Posts filed under ‘New Institutional Economics’
São Paulo Workshop on Institutions and Organizations
| Peter Klein |
Three Brazilian institutions — Fundação Getúlio Vargas São Paulo, IBMEC São Paulo, and the University of São Paulo — are jointly sponsoring a “Research Workshop on Institutions and Organizations” in São Paulo, 2-4 September 2007. Keynote speakers are Jackson Nickerson, Armando Castelar, and me. From the blurb:
Seminar participants will discuss recent developments in the analysis of institutions and organizations through the lenses of Economics, Management, Sociology, Law and other social sciences. Instead of focusing on the contributions of specific disciplines dealing with institutions and organizations, workshop participants will emphasize differences and commonalities among different approaches, leading to potential advances and refinements in the field.
Here is registration information and a preliminary schedule.
Austrian Economics at the AoM
| Peter Klein |
Last week’s Academy of Management meeting featured a pre-conference workshop, “The Austrian School of Economics: Applications to Organization, Strategy, and Entrepreneurship,” organized by Nicolai and myself. I began with an overview of the Austrian approach and reviewed some of the key figures in its development. Panelists Joe Mahoney, Yasemin Kor, Dick Langlois, Nicolai, and Elaine Mosakowski each gave some prepared remarks about aspects of the Austrian tradition that apply to their work, followed by general discussion among the panelists and the audience. Here are copies of the prepared remarks and here are some photos (courtesy of Peter Hofherr).
We weren’t sure what to expect — a dozen or so participants, perhaps? — and were delighted when over 100 people showed up, leaving standing room only. This and other indicators suggest growing interest in Austrian economics among management scholars. Of course, a belief in the relevance of the Austrian approach to business administration is a core value here at O&M.
Managing Through Incentives
| Nicolai Foss |
In my recent mention of various textbooks on organizational economics I somehow forgot to mention two excellent books on the subject. One is by former O&M guest blogger Joe Mahoney (which makes the omission the more embarrassing), Economic Foundations of Strategy (most of which turns out to be organizational economics). The other is the more managerially oriented Managing Through Incentives by Dwight Lee (my co-blogger’s former University of Georgia colleague) and Donald McKenzie. In addition to watching 300, I read through most of Managing Through Incentives on my flight back from the AoM in Philadelphia.
The book is light and engaging, but not exactly your average management book. Although clearly intended for a management audience it is probably too long and complicated to successfully serve that role. But it is excellent as an inspiration for teachers of organizational economics and organizational strategy. It abounds in nice examples and applications of, mainly, agency theory that can be very usefully applied in teaching. Or you may simply read it for fun. There is a humorous tone to much of the writing, it has appealing libertarian leanings (David Friedman and Robert Hessen are approvingly cited), and it features a nice chapter that takes issue with Alfie Kohn’s views on incentives. Highly recommended!
Is Social Capital Path Dependent?
| Peter Klein |
Recent work by Robert Putnam, Douglass North, Ed Glaeser, and others has highlighted the role of social capital — membership in organizations, participation in civic activities, social trust — plays in economic development. Empirically, social capital has typically been measured with survey data, making historical comparisons difficult. It is important to know, however, how social capital changes over time. If social capital is largely path dependent, then there is little that can be done to improve the stock or productivity of social capital at a particular time.
A new paper by Marta Felis Rota, “Is Social Capital Persistent? Comparative Measurement in the Nineteenth and Twentieth Centuries,” exploits Adelman and Morris’s (1965) database of socio-economic indicators for 23 countries from 1850 to 1914 to construct social capital indicators for the late nineteenth century, which can be compared to similar indicators for the twentieth century. Evidence for path dependence is weak; all countries enjoy long-run increases in social capital but rates of change vary widely. Check it out.
Efficient Organizational Design by Marco Weiss
| Nicolai Foss |
Good textbooks in organizational economics are badly missing from the market. In particular, good textbooks that are more advanced than Brickley, Smith, and Zimmerman’s Managerial Economics and Organizational Architecture (great book, BTW), but still more accessible than the average organizational economics research papers, basically do not exist. Milgrom and Roberts’s Economics, Organization, and Management has much interesting material in it, but there is simply too much material (students drown) and the book is extremely uneven in terms of readability (some chapters, e.g., chpt. 4 are hard to read even for advanced readers and even more for students). George Hendrikse’s Economics and Management of Organizations is organized much like the Milgrom and Roberts book but is more readable. However, parts of it are too difficult for the average 3rd or 4th year business student. (more…)
Two Essays on Douglass North
| Peter Klein |
By Arnold Kling, here and here.
I usually recommend to my students North’s 1991 Journal of Economic Perspectives paper, “Institutions,” for an overview of his general approach to institutions and economic change.
Formation of Beliefs About Markets
| Peter Klein |
What explains differences in beliefs about social and political institutions across groups? Are such beliefs learned from experience, acquired through rational persuasion, or given exogenously? Empirically, it is difficult to distinguish the effects of location or occupation from selection. Does living in Berkeley, for example, or studying sociology turn people to the Left, or do Lefties congregate in places like Berkeley and in sociology departments?
To gain insight into this problem, suppose you could take two virtually identical groups of people, place them in different institutional environments, and look later for differences in beliefs about market and society. Rafael Di Tella, Sebastian Galiani, and Ernesto Schargrodsky’s paper “The Formation of Beliefs: Evidence From the Allocation of Land Titles to Squatters” (Quarterly Journal of Economics, February 2007) investigates exactly this natural experiment.
We study the formation of beliefs in a squatter settlement in the outskirts of Buenos Aires exploiting a natural experiment that induced an allocation of property rights that is exogenous to the characteristics of the squatters. There are significant differences in the beliefs that squatters with and without land titles declare to hold. Lucky squatters who end up with legal titles report beliefs closer to those that favor the workings of a free market. Examples include materialist and individualist beliefs (such as the belief that money is important for happiness or the belief that one can be successful without the support of a large group). The effects appear large. The value of a (generated) index of “market” beliefs is 20 percent higher for titled squatters than for untitled squatters, in spite of leading otherwise similar lives. Moreover, the effect is sufficiently large so as to make the beliefs of the squatters with legal titles broadly comparable to those of the general Buenos Aires population, in spite of the large differences in the lives they lead.
Thanks to Dan Benjamin for the pointer.
Plasticity and Asset Specificity
| Peter Klein |
A reader asks what I think of Alchian and Woodward’s concept of “plasticity” and how it relates to Williamson’s notion of asset specificity.
The term was introduced in “The Firm is Dead: Long Live the Firm” (Journal of Economic Literature, 1988), Armen Alchian and Susan Woodward’s thoughtful review of Williamson’s Economic Institutions of Capitalism. They define plasticity as the range of uses to which an asset may be put. “We call resources or investment ‘plastic’ to indicate that there is a wide range of discretionary, legitimate decisions within which the user may choose” (p. 69). In the Barzelian language favored on this blog, plasticity can be interpreted as the number of attributes — realized or potential — that assets possess. Trucks and copy machines are highly plastic. So are R&D labs, in the sense that they can be used to pursue long- or short-term objectives, to satisfy clients’ objectives or to maximize the researchers’ utility, and so on. Steel mills are implastic because they can be used to make steel and little else. (more…)
What Does “Zero Transaction Costs” Mean, Epistemically?
| Nicolai Foss |
What does the Coase Theorem require epistemically? To put it less mysteriously, what are the assumptions concerning agents’ knowledge that must be made for the Coase theorem to hold? Or, to rephrase it somewhat, what does zero transaction costs mean in terms of agents’ knowledge (an inquiry started by Carl Dahlman in this paper)?
In his retrospective (1988) discussion and assessment of the debate on the theorem, “Notes on the Problem of Social Cost,” Coase seems to imply that the Theorem requires omniscience. I think that Barzel makes the same inference in his Economic Analysis of Property Rights. In other words, the Coase Theorem holds iff all resource uses, current as well as future ones, are known by everyone.
Not all writers seem to agree with this interpretation, however. (more…)
Barzel on Property Rights
| Nicolai Foss |
This is how Yoram Barzel — arguably the most creative current exponent of property rights economics — defines (economic) property rights (in this paper, p. 394):
… an individual’s net valuation, in expected terms, of the ability to directly consume the services of the asset, or to consume it indirectly through exchange. A key word is ability: The definition is concerned not with what people are legally entitled to do but with what they believe they can do.
Notice how different this is from other (older) economic conceptions (e.g., Furubotn & Pejovich, Alchian, Demsetz et al.) which have typically categorized property rights into usus, usus fructus and abusus rights (and the right to sell these rights), often keeping a legalistic connotation. (more…)
Varieties of Institutionalism
| Peter Klein |
The new institutional economists have not been kind to their “old institutional” predecessors. Coase’s dismissal of J. R. Commons, Wesley Clair Mitchell, Thorstein Veblen, Clarence Ayres, and their associates is typical: “Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.” Like its older counterpart, the new institutional economics is interested in the social, economic and political institutions that govern everyday life. However, the new institutional economics eschews the holism of the older school, adopting strict methodological individualism and some kind of rational choice framework. (See former guest blogger Dick Langlois’s 1989 paper, “What Was Wrong with the ‘Old’ Institutional Economics? (And What Is Still Wrong with the ‘New’?),” for a more sophisticated treatment of these differences.)
Among political scientists there is a similar distinction: “historical institutionalism” versus “rational choice institutionalism.” The differences, as discussed in Preferences and Situations, edited by Ira Katznelson and Barry Weingast (Sage, 2005), revolve mainly around the concept of preference. Rational choice institutionalists — like mainstream economists — take preferences as given, while historical institutionalists take preferences as endogenously determined by historical circumstance, rendering attempts to understand historical phenomena in methodologically individualistic terms impossible.
The historical approach has many problems, however. Mike Munger objects to its relativism: It tends “to presume that theory — any general theory — is wrongheaded: everything is different in various ways from one case to another. The central thesis of much of the work reported in Preferences and Situations seems to be that it is difficult to say anything interesting about persuasion, and the authors go on to demonstrate this claim persuasively.” (Jean Baudrillard, call your office!) More generally, is historical institutionalism, in its modern variant, much of an advance over the crude historicism smacked down in prior generations by the likes of Mises and Popper?
Economizing and Strategizing
| Nicolai Foss |
In a much-cited 1991 paper in the Strategic Management Journal, “Strategizing, Economizing, and Economic Organization,” Oliver Williamson introduced the distinction alluded to in the title of the paper between “economizing,” that is, economizing with transaction costs, and “strategizing,” that is, the exercise of market power (in the standard sense of setting p above mc and imposing a deadweight welfare loss on society). Whereas strategizing is only available to relatively few, large players, Williamson argued, any firm can engage in economizing. Thus, “… economy is the best strategy. That is not to say that strategizing efforts to deter or defeat rivals with clever ploys and positioning are unimportant. In the long run, however, the best strategy is to organize and operate efficiently.”
However, in a certain sense, economizing and strategizing are made of the same stuff, and the distinction may, for this reason, be somewhat overdrawn. (more…)
Fabio Chaddad to Join Missouri Faculty
| Peter Klein |
I’m pleased to announce that Fabio Chaddad of IBMEC is joining the Division of Applied Social Sciences at the University of Missouri. Fabio’s research deals with networks, supply-chain management, cooperatives, corporate finance, and other aspects of strategy and organization. He may even be worthy of a guest-blogger spot at O&M!
Organizational Innovation
| Nicolai Foss |
Organizational economists, new institutional economics, contract theorists, etc. are taken up with assessing alternative feasible allocations of decision and income rights, contracts, governance structures and institutions in terms of their impact on value creation for a relevant social system, whether a dyad, a multi-person firm, an industry, or a whole economy.
However, they usually assume that the set of alternatives is given to the choosing agent or set of agents. For example, in the Grossman/Hart/Moore property rights view, agents may not entirely understand the sources of payoffs, but they know exactly how alternative allocations of property rights impact payoffs. Of course, this is entirely in line with what we — given Peter’s post on Lionel Robbins below — may call “Robbinsian maximizing” in which the discovery and/or creation of new alternatives is deliberately disregarded. (more…)
Measuring the Institutional Environment
| Peter Klein |
An central problem in empirical research on institutions is the difficulty of measuring key attributes of the institutional environment. Secure property rights, respect for the rule of law, transparency, free markets, norms of fairness and reciprocity, and similar characteristics are held to be critical for economic development. But how do you know them when you see them?
Most of the literature has used indicators derived from secondary data, such as the economic freedom measures produced by the Fraser Institute and Heritage Foundation, Witold Henisz’s polcon database, the World Bank’s database of political institutions, various indexes of shareholder and creditor rights compiled by the La Porta gang, and the like. These measures have much to recommend them, but may proxy only indirectly for the real institutional constraints of interest.
This paper by Jan Svejnar and Simon John Commander takes a different approach: it asks. The authors use primary data from the Business Environment and Enterprise Performance Survey (BEEPS), in which managers of several thousand firms in 26 transition countries are asked for their subjective perceptions about tax and regulatory policy, uncertainty about regulatory change, macroeconomic stability, the effectiveness of the judiciary, corruption, crime, infrastructure, and other institutional characteristics. (The authors conclude that most of the variation in firm performance is explained by time-invariant country fixed effects, and that individual institutional variables have little explanatory power, suggesting that existing studies using secondary measures of institutional characteristics may overstate their effects.)
Taxi Drivers in Nam
| Nicolai Foss |
It is always lovely to witness our theories come alive. So, here is an illustration of the agency problem for the benefit of our non-American readers (the example will be lost on Americans for reasons that will become clear :-)). A favorite examplification of agency problems are taxis (not Hayekian ones — real ones), because of the complex ownership arrangements of these assets.
When I visited Vietnam in January with my family, the way we got around in the cities was mainly using the private and extremely inexpensive taxis (there is virtually no public transportation in this supposedly commie country). Most other transport options (certainly bikes, “cyclos”, motorbikes, even walking) increase the death risk rather dramatically in the horrendous Vietnamese traffic. (more…)
Bruno Frey on Awards
| Nicolai Foss |
Bruno Frey is one of those economists who make economics fun. Like economists such as Yoram Barzel, Gary Becker, and, of course, Stephen Levitt, he has a great intuition for applying economics to new areas where nobody has hitherto thought of taking it.
Like George Akerlof, but unlike Barzel, Becker and Levitt, Frey is, however, not that satisfied with the behavioral core of mainstream economics, mainly because it tends to provide an impoverished treatment of human motivation. Thus, he is no Becker-style economic imperialist (or, at least, the charicature thereof), but on the contrary is quite attentive to relevant insights in, particularly, psychology. Whereas numerous economists have taken an interest in the cognitive dimensions of psychology research — as witness the recent explosion of interest in nanoeconomics — Frey’s interest in psychology has been more concerned with motivational issues. Thus, quite a lot of Frey’s enormous (and enormously impressive) production has been devoted to pushing the boundaries of economics by taking seriously psychology ideas on social comparison processes, intrinsic motivation, etc. His work with Margit Osterloh on the motivational foundations of knowledge sharing in organizations will be familiar to many readers of this blog.
Frey has recently started a new research program, namely research into the function of awards (see here and here). (more…)
The Collected Works of Armen Alchian
| Nicolai Foss |
It has been said that “Armen Alchian’s output may be sparse and informal, but it has been among the most influential.” Still, his “virtuoso work on neoclassical price theory” has been sufficiently voluminous that his collected works run 1,620 pages!
The two volumes that contain all these pages were published in November by Liberty Fund at the ridiculously low price of $15 for the set. Over the years Liberty Fund has published an unbelievable amount of true classics in economics, law, history, philosophy and classical liberal scholarship in general at absolute bargain prices. (more…)
Another Cost of Selective Intervention: Convincing the Market
| Peter Klein |
Nicolai blogged recently on Williamson’s concept of the “impossibility of selective intervention.” Williamson asks why a large firm cannot do everything a collection of small firms can do and more. In princple, a set of projects could be combined into a single firm, with the firm’s management promising not to interfere with individual projects unless doing so would generate net gains. In this way, a firm could have responsibility an almost unlimited set of projects, each of which would be at least as profitable as it would be as a standalone entity. What, then, explains the limits to the firm?
Williamson’s answer has to do with the difficulties of making such a commitment credible. Project managers will not believe the firm’s promise not to interfere and will take value-reducing actions to protect their own returns and asset values. (Williamson identifies “asset malutilization” and “accounting contrivance” as specific problems; see Nicolai’s post for details.)
A story in today’s W$J on Blue Moon beer raises another issue. Even if central managers can convince division heads or project managers that they will not engage in opportunistic behavior, they may be unable to convince buyers, suppliers, or other market participants. Here’s an example: Blue Moon is a popular “craft,” or niche, beer that appeals to high-end, quality-conscious consumers. Such beers are typically produced locally, in small quantities, and marketed as “micro-brews.” The Journal piece explains how Blue Moon’s marketing department goes to great lengths to hide the fact that the beer is actually made by Molson Coors, North America’s third-largest brewer. A similar example is Chipotle, a restaurant chain popular with the young and trendy (and the not-so-young and even-less trendy — I love it!), which before going public was majority owned by McDonald’s. The fact that such niche products would be regarded, by their target demographic, as “tainted” were their parentage known, suggests that market participants do not believe that corporate parents can manage small subsidiaries without interference. The market, it seems, agrees with Williamson that selective intervention is a “myth.”
Schmoller Revisited
| Peter Klein |
The Jahrbuch für Gesetzgebung, Verwaltung, und Volkswirtschaft, edited by Gusav Schmoller — commonly known as Schmollers Jahrbuch — was one of the most important and influential economics journals of the nineteenth century. Schmoller was the leader of the younger German Historical School and the main opponent of Carl Menger in the Methodenstreit, or battle over methods, that raged between the German historicists and the fledgling Austrian School. (It was Schmoller and his followers who coined the phrase “Austrian School,” the word Austrian being synonymous, among German-speaking intellectuals, for provincial and second-rate). Schmoller and his school are little known to contemporary social scientists, suffering the same fate that befell their American disciples, the Institutionalists Thorstein Veblen, John R. Commons, and Wesley Clair Mitchell. (As Coase once remarked: “Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.”)
To my surprise I received an email today announcing a new issue of Schmollers Jahrbuch. I had no idea the journal was still being published. The announcement was for a special issue, “Schmoller’s Legacy for the 21st Century.” Papers include “Schmoller’s Impact on the Anglophone Literature in Economics” by Geoffrey Hodgson, “Schmoller and Modern Sociology” by Yuichi Shionoya, “Gustav Schmoller, His Heirs and the Foundation of Today´s Social Policy” by Gerold Blümle and Nils Goldschmidt, and “Gustav Schmoller and Globalisation” by Heinz Rieter and Joachim Zweynert.
Incidentally, Murray Rothbard used to tell the story that during an intense (but friendly) disagreement between himself and Mises at Mises’s New York seminar Mises teasingly called him a “Schmollerite” — the ultimate insult to an Austrian economist!
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