Posts filed under ‘– Klein –’
Prediction Markets and Corporate Governance
| Peter Klein |
Prediction markets have generated a lot of buzz (particularly in the econo-blogosphere). A new paper by Michael Abramowicz and Todd Henderson explores the potential role of prediction markets in corporate governance. The authors are enthusiasts:
Prediction markets can increase the flow of information, encourage truth telling by internal and external firm monitors, and create incentives for agents to act in the interest of their principals. The markets can thus serve as potentially efficient alternatives to other approaches to providing information, such as the Sarbanes-Oxley Act’s internal controls provisions. Prediction markets can also produce an avenue for insiders to profit on and thus reveal inside information while maintaining a level playing field in the market for a firm’s securities. This creates a harmless way around existing insider trading laws, undercutting the argument for the repeal of these laws. In addition, prediction markets can reduce agency costs by providing direct assessments of corporate policies, thus serving as an alternative or complement to shareholder voting as a means of disciplining corporate boards and managers.
For caveats and qualifications regarding the ability of prediction markets to replace entrepreneurial judgment, see this technical report and this non-technical, critical assessment.
Choosing Your Institutional Environment
| Peter Klein |
The new institutional economics typically treats the institutional environment — the background constraints, or rules of the game, that guide individual’s behavior — as exogenous, forming the framework within which individuals act. But what if parties could choose the institutional environment they want?
Physically moving from one country to another constitutes a strong form of institutional-environment selection. A weaker form is “forum shopping,” in which plaintiffs search for jurisdictions with favorable legal rules. (Prominent recent examples include David Irving’s libel suit against Deborah Lipstadt and Richard Perle’s threatened suit against Seymour Hersh.) US firms engage in a kind of forum shopping when they incorporate in Delaware, the state perceived to have the best corporate-chartering and dispute-resolution rules.
A new paper by Geoffrey P. Miller, “The Market for Contracts,” shows that firms most often choose New York as the venue for commercial contracting, making New York “the leading supplier of law and forum in commercial contracts.” Miller argues that New York lawmakers have deliberately designed a contract-law regime that is favorable to commercial transactions. I.e., “New York’s success in attracting choice-of law and forum selection clauses has been due, in substantial part, to the state’s provision of rules, procedures, and adjudicative services deemed attractive by major commercial parties. This explanation parallels the well-known theory that Delaware’s success in the incorporation market is largely due to the superior quality of legal services it provides to its corporate clients.”
Posner and Becker on Microfinance
| Peter Klein |
Further reservations about the microfinance phenomenon, offered here by Richard Posner and Gary Becker. Posner:
The evidence for the efficacy of microfinance in stimulating production and alleviating poverty is so far anecdotal rather than systematic. The idea of borrowing one’s way out of poverty is passing strange. And I am unaware of any historical examples of nations that climbed out of poverty on the backs of small entrepreneurs financed by credit. Also, recall that Grameen Bank has lent almost $6 billion to some 6 million persons. This implies an average loan of almost $1,000, which in a country like Bangladesh is not chicken feed and makes one wonder how much of the Grameen Bank’s loan portfolio is actually microfinance.
Adds Becker:
[A]ll economists who have studied microfinance agree that it will never be more than a minor factor in ending poverty in any country. Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government. Microfinance makes only a small direct contribution to any of these variables.
Bleg: Parsons, Popper, and the Austrians
| Peter Klein |
From Rafe Champion:
I am working up a paper on the way Talcott Parsons rediscovered the Austrian wheel of methodological individualism and the “action frame of reference” during the 1930s when he wrote “The Structure of Social Action” (1937). Karl Popper also picked up some elements of the Austrian approach (not surprisingly) including methodological individualism and “situational analysis” which is essentially the action frame of reference including subjectivism.
Can people help out with any cross references and citations between those three lines of work? The volume of literature in each of the three is immense, and in my reading of the principals there is next to no cross referencing.
I am not aware that Parsons ever cited Mises or Popper and their associates. Popper in personal communication described Parsons as a contributor to verbalism in the social sciences but did not cite him in print. Jarvie (of the Popper school) referred briefly to Parsons in the course of a protracted debate by sociologists and anthropologists over MI involving associates of Popper (mostly Watkins) and others. In that context Hayek was cited as an exponent of MI but there was no reference to Mises or the Austrian tradition generally. This appears to indicate a high degree of fragmentation in the field or at least a lack of collegiate spirit in recognizing the contribution of scholars in other schools of thought who are fellow travelers in some respects.
Any Parsons scholars out there who can help him out? If so, please write Rafe or, even better, post a comment below.
I Love France
| Peter Klein |
Here is a confession. I love France. Not just the food or the countryside or the language, but also the culture, the history, the way of life. Perhaps that makes me a cheese-eating surrender monkey. I don’t know. But I do know that I like France. And I don’t even mind the French all that much.
Seriously, I’m fortunate to count such diverse thinkers as Pierre Garrouste, Jean-Michel Glachant, Guido Hülsmann, Nathalie Janson, Armelle Mazé, Claude Ménard, Philippe Nataf, Pascal Salin, Stéphane Saussier, and Anne Yvrande-Billon as friends, colleagues, and research collaborators.
Despite my Francophilia — or perhaps because of it — I have enjoyed reading Stephen Clarke’s A Year in the Merde, a send-up of French society and culture written by a young British expat. It’s funny (though a bit raunchy), and resonates well with those of us who admire, but fail to comprehend, so much of what it means to be French. A good read.
What’s So Great About Tacit Knowledge?
| Peter Klein |
The knowledge management and capabilities literatures are in love — in love with tacit knowledge. Managing tacit knowledge, leveraging tacit knowledge, growing tacit knowledge — these are seen as the keys to achieving sustained competitive advantage. Economists, too, have gotten into the act, asking how incentive plans and the allocation of decision rights affects employees’ use of dispersed, specific knowledge. And, of course, F. A. Hayek’s analysis of socialism is built on the notion that centralized systems without markets and prices cannot make effective use of tacit knowledge.
But is tacit knowledge always “better” — more correct — than explicit knowledge? The knowledge management and capabilities literatures seem to take this for granted. And yet, a growing body of evidence on behavioral anomalies suggests that cognitive biases and heuristics can render individual judgments unreliable.
This came to my mind when reading Alex Tabarrok’s recent comments on the surprisingly primitive practice of medicine (here and here). (more…)
Economics and Literature Redux: Panics in Fiction
| Peter Klein |
On the heels of these remarks on economic analysis in fiction comes a review of David Zimmerman’s Panic! Markets, Crises, and Crowds in American Fiction (University of North Carolina Press, 2006), reviewed by Scott Dalrymple for EH.Net.
In _Panic!_, David Zimmerman, a professor at the University of Wisconsin, Madison, has chosen a fascinating lens through which to view the phenomenon of bank panics: contemporary novels written in response to the panics. As Zimmerman points out, bank panics left people searching for answers about what had just happened, and why. And as they always do, authors of fiction stepped forward in an attempt to make sense of it all.
See also this discussion on teaching economic history through fiction and narrative.
Thanks to David Gordon
| Peter Klein |
Many thanks to guest blogger David Gordon for his fine posts on the philosophical and methodological underpinnings of economics and organizational analysis. We look forward to his continued participation as an occasional commenter and, if the urge strikes him, as a guest blogger once again.
The Costs of Family Succession in Firms
| Peter Klein |
Interesting new paper shows that keeping senior management positions within the family reduces firm performance:
Inside the Family Firm: The Role of Families in Succession Decisions and Performance, by Morten Bennedsen, Kasper M. Nielsen, Francisco Pérez-González, Daniel Wolfenzon
This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO’s firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms’ outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. . . . Overall, our empirical results demonstrate that professional, non-family CEOs provide extremely valuable services to the organizations they head.
The instrumental-variables technique reminds me of another paper on the value of top management that exploits a different source of exogenous variation in succession patterns: death. (more…)
Was Coase Right About the Lighthouse?
| Peter Klein |
A few years ago I attended a Liberty Fund conference on the private provision of public goods. In preparation for the conference I re-read Coase’s classic 1974 article, “The Lighthouse in Economics,” for the first time since my graduate-school days. I recall being surprised how much weaker the argument was than the way I had remembered it. Far from showing that British lighthouses were “private” — as the paper is widely thought to have demonstrated — Coase’s analysis shows simply that public goods can be financed through user fees, rather than general tax revenue. But, in the case of the British lighthouses, the user fees were compulsory, government-enforced levies on ship owners, not voluntary market transactions. The British lighthouses were government-granted monopolies, more like the East India Company or a local public utility than “free-enterprise” institutions. (more…)
US Moving to Ban Microcredit
| Peter Klein |
Larry White asks an important question: Given the near-universal enthusiasm for microcredit, why is its US equivalent — the payday loan — constantly under fire? Payday loans, cash advance loans, check advance loans, and the like are small, short-term, high-interest loans, typically offered to low-income, credit-constrained consumers. As Larry points out, the 2007 National Defense Authorization Act, signed last week by President Bush, includes a 36% interest-rate cap on payday loans made to military personnel; there are calls to extend such a cap to all payday loans in the US, which would effectively shut down much of the payday-loan industry.
Of course, the typical payday-loan consumer in the US is not an entrepreneur seeking capital to start a new venture, but a low-income consumer without savings or credit cards trying to pay the rent, make a car payment, or even buy groceries. Still, the basic principles are the same. Payday loans are high-risk, uncollateralized loans, and naturally carry higher interest rates than conventional secured debt. They provide credit to individuals who are otherwise unable to acquire funds. Grameen Bank defends its interest rates — typically 25 to 50 percent annually — on the grounds that the alternatives facing borrowers are even worse. Wouldn’t the same apply to payday lending?
Roundup of Interesting Working Papers
| Peter Klein |
Kathy Fogel, Randall Morck, and Bernard Yin Yeung, “Big Business Stability and Economic Growth: Is What’s Good for General Motors Good for America?” NBER Working Paper 12394. On the relationship between Schumpeterian competition and overall economic performance.
Thomas Malone, Peter Weill, Richard K. Lai, Victoria T. D’Urso, George Herman, Thomas Apel, and Stephanie Woerner, “Do Some Business Models Perform Better than Others?” MIT Sloan Research Paper No. 4615-06. Interesting attempt to classify all 10,970 publicly traded US corporations from 1998 to 2002 according to two dimensions, what asset rights are sold (Creators, Distributors, Landlords, and Brokers) and what type of assets are involved (Financial, Physical, Intangible, and Human). Finds that some types outperform other types on particular performance dimensions, though no single type dominates all other types on all dimensions.
Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000,” NBER Working Paper 12455. Asks why partnerships, rather than corporations, were the dominant business structure before the twentieth century. Uses US and French data to argue that partnerships and corporations are complementary organizational forms.
Salvation Through Corn?
| Peter Klein |
I enjoyed this rant against agricultural subsidies by Kyle of Impudent Domain. Kyle is mostly on target (though E. C. Pasour provides a more systematic overview of the relevent issues here and here). The best part is the closing line, on the ethanol boondoggle, which echoes William Jennings Bryan. I say, you shall not crucify American energy consumers on a cross of corn!
Economics and Literature
| Peter Klein |
Lest the “Pomo Periscope” series below make you think we at O&M are anti-literary or anti-narrative, let me tell you about one of my favorite literary scholars, University of Virginia professor Paul Cantor. A specialist in Shakespeare and English Romanticism, Cantor has recently begun writing about the relationship between literature and economic theory (and, in his Gilligan Unbound, the relationship between economics and pop culture).
Cantor burst on the (economics) scene with a 1994 article in the Review of Austrian Economics, “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics.” Focusing on Mann’s 1925 short story “Disorder and Early Sorrow,” set in the waning days of the Weimar Republic, Cantor explores the parallels between hyperinflation and “hyperreality,” the condition of being unable to distinguish fact from fiction. “If modernity is characterized by a loss of the sense of the real,” writes Cantor, “this fact is connected to what has happened to money in the twentieth century.” Mann’s story, as interpreted by Cantor, illustrates how closely the commercial and cultural worlds are linked. (Cantor has also written about the economic views of such diverse literary and cultural figures as Percy Bysshe Shelley and W. C. Fields.)
Here is a series of Cantor lectures from a July 2006 seminar on “Commerce and Culture.” Topics include “The Economic Basis of Culture”; “The Economics of Painting: Patronage vs. the Market”; “The Economics of Classical Music: Patronage vs. the Market”; “The Economics of Modernism”; and “Totalitarianism and the Arts in the 20th Century.” All are well worth watching.
Hummer on the End-Period Problem
| Peter Klein |
I don’t drive a Hummer, but Hummers provide me what environmental economists call existence value. The fact that Hummers exist — or, more precisely, that their existence drives certain people crazy — gives me pleasure. And their advertisements are terrific: well-crafted, entertaining, and funny, in a we-don’t-take-ourselves-too-seriously kind of way.
The latest television ad for the H2 provides a perfect illustration of the “end-period problem” in repeated games. I don’t know how to link to the clip directly, but you can find it on Hummer’s site by clicking “Hummer World,” “TV Commercials,” and “Astronomer.”
Well, what would you do if a giant asteroid were headed our way?
Specialized Wikis for Sharing Class Notes
| Peter Klein |
Students wishing to share class notes can try two new wiki-like services, NoteMesh and stud.icio.us. EdTechPost offers some commentary.
More than ever, professors need to add a disclaimer to their syllabi: “I am not responsible for information on class notes wikis, MySpace, Facebook, or any other websites. To be honest, I’m not even sure what those things are.”
If such tools had been available when I was a student, just think where I could be today!
Vanderbilt PhD Program in Law and Economics
| Peter Klein |
Vanderbilt University is the only US institution (as far as I know) offering a PhD degree in Law and Economics. The program now has a web page describing the faculty, curriculum, seminar series (Henry Manne is on the Fall slate), and other practicalities. (Via Josh Wright.)
Further Dissent on Grameen
| Peter Klein |
The econo-blogosphere continues to heap adulation on Nobel Laureate Muhammad Yunus and the Grameen Bank. I keep waiting for someone to join me in expressing reservations. Economists and bloggers alike excel at challenging the conventional wisdom, especially when press coverage of an individual or event is completely one-sided. But so far no takers.
Much of the information circulating about Grameen doesn’t pass the “smell test.” For instance, we’re told that 90 percent of Grameen’s borrowers are women. Yunus says poor Bangladeshi women are better credit risks than poor Bangladeshi men, and that such women are historically underserved by credit institutions. Fair enough, but 90 percent? If that number is accurate, then we’re talking about a political statement, not a development strategy.
The number that puzzles me the most, though, is Grameen’s repayment rate, variously described at 98 or 99 percent. To begin with, this is an odd statistic to tout. Banks do not measure their performance by the repayment rate, but by profitability or the efficiency with which deposits are converted into loans. OK, you say, Grameen is not chasing profits, but broader social objectives. Fine, but then the appropriate performance measure is the number of new businesses created with Grameen credit, the change in the poverty rate, or some other measure of social welfare.
In any case, the point is moot, because the number is bogus. As reported in the October 14 WSJ:
Mr. Yunus often says the bank has a loan-recovery rate as high as 98.5%. Yet that figure ignores the clients who are far behind in their loan payments. The bank reports a loan as overdue only if the borrower has missed 10 or more consecutive payments. And the bank has often provided new loans to allow borrowers to keep current on old ones. The problem came to a head early this decade, when 19% of Grameen loans were at least one year overdue.
Politically Incorrect Entrepreneur of the Year
| Peter Klein |
A German entrepreneur wants to create a nostalgic smokers’ haven above the clouds by starting a nicotine-friendly airline offering Cuban cigars, caviar and flight attendants in designer uniforms — as well as smoking allowed in every seat.
Thanks to Lew Rockwell for the link. Incidentally, starting in January 2007 smokers in my town of Columbia, Missouri, will be banned from all restaurants, bars, and even the most sacred space of any American college town — the football stadium.
A Nobel for Entrepreneurship?
| Peter Klein |
This year’s Nobel Prize in economics didn’t go to William Baumol or Israel Kirzner, but the peace prize went to economist and banker Muhammad Yunus, founder of Bangladesh’s Grameen Bank. Yunus is a pioneer of microcredit — small, uncollateralized loans given to poor borrowers for starting small businesses. Microcredit is widely touted as a market-based, entrepreneurial solution to world poverty.
The econo-blogosphere is elated. Greg Mankiw calls it a “second Nobel” for economics. Tyler Cowen says it’s a “wonderful choice,” noting (correctly) that Yunus would never have been considered for the economics prize.
But how well does microcredit work? The evidence is mixed. A few studies claim to find substantial, beneficial effects on entrepreneurial activity and wealth, but these studies tend to come from the Grameen Bank itself, or from advocacy groups like the Microcredit Summit Campaign. Search SSRN or RePEc and the picture becomes much cloudier.
Call me a microcredit skeptic. Here’s why: (more…)
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