Posts filed under ‘Papers’
Interview with a Randian CEO
| Peter Klein |
Today is Ayn Rand’s birthday, so in her honor we direct you to the December 2009 issue of Academy of Management Learning and Executive, which features an interview with BB&T Bank CEO John Allison, a follower of Rand. Access appears to be restricted to AoM members (manuscript version here, published version here). Sample:
After I went to work I began to read philosophy, in search for the answers to the big questions of life. I became interested in what I consider to be the great reason/reality based philosophers — Aristotle, Thomas Aquinas, John Locke, Thomas Jefferson and Ayn Rand.
That philosophical background combined with my own observations, which I call my inductions from life, together with my family upbringing, formed my philosophical framework as a young adult and executive. In 1993 or 1994 I read Objectivism: The Philosophy of Ayn Rand by Leonard Peikoff. This book really integrated everything for me. It enabled me to focus my thinking. By this time, I had been CEO of BB&T for a few years and we were in the midst of a merger of equals. It was very important that we have a clearly defined value system. Two large organizations with cultures that had some differences had to come together with a single value system. Peikoff’s book put everything together for me. We had some of the basics of a value system — honesty, integrity, traditional conservative business values, but we also held a number of contradictions. What Rand’s philosophy did for me was to provide a framework for how to integrate all the disparate pieces. I could see everything in a different way than I had seen before. Rand’s philosophy provided an ordering. It also clarified concepts. For example, people often mix up justice with mercy. From Rand I learned that justice requires that you reward those who contribute the most with the most, which implied that paternalism is unjust; failing to deal with non-performance is unjust. Also, rationality is the foundation for values, and rationality can not be compromised.
NB: BB&T has funded a number of professorships in the last few years.
A Tale of Two Papers, or, Humpty Dumpty Writes About Exchanges
| Craig Pirrong |
The American Economic Association/American Finance Association Meetings are just about over. I made a quick trip there to comment on a paper. Upon returning home, I downloaded a couple of the papers presented that seemed of interest. Good call on one, bad call on the other.
The bad one is “Centralized versus Over The Counter Markets” by Viral Acharya of LBS and NYU, and Alberto Bisin of NYU. Although the motivation of the paper is admirable, the execution is execrable, and is representative of a lot of what is wrong in the profession.
The motivation is to compare the efficiencies of alternative ways of organizing derivatives trades: centralized exchanges and over-the-counter (OTC) markets. Great. Big question. I’ve written a lot about it, and would be very interested in seeing other takes thoughtful on the subject.
The paper concludes that organized exchanges are (constrained) first best efficient, and more efficient than OTC markets. A quick review of the paper makes it clear, however, that they’ve rigged the game to produce that result. (more…)
A New Negative Externality
| Lasse B. Lien |
If you haven’t been brilliant lately, here is a possible explanation. It’s not at all your fault, it’s just that your colleagues are too good-looking. Note, though, that this excuse can apparently only be used by men.
Abstract: The present research tested the prediction that mixed-sex interactions may temporarily impair cognitive functioning. Two studies, in which participants interacted either with a same-sex or opposite-sex other, demonstrated that men’s (but not women’s) cognitive performance declined following a mixed-sex encounter. In line with our theoretical reasoning, this effect occurred more strongly to the extent that the opposite-sex other was perceived as more attractive (Study 1), and to the extent that participants reported higher levels of impression management motivation (Study 2). Implications for the general role of interpersonal processes in cognitive functioning, and some practical implications, are discussed.
Isn’t this a classic case of a negative externality? Surely there must be some kind of taxation or side payment scheme that can reduce this burden to society.
Source: Johan C. Karremans, Thijs Verwijmeren, Tila M. Pronk, and Meyke Reitsma, “Interacting with women can impair men’s cognitive functioning,” Journal of Experimental Social Psychology 45(4), July 2009, 1041-44.
Skewness in Journal Rankings
| Lasse Lien |
Here is an interesting piece about journal rankings in economics (abstract below). See also Steve Phelan’s comment and link about similar issues in management (#3).
Nearly all journal rankings in economics use some weighted average of citations to calculate a journal’s impact. These rankings are often used, formally or informally, to help assess the publication success of individual economists or institutions. Although ranking methods and opinions are legion, scant attention has been paid to the usefulness of any ranking as representative of the many articles published in a journal. First, because the distributions of citations across articles within a journal are seriously skewed, and the skewness differs across journals, the appropriate measure of central tendency is the median rather than the mean. Second, large shares of articles in the highest-ranked journals are cited less frequently than typical articles in much-lower-ranked journals.
Source: Wall, Howard J. (2009), “Don’t Get Skewed Over by Journal Rankings,” The B.E. Journal of Economic Analysis & Policy: Vol. 9 (1).
Special Issue of HRM on “HRM and Knowledge Processes”
| Nicolai Foss |
With Scott Snell (Darden Graduate School of Business) and my SMG colleague Dana Minbaeva, I have edited this just-published special issue of Human Resource Management on the intersection of knowledge management and HRM. One of this highlights of the special issue is an excellent paper by Teppo Felin, Todd Zenger, and Joshua Tomsik that takes issue with some influential ideas on how “knowledge” prompts the emergence of “communal” forms of organizing.
Organizations or Markets in Morality?
| Benito Arruñada |
Moral codes can be produced and enforced through markets or through organizations. In particular, Catholic theology can be interpreted as a paradigm of the organizational production of morality. In contrast, the dominant moral codes are now produced in something resembling more a market.
The organizational character of Catholicism comes from its centralized production and enforcement of the moral code by theologians and priests and the mediation role played by the Church between God and believers. The epitome of both features is the old institution of confession of sins, a cultural universal that reaches full sophistication — for good and for bad — within Catholicism. My forthcoming JSSR paper argues that confession was a strikingly organizational solution to the production and enforcement of morality, something that Western societies now do mostly through markets. (more…)
If You’re So Smart …
| Nicolai Foss |
… that it makes sense to delegate a lot of decision-making authority to you when you perform as an agent for a principal, you may also be so smart that you can game the incentive plan. In “Ability and Agency Costs: Evidence From Polish Banking,” Douglas Frank and Tomasz Obloj, both INSEAD, argue (rightly, IMO) that the link between cognitive ability and agency costs has not yet been studied in agency theory. (more…)
Campello and Fluck
| Lasse Lien |
Here is a paper from 2006 by Maurillo Campello and Zsuzsanna Fluck that is even more interesting now than it was in 2006. If you are interested in the micro-implications of the current crisis, you’ll surely like this one.
Abstract: We model the interaction of product market competition and firms’ financing decision when firms face capital market imperfections and consumers face switching costs. In our model, consumers anticipate that capital market frictions may drive their supplier out of business and account for welfare losses that firm bankruptcy imposes upon them. Likewise, managers, when investing in long-term market share building, take into account the possibility of business failure and the residual value they may capture from the firm’s liquidation process. Our theory yields four central implications. In response to a negative shock to demand: (1) more leveraged firms will experience significant market share losses; (2) the market share losses of more leveraged firms will be more pronounced in industries where low debt usage is the norm; (3) the market share losses of more leveraged firms will be more pronounced in industries where consumers face higher switching costs; and (4) the market share losses of more leveraged firms will be magnified in industries where asset liquidation is less efficient. Using detailed firm- and industry-level data from U.S. manufacturers over the 1990-91 recession, we present empirical evidence supporting our model’s predictions. We later expand our empirical analysis, studying a large panel of firms over the various phases of the full business cycles contained in the 1976-96 period. Results from these broader tests provide additional evidence in support of our theory.
Factor-Biased Technological Change
| Dick Langlois |
Back in October, I blogged about Daron Acemoglu’s presentation at the Economic History Association meeting. There now seems to be an NBER working paper version of that talk, called “When Does Labor Scarcity Encourage Innovation?” Here is the abstract.
This paper studies the conditions under which the scarcity of a factor (in particular, labor) encourages technological progress and technology adoption. In standard endogenous growth models, which feature a strong scale effect, an increase in the supply of labor encourages technological progress. In contrast, the famous Habakkuk hypothesis in economic history claims that technological progress was more rapid in 19th-century United States than in Britain because of labor scarcity in the former country. Similar ideas are often suggested as possible reasons for why high wages might have encouraged rapid adoption of certain technologies in continental Europe over the past several decades, and as a potential reason for why environmental regulations can spur more rapid innovation. I present a general framework for the analysis of these questions. I define technology as strongly labor saving if the aggregate production function of the economy exhibits decreasing differences in the appropriate index of technology, theta, and labor. Conversely, technology is strongly labor complementary if the production function exhibits increasing differences in theta and labor. The main result of the paper shows that labor scarcity will encourage technological advances if technology is strongly labor saving. In contrast, labor scarcity will discourage technological advances if technology is strongly labor complementary. I provide examples of environments in which technology can be strongly labor saving and also show that such a result is not possible in certain canonical macroeconomic models. These results clarify the conditions under which labor scarcity and high wages encourage technological advances and the reason why such results were obtained or conjectured in certain settings, but do not always apply in many models used in the growth literature.
World Bank’s “Doing Business” Changing Course
| Benito Arruñada |
Thanks to O&M for the opportunity to join the conversation. I plan to be blogging about some issues discussed in my book.
One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 2007, 2009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings. In many developing countries, registers produce documents that judges do not trust and, therefore, registration does not facilitate impersonal transactions that it should be supporting. Reducing the explicit cost of registers and speeding production of useless paperwork will not help. The priorities of reform policies should therefore be thoroughly reviewed, aiming first for registers to achieve a minimum reliability. (See this discussion).
In April, following continuing pressure by Barney Frank, chairman of the US House Financial Services Committee, the World Bank decided to drop Doing Business’s “Employing Workers Indicator” and develop a new “Worker Protection Indicator” after concluding that the first indicator “does not represent World Bank policy and should not be used as a basis for policy advice or in any country programme documents that outline or evaluate the development strategy or assistance programme for a recipient country” (Aslam, 2009).
In line with my argument about registration, meaningful indicators of institutional quality should be comprehensive of costs and values. Therefore, an indicator of the quality of employment regulation should consider not only workers’ protection but other aspects, such as, most prominently, unemployment rates.
More Economic Institutions of Strategy
| Nicolai Foss |
In his post of yesterday, Peter failed to mention that among the O&M bloggers not just Klein and Lien but also yours truly contributed to the Nickerson and Silverman 2009 edition of Advances in Strategic Management. Specifically, with Stieglitz (Nils — and with an “e”) I have written “Opportunities and New Business Models: Transaction Costs and Property Rights Perspectives on Entrepreneurship.” The paper can be downloaded from SSRN.
New Foss Sell-Out (?) Paper
| Nicolai Foss |
With Siegwart Lindenberg, Professor of Cognitive Sociology at the University of Groningen, I have written “Why Firms Work? A Goal-Framing Theory of the Firm.” Colleagues already refer to it as the “Foss sell-out paper” (but wait until I blog on that recent sell-out paper on entrepreneurship and the government by a certain O&M blogger . . . ).
Whatever that is, the paper starts from the familiar and long-standing debate between organizational economists and proponents of the knowledge-based view, and the many interesting recent attempts to merge key insights from TCE with ideas on learning and capabilities (Argyres, Nickerson, Mayer, Leiblein, Zenger, Hoettker, and others). The underlying idea is that additional explanatory leverage, for example, with respect to understanding the boundaries of the firm, will emerge from an integration of the two (clusters of) theories. (more…)
New AEA Journals
| Lasse Lien |
The AEA has recently introduced no less than four new journals. AEJ: Microeconomics, AEJ: Macroeconomics, AEJ: Applied Economics and AEJ: Economic Policy. I’m sure all four will all be great journals, but judging from the first issue, I think AEJ: Microeconomics will be my favorite. Here are two examples why:
Reputational Incentives for Restaurant Hygiene
Ginger Zhe Jin and Phillip Leslie
How can consumers be assured that firms will endeavor to provide good quality when quality is unobservable prior to purchase? We test the hypothesis that reputational incentives are effective at causing restaurants to maintain good hygiene quality. We find that chain affiliation provides reputational incentives and franchised units tend to free-ride on chain reputation. We also show that regional variation in the degree of repeat customers affects the strength of reputational incentives for good hygiene at both chain and nonchain restaurants. Despite these incentives, a policy intervention in the form of posted hygiene grade cards causes significant improvements in restaurant hygiene.
The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre
Ali Hortaçsu, F. Asís Martínez-Jerez and Jason Douglas
We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong “home bias” for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias.
Our Collective Delusions
| Dick Langlois |
I just ran across a new NBER working paper by Roland Benabou called “Groupthink: Collective Delusions in Organizations and Markets.” Looks like an interesting paper. But why does he pick on this blog? I believe we here at O&M are far more resistant than most to groupthink. And I’m sure you all share this view.
That Great Klein (1996) Paper
| Peter Klein |
No, not this one. I’m talking about Ben Klein’s 1996 Economic Inquiry paper, “Why Would Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” It’s from a special issue honoring Armen Alchian, the entire contents of which are worth reading. Klein’s paper extends the Klein, Crawford, and Alchian (1978) model by explaining why, in equilibrium, holdups can occur, even if parties are farsighted. The basic story — that parties deliberately leave “gaps” in their contracts because the marginal costs of filling in the gaps exceed the marginal benefits — is closer in spirit to neoclassical economics than is Williamson’s Carnegie-style appeal to bounded rationality. Writes Klein:
[In an uncertain world where complete contractual specification is costly, transactors use incomplete contracts that deliberately do not take account of every contingency. As a result, transactors knowingly leave themselves open to the possibility of hold-ups.
The costs associated with contractual specification that lead transactors to use incomplete and imperfect contracts involve much more than the narrow transaction costs of writing down responses to additional contingencies. In addition to these extra “ink costs,” complete contractual specification entails wasteful search and negotiation costs associated with discovering and negotiating prespecified contractual responses to all potential contingencies. Because most future events can be accommodated at lower cost after the relevant information is revealed, much of this activity involves largely redistributive rent dissipation with little or no allocative benefit. Transactors are merely attempting to obtain an informational advantage over their transacting partners, hoping to place themselves in a position where they will be more likely to collect on (and less likely to pay for) hold-ups. Therefore, rather than attempting to determine all of the many events that might occur during the life of a contractual relationship and writing a prespecified response to each, the gains from exchange are increased by the use of incomplete contracts.
Transactors also use incomplete contracts because writing something down to be enforced by the court creates rigidity. Since contract terms are necessarily imperfect, once something is written down transactors can engage in a hold-up by rigidly enforcing these imperfect contract terms, even if the literal terms are contrary to the intent of the contracting parties (p. 447). (more…)
New Foss Thought Piece
| Nicolai Foss |
I blatantly confess that I enjoy writing what are known in academic putdown-ese as “essays” or “thought pieces,” that is, “conceptual” papers that do not construct a theoretical model, and/or engage in empirical analysis. My most recent product in this genre is inelegantly titled, “Alternative Research Strategies in the Knowledge Movement: From Macro Bias to Micro-Foundations and Multi-level Explanation.” It is an invited paper for European Management Review (the other invited contributors are David Teece, Bronwyn Hall and Will Mitchell). Mail me at njf.smg@cbs.dk if you want a copy. Here is the abstract:
The emergence over the last two decades or so of “knowledge” as an important part of the explanatory structure of management research is an intellectual breakthrough that is comparable in terms of its transforming impact to the behavioral revolution of the 1960s. A veritable “knowledge movement” has emerged that spans several fields in management. I take stock on alternative research strategies with that movement, distinguishing between “capabilities first,” “networks first,” and “individuals first” strategies. Reasons are given why more research attention need to be allocated to the latter strategy if the knowledge movement is to continue making progress, but that the aim should ultimately be to reach towards multi-level research that combines aggregate constructs with top-down processes and bottom-up processes.
New NBER Working Papers
| Peter Klein |
Three new NBER papers likely to interest the O&M crowd. (Aggressive Googlers can probably find ungated versions.)
Railroads and the Rise of the Factory: Evidence for the United States, 1850-70 by Jeremy Atack, Michael R. Haines, and Robert A. Margo
Over the course of the nineteenth century manufacturing in the United States shifted from artisan shop to factory production. At the same time United States experienced a transportation revolution, a key component of which was the building of extensive railroad network. Using a newly created data set of manufacturing establishments linked to county level data on rail access from 1850-70, we ask whether the coming of the railroad increased establishment size in manufacturing. Difference-in-difference and instrument variable estimates suggest that the railroad had a positive effect on factory status. In other words, Adam Smith was right – the division of labor in nineteenth century American manufacturing was limited by the extent of the market.
The Limited Partnership in New York, 1822-1853: Partnerships Without Kinship by Eric Hilt and Katharine O’Banion
In 1822, New York became the first common-law state to authorize the formation of limited partnerships, and over the ensuing decades, many other states followed. Most prior research has suggested that these statutes were utilized only rarely, but little is known about their effects. Using newly collected data, this paper analyzes the use of the limited partnership in nineteenth-century New York City. We find that the limited partnership form was adopted by a surprising number of firms, and that limited partnerships had more capital, failed at lower rates, and were less likely to be formed on the basis of kinship ties, compared to ordinary partnerships. The latter differences were not simply due to selection: even though the merchants who invested in limited partnerships were a wealthy and successful elite, their own ordinary partnerships were quite different from their limited partnerships. The results suggest that the limited partnership facilitated investments outside kinship networks, and into the hands of talented young merchants.
Inside the Black of Box of Ability Peer Effects: Evidence from Variation in Low Achievers in the Classroom by Victor Lavy, Daniele Paserman, and Analia Schlosser
In this paper, we estimate the extent of ability peer effects in the classroom and explore the underlying mechanisms through which these peer effects operate. We identify as low ability students those who are enrolled at least one year behind their birth cohort (repeaters). We show that there are marked differences between the academic performance and behavior of repeaters and regular students. The status of repeaters is mostly determined by first grade; therefore, it is unlikely to have been affected by their classroom peers, and our estimates will not suffer from the reflection problem. Using within school variation in the proportion of these low ability students across cohorts of middle and high school students in Israel, we find that the proportion of low achieving peers has a negative effect on the performance of regular students, especially those located at the lower end of the ability distribution. An exploration of the underlying mechanisms of these peer effects shows that, relative to regular students, repeaters report that teachers are better in the individual treatment of students and in the instilment of capacity for individual study. However, a higher proportion of these low achieving students results in a deterioration of teachers’ pedagogical practices, has detrimental effects on the quality of inter-student relationships and the relationships between teachers and students, and increases the level of violence and classroom disruptions.
The Case Against Corporate Social Responsibility
| Dick Langlois |
Another sign of the Apocalypse: Robert Reich channels Milton Friedman.
Strong-Man Economics
| Lasse Lien |
Here is an interesting paper from the NBER working paper series. Bolton, Brunnermeier and Veldkamp show that it can be optimal for organizations to hire an irrational manager. Irrational in the sense that the manager is less likely to revise strategy as new information becomes available (i.e. is resolute).
The basic setup is that in the first stage the manager receives a signal about the state of the environment and formulates an initial strategy. In the second stage the organizational members act, deciding how closely the will align their actions to the proposed strategy. The actions of individual members are chosen given their knowledge about the manager’s type and a private signal about the environment. The latter may lead them to anticipate a revision of the strategy. In the third stage the manager receives a second signal about the state of the environment, and in the fourth and final stage the leader decides on the final strategy and payoffs are realized.
The essence of the argument is that the less likely the manager is to revise strategy, the better the coordination of the individual members actions. So there is a time-consistency problem that is reduced when a manager is resolute in the sense of not updating as much as optimal adaptation would suggest, and this is known by followers. The paper also supplies interesting discussions of what happens if the leader can commit to not revising strategy (instead of being a resolute “type”), and the cost of resoluteness if the manager can learn from followers.
One can always quibble about the assumptions made in game-theoretic models. An example here would be the assumption that there is no coordination problem after the manager announces his/her final strategy, only in the period between the initial strategy announcement, and the arrival of the second signal about the environment. But definitely a good read, which nicely captures the trade-off between coordination and adaptation. Hereby recommended (the paper, that is, not the hiring of irrational managers or politicians).
Monetary Policy and the Housing Crisis
| Dick Langlois |
I know I’m swimming over my head in macro-infested waters, but I thought I would think out loud some more about the housing mess. In my previous post on the subject (and comments), I posed the question whether a politically influenced (exogenous) lowering of credit standards was more of a culprit than monetary policy (or other macro forces) in causing the housing bubble and subsequent collapse. So I looked at an NBER Working Paper by John Taylor at Stanford that’s been out for a few months. Taylor argues that it was indeed Fed policy that caused the run-up in housing prices. He rejects the alternative possibilities (A) that most of the liquidity fueling the boom was money rushing in to the U.S. from overseas or (B) that it was the increased liquidity that came from securitization and financial innovation. Most interestingly, he argues — as have others, though I can’t find a good reference — that a large part of the reduction in lending standards was endogenous. Foreclosure risk was (is) anticorrelated with an increase in housing prices; so in the run-up, risk of foreclosure was actually declining ceteris paribus. Partly because of the complex and often impenetrable structure of housing finance, lenders took these foreclosure rates as stable in the long term. Moreover, as others have pointed out, lenders were concerned less with default in the run-up than with the risk of early repayment as people refinanced the equity out of their houses (or sold quickly for speculation, as Liebowitz says). All of this meant that lenders considered it optimal to lower credit standards.
This story strikes me as having a Hayekian flavor to it, though I don’t know if Peter and his commentators would agree. It also has something of Leijonhufvud about it, as Taylor’s main message is that the Great Moderation was a matter of the Fed sticking to the program — staying within the “corridor” — and not deviating as it did in 2003-2006, presumably in an effort to stimulate the economy after the Internet crash. The deviation of 2003-06 was “comparable to the turbulent 1970s.”
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