way — keep up the good work, guys!). Daniel notes, wisely:
I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record. A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.
Podcast: Munger on Coase on the Firm
| Peter Klein |
The latest podcastin Russ Roberts’s EconTalk series features Duke’s Mike Munger on Coase and the nature of the firm.
Nicolai and I are big proponents of the Coasian framework, though it is important to realize that a lot of work has been done in this area since the 1970s (let alone 1937). See here and here for commentary.
Organizations and Markets 
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