Posts filed under ‘New Institutional Economics’
Did Avner Greif Misread the Geniza Documents?
| Peter Klein |
That’s the claim of this startling paper by Jeremy Edwards and Sheilagh Ogilvie, “Contract Enforcement, Institutions and Social Capital: The Maghribi Traders Reappraised.” Avner Greif’s influential papers (1989, 1993) and book argue, based on documentary evidence from the Cairo Geniza, that the medeival Maghribi traders developed an elaborate, informal network of trading relationships without central coordination or state enforcement. Close social ties, repeated interaction, and careful record-keeping allowed the Maghribi to overcome the prisoner’s dilemma — a perfect example of order without law.
Edwards and Ogilvie, returning to the primary sources, dispute this account. They claim that (1) the Maghribi relied primarily on the Jewish and Muslim state legal systems, not private enforcement, for settling disputes; (2) the Maghribi traded heavily with non-Maghribi; and (3) communications channels were too slow and unreliable to support the social-sanction mechanism proposed by Greif. In short, while reputation effects could be important for individual traders, there is no evidence of the broad Maghribi coalition described by Greif.
I don’t know the primary sources well enough to have an opinion on the merits of this critique, but it strikes me as a very serious critique indeed. Of course, we Hayekians have known about “spontaneous order” long before Greif set pen to paper (or fingers to keyboard), so losing this example wouldn’t be a devastating loss for the theory of decentralized social institutions, any more than losing the Fisher-GM example would wipe out the asset-specificity theory of vertical integration. But it’s important to get the details right.
Aoki on North
| Peter Klein |
Masahiko Aoki’s contribution to a forthcoming North symposium, “Understanding Douglss North in Game-Theoretic Language,” is available on SSRN. North’s 1990 book Institutions, Institutional Change and Economic Performance, writes Aoki,
laid the foundation for New Institutional Economics by conceptualizing institutions as the rules of the game, pointing out the vital importance of effective enforcement and arguing for the crucial roles they play in determining economic performance. Thus it became a seminal book. But if the rules of the game are so crucial, then why doesn’t a lagging economy emulates the rules that prevail in more advanced economies? Why cannot the rules of the game be changed and enforced by emulation? It seemed that in his [1990] book North regarded it as the essential role of polity to change and enforce the (formal) rules of the (economic) game. But in his view, political markets are imperfect and inefficient so that better rules cannot be emulated/devised or enforced as desired. Thus a further question is raised regarding how rules of political games are determined. This problem of potential infinite regression needs to be answered by going back in historical time to the past. Thus history matters to our understanding of institutions and thus the performance of an economy. . . .
In [Understanding the Process of Economic Change, 2005], particularly in Part I, he has made critical progress toward understanding to the nature of this process. He is now more explicit and vocal about the evolutionary nature of institutional change. . . . He innovatively focuses on the evolution of belief systems that human agents hold, arguing that we perceive the “human landscape,” interpret it, discover problems within it and intend to solve them. In this way, we collectively and incrementally change the societal rules of the game. In other words, we may say that there is a coevolution of belief systems and institutions.
See also reviews of the newer book by Alex Field, Stefan Voigt and Stanley Engerman.
Accounting and Modern Management
| Peter Klein |
In assessing the role of accountants during the industrial revolution, historians generally have been guided by Sidney Pollard’s interpretation expressed in The Genesis of Modern Management (1965). Pollard contended that early industrial accounting exhibited a marked confusion between capital and revenues. This confusion suggested to him that early industrialists were more concerned with calculating and extracting interest on their investments rather than maximizing their rate of return. Thus, Pollard concluded, these early entrepreneurs apparently lacked the true profit motive possessed by modern capitalists.
David Oldroyd’s book seeks to test these contentions by subjecting the financial accounts of three northern [coal] estates to detailed analysis in four specific areas: the performance of contracts, investment planning, labor management, and managerial behavior. . . .
The result is a discussion of early industrial entrepreneurship that is both revealing and nuanced. For example, Oldroyd shows that an extensive network of contracts regulated the exploitation of the Durham and Northumberland coalfield. These contracts covered a myriad of circumstances involved in both the underground mining and aboveground transportation of minerals. A typical enterprise might need to contract the leasing or subcontracting of a mine, aboveground “wayleaves” to transport coal across neighboring properties, the shipment of coal to London or other ports, and the off-loading of coal at the point of sale. In all of these areas, accounting records carefully quantified not only total production and transport, but very often unit costs as well. Oldroyd therefore concludes that, contrary to Pollard, accounting was an essential and extremely adaptable tool promoting economic efficiency during this era.
This is from James Jaffe’s EH.Net review of David Oldroyd’s Estates, Enterprise and Investment at the Dawn of the Industrial Revolution (Ashgate, 2007). Interesting fodder for business historians and specialists in contracting and organization. And here are some previous posts on accounting (1, 2, 3, 4, 5, 6).
Hubbard on Firm Boundaries
| Peter Klein |
Thomas Hubbard has a nice review article in the May 2008 issue of the Canadian Journal of Economics, “Empirical Research on Firms’ Boundaries.” (Thanks to Fabio Chaddad for the pointer.) It’s a well-worn subject but there is certainly room for new interpretations. And Hubbard himself has been an important contributor to this literature (e.g., here and here). Here’s the abstract:
La recherche empirique sur les déterminants des frontières de l’entreprise a fleuri au cours des derniers 25 ans. Cet article discute des progrès accomplis en mettant l’accent sur les avancées intellectuelles faites par les chercheurs dans la littérature spécialisée durant cette période. On souligne le rôle important des chercheurs empiriques dans l’opérationnalisation des concepts théoriques, et on explique comment les succès dans ce registre ont contribué à faire que ces concepts ont eu un impact sur les décisions de faire-ou-faire-faire dans la vie réelle. On discute aussi des déficiences de cette littérature — en particulier la pauvreté des travaux de recherche sur l’impact de la variation dans les frontières des entreprises sur les rendements économiques — et on suggère comment de telles déficiences pourraient être corrigées.
Ha ha, April Fool’s! OK, here it is in English: (more…)
Shared Governance: Benefits and Costs
| Peter Klein |
Back in grad school I was regularly hectored by a fellow student about joining the Association of Graduate Student Employees (AGSE), our local collective-bargaining association. Despite his attempt to stigmatize me as a free rider, I never joined. I didn’t think I agreed with the organizations goals, and I was sure I didn’t want to be associated with AGSE’s parent organization, the United Auto Workers (go figure). One year there was even a strike, which I found silly (I scabbed).
This semester I’m getting repeated invitations to join the American Association of University Professors (AAUP). Again, I hesitate. Of course, as an American university professor, I’m happy to see more power, prestige, and perquisites go to American university professors (OK, specifically, to me). But the AAUP has a strange agenda. Its mission includes not only protecting academic freedom and defending the role of the university in public life, but also preserving shared governance. Having spent many years in university settings, I’m convinced that shared governance is grossly inefficient, at least most of the time. There can be benefits, of course, to offset these costs, as is the case with worker-owned cooperatives and other non-standard forms of organization. But one searches the AAUP’s website in vain for any analysis or evidence on shared governance. What are the benefits and costs, relative to other feasible organizational forms? Why should professors defend this peculiar institution? (more…)
A Picture Is Worth a Thousand Bullet Points
| Peter Klein |
An alert reader directs me to slide 241 of the slide pack for Dick Langlois’s Economics of Organization course. Click the image below for a look. Dick seems to be raising the point that Williamson’s TCE (as well as other theories of economic organization) pays insufficient attention to the processes by which firms reach their “optimal” organizational structures. TCE holds that firms try to minimize (or should minimize) the sum of production and transaction costs. But do firms actually do this? Do they make mistakes? Do they experiment and learn? Is the selection environment strong enough that inefficient organizational choices are quickly eliminated, or do inefficiencies persist? (The problem is particularly important for empirical literature on organizational form — see pp. 440-42 of this paper.) Or, can we assume, with Dr. Pangloss, that whatever is, is optimal?
To illustrate the point, Dick includes a photo of Williamson giving a seminar, with some additional background art — an etching from Candide — added to the frame. If you’re not paying attention you might think the etching is part of the original. I give Dick points for cleverness, but my anonymous correspondent finds the illustration a bit too subliminal. What do you think?
Economics and the Rule of Law
| Peter Klein |
This week’s Economist features a summary of recent economic controversies about the rule of law (thanks to Fabio Chaddad for the pointer). There is near-universal consensus among specialists in economic history and economic growth that the legal rules — and institutions more generally — “matter,” though the precise mechanisms are in dispute, and aspects of the institutional environment such as the quality of legal rules are difficult to measure consistently across societies and over time. We’ve touched on the closely related “legal origins” debate before. As with that controversy, the arguments in this one have become more subtle and complex in the last decade. As the Economist notes:
[A]s an economic concept the rule of law has had a turbulent history. It emerged almost abruptly during the 1990s from the dual collapses of Asian currencies and former Soviet economies. For a short time, it seemed to provide the answer to problems of development from Azerbaijan to Zimbabwe, until some well-directed criticism dimmed its star. Since then it has re-established itself as a central concept in understanding how countries grow rich — but not as the panacea it once looked like.
The Economist piece focuses on the distinction between “thick” and “thin” understandings of the rule of law. (more…)
Upcoming Events: A Busy June
| Peter Klein |
June is an exciting month for O&Mers looking for research conferences. First up is ACAC 2008, 12-14 June in Atlanta. ACAC, which has received high marks on this blog, is an annual workshop organized by Rich Makadok emphasizing the “big issues” in strategic management. Next is the DRUID 25th Anniversary Conference, 17-20 June in Copenhagen, with the theme of “Entrepreneurship and Innovation.” The distinguished participant list includes Rajshree Agarwal, Carliss Baldwin, Bo Carlsson, Kathy Eisenhardt, Maryann Feldman, Bronwyn Hall, Steve Klepper, Anita McGahan, Joanne Oxley, Olav Sorenson, Scott Stern, Sid Winter, and some Foss guy. Immediately afterward is ISNIE’s 12th annual meeting, 20-21 June, in Toronto. I am on the program committee, working with president-elect Scott Masten, and we got a bunch of great submissions this year. Barry Weingast and Robert Ellickson are keynoters. The preliminary program should be up on the ISNIE website soon.
Also, for graduate students in economics, history, philosophy, political science, business administration, and related disciplines there’s the Rothbard Graduate Seminar, 13-18 June in Auburn, Alabama. The RGS is an intensive workshop and research seminar on Austrian economics that uses Murray Rothbard’s Man, Economy, and State as its core text. I am one of the discussion leaders.
If I could teleport I’d attend all four!
Asset Specificity and International Trade
| Peter Klein |
The May 2007 issue of the Quarterly Journal of Economics featured a nice piece by Nathan Nunn, “Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade.” The paper constructs an aggregate, country-level measure of asset specificity and relates it to characteristics of a country’s contract-law regime and its patterns of international trade. When asset specificity is high, firms tend to rely on contracts or vertical integration, rather than spot markets, so countries with good legal protection for contracts are more likely to specialize in the production of goods requiring specific investments.
Is a country’s ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require relationship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.
One can quibble about the data and variables, such as the proxy for asset specificity (the absence of organized exchange or a publicly listed price for an input) and use of national input-output tables to construct measures of vertical integration, but overall this strikes me as an impressive piece of work, a clever combination of transaction cost economics and international trade theory. Check it out.
Steven Cheung Has a Blog
| Peter Klein |
Unfortunately it’s in Chinese. Perhaps one of our Chinese-speaking readers could summarize its contents?
Here is an English-language blog dedicated to Cheung’s ideas. Here is his wikipedia entry, which includes some information on the Late Unpleasantness. And of course the economic analysis of property rights, to which Cheung is a major contributor, is a popular topic on this blog.
Marshallian Industrial Economics
| Peter Klein |
Almost every recent paper on networks, clusters, agglomeration economies, and the like mentions Alfred Marshall’s concept of the “industrial district” and gives the obligatory cite to Book IV of Marshall’s Principles (Marshall’s term was the more colorful “thickly peopled industrial district”). But what exactly were Marshall’s views on industrial districts, and on industrial economics more generally? Attend this workshop to find out:
International Workshop: “Marshall and the Marshallians on Industrial
Economics”March 15-16th 2008, Mercury Tower, Hitotsubashi University, Tokyo (more…)
Still More on Legal Origins
| Peter Klein |
John Armour, Simon Deakin, Prabirjit Sarkar, Mathias Siems, and Ajit Singh add to the debate with a new dataset and a new interpretation: common-law countries offer better shareholder protection not because of the characteristics of common law per se, but because the emergence of a global common-law standard gave common-law countries a head start, a sort of network effect. Here is the paper. Abstract:
We test the ‘law matters’ and ‘legal origin’ claims using a newly created panel dataset measuring legal change over time in a sample of developed and developing countries. Our dataset improves on previous ones by avoiding country-specific variables in favour of functional and generic descriptors, by taking into account a wider range of legal data, and by considering the effects of weighting variables in different ways, thereby ensuring greater consistency of coding. Our analysis shows that legal origin explains part of the pattern of change in the adoption of shareholder protection measures over the period from the mid-1990s to the present day: in both developed and developing countries, common law systems were more protective of shareholder interests than civil law ones. We explain this result on the basis of the head start common law systems had in adjusting to an emerging ‘global’ standard based mainly on Anglo-American practice. Our analysis also shows, however, that civil law origin was not much of an obstacle to convergence around this model, since civilian systems were catching up with their counterparts in the common law. We then investigate whether there was a link in this period between increased shareholder protection and stock market development, using a number of measures such as stock market capitalisation, the value of stock-trading and the number of listed firms, after controlling for legal origin, the state of economic development of particular countries, and their position on the World Bank rule of law index. We find no evidence of a long-run impact of legal change on stock market development. This finding is incompatible with the claim that legal origin affects the efficiency of legal rules and ultimately economic development. Possible explanations for our result are that laws have been overly protective of shareholders; transplanted laws have not worked as expected; and, more generally, the exogenous legal origin effect is not as strong as widely supposed.
The Role of Missionaries in Social and Institutional Change
| Peter Klein |
First Brayden, then Fabio. Today another talented young sociologist, Robert Woodberry of UT-Austin, gave a research workshop in my building. Bob is leading a massive project to construct a comprehensive dataset of all Protestant and Catholic missionary activity from 1813 to 1968. Some of the data are here. Bob presented a working paper (not yet online) on the affect of missionary activity on the spread of democracy in the global south. Once Protestant missionary activity (missionaries per capita, length of time in host country, percent of local population evangelized) is controlled for, the usual predictors of democracy (British colonial origin, location, economic variables) drop out of regression models as statistically significant. One implication is that studies on the effect of religion on economic performance (e.g., Stulz and Williamson 2003) should control more carefully for the precise charactersitics of religious activity (not simply “Protestant,” “Catholic,” etc.).
Essay Contest on Property Rights
| Peter Klein |
My co-blogger, an enthusiast for the Coase-Alchian-Demsetz-Cheung-Barzel property-rights approach, will appreciate the topic for this year’s Sir John M. Templeton Fellowships Essay Contest, sponsored by the Independent Institute:
For decades social critics in the United States and throughout the Western world have complained that “property” rights too often take precedence over “human” rights, with the result that people are treated unequally and have unequal opportunities. Inequality exists in any society. But the purported conflict between property rights and human rights is a mirage — property rights are human rights.
— Armen Alchian, “Property Rights,” in The Concise Encyclopedia of Economics
Are property rights human rights? How are they related? What are their similarities and differences? If property rights are human rights, why have they enjoyed fewer legal protections and intellectual champions than other human rights?
The contest is for college students and “young” college professors (sorry Nicolai).
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.)
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.
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.
Combining Transaction Cost Economics and the Property Rights Approach
| Peter Klein |
The transaction cost framework associated with Ben Klein and Oliver Williamson and the property-rights approach of Grossman, Hart, and Moore have a complicated relationship, as Bob Gibbons has explained. Clearly, property-rights theory is not simply a formalization of TCE, as is sometimes believed (see Williamson, Whinston, and Whinston again on the differences). One key difference, emphasized by Williamson and by Gibbons, is that the PRT focuses on the alignment of incentives ex ante, assuming efficient bargaining ex post, while TCE emphasizes ex post hazards.
A recent paper by Patrick Schmitz, “Information Gathering, Transaction Costs, and the Property Rights Approach” (AER, March 2006) tries to reconcile the two perspectives by creating a GHM-style incomplete-contracting model in which parties can obtain private information about their ex post benefit, resulting in inefficient rent-seeking over the realized gains from trade. Under certain circumstances, the PRT conclusions are reversed — i.e., the party with the most important relationship-specific investment should not necessarily own the other party’s investment, as the PRT implies. Worth a read.
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