Posts filed under ‘Papers’
Motivation in Knowledge-Sharing Networks
| Nicolai Foss |
Knowledge-sharing networks have become a huge research subject in various fields in management. Much of this work builds from applications of the work of Mark Granovetter or Ronald Burt. It probably represent the most potent sociological impact on management research over the last decade. Even strategic management — which has traditionally been strongly influenced, even dominated, by economics — has been influenced by this research. Prominent work has been done by Hansen (e.g., here and here), Tsai (e.g., here), and Reagans and McEvily (here) (and here is an excellent related paper by Obstfeld).
Most of this work treats motivation in a somewhat indirect manner, if at all. Implicitly, individuals that are placed in similar network positions are taken to give or receive knowledge to the same extent. This need not be the case, however, as individuals need to be motivated to seize opportunities, and motivation can differ across networks and employees. However, most studies of knowledge sharing in networks abstract from the role played by motivation. This may be partly justified to the extent that a network position translates directly into motivation. However, this should be treated as an empirical issue rather than as a starting point for analysis. (more…)
How Well Does the Market Handle Network Effects?
| Peter Klein |
Quite well, according to Dan Spulber’s paper “Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets with Network Effects,” out recently in the Journal of Competition Law and Economics (June 2008). Dan distinguishes between network effects in small- and large-numbers bargaining situations; Coasean bargaining can solve the problem in the former while Hayekian “spontaneous order” can emerge in the latter. The paper also contains a useful, up-to-date summary of the network effects literature. Highly recommended!
Organizational Structure and the Diversification Discount
| Peter Klein |
Do diversified conglomerates trade at a discount relative to more specialized firms? A huge literature in strategy and corporate finance emerged over the last couple of decades devoted to this question. Early studies claimed to find a substantial diversification discount, though more recent papers claim that the observed discount is due to measurement error, self-selection, and other characteristics, not a harmful effect of diversification per se. (For a good overview of this literature, now slightly dated, see this roundtable report edited by Belén Villalonga. Some of my own contributions are here and here.)
Seemingly lost in the search for a diversification discount, however, is a related question: What is being discounted? Potential benefits of diversification, according to the literature, include access to internal capital markets and more efficient redeployment of distressed assets; potential costs include inefficient rent-seeking, bargaining problems, and bureaucratic rigidity. But these benefits and costs have little to do with industry or geographic diversification per se — they apply to the management of any multi-unit organization, even if its activities do not span different industries or regions.
In a new paper, “Organizational Structure and the Diversification Discount: Evidence from Commercial Banking,” Marc Saidenberg and I try to distinguish the effects of diversification and organiztaional complexity by studying multi-unit firms within a single industry, commercial banking. (more…)
MDE Special Issue: Frontiers of Strategic Management Research
| Nicolai Foss |
Managerial and Decision Economics has become a favorite journal of mine. It has a strong econ orientation, to be sure, but the journal stresses econ that is relevant, readable, and right. In other words, there is lots of applied microeconomics, transaction cost economics, etc. Moreover, over the last few years MDE — presumably as a result of Margie Peteraf’s tenure as co-editor — has become very much of an econ-based strategic management journal, not like the Journal of Economics and Management Strategy, to be sure, but more economics-oriented than the Strategic Management Journal.
The most recent issue(s — issue 2 and 3 are bundled into one special issue) features a string of excellent papers under the heading “Frontiers of Strategic Management Research,” edited by Peteraf and Catherine Maritan. Several of the papers should be of interest to the O&M readership. For example, Kyle Mayer (with Janet Bercovitz) continues to work with his information technology service contracts dataset, this time looking at the influence of inertia on what contract clauses that are included in these kind of contracts. Maritan and Robert Florence engage in a nice modelling exercise, modelling strategic factor markets in a way that seems quite different from earlier attempts (e.g., by Rich Makadok). Michael Jacobides builds an interesting argument, linking foreign direct investment to the investing firm’s embeddedness in value chains in the home country and value chain conditions in the host country. And, of course, there is the usual handful of alliance articles. A great special issue. Highly recommended.
Langlois Paper on the Theory of the Firm and Austrian Economics
| Nicolai Foss |
Former O&M guest blogger Dick Langlois is IMHO one of the most original thinkers in the field of economic organization. He is also one of the best writers in management and in economics. So I try to keep track of his writings and usually succeed. However, this paper, “The Austrian Theory of the Firm: Retrospect and Prospect,” written for a conference at the George Mason Law School last May, had escaped my attention until today.
Dick develops a number of related arguments. One is that Hayek (of the 1945 essay, “The Use of Knowledge in Society”) developed richer insights in economic organization than Coase. Moreover, by pointing out the importance of dispersed knowledge, the coordination problem this raises, and the importance of “change” for “economic problems,” Hayek anticipated the capabilities theory of the firm. In a parallel argument, Dick links his own work on the capabilities theory of the firm to Austrian capital theory (see also here and here). He ends by speculating on the future of Austrian arguments in the theory of the firm, noting various manifestations, particularly in strategic management, of these arguments (he notes that “Some work in this literature is close in spirit to my own, in some cases extremely close (Jacobides and Winter 2005)” — one agrees). Definitely worth a read!
“Let’s Write a Paper”
| Nicolai Foss |
I have noticed that an increasing number of colleagues build up and afterwards desperately try to manage increasingly large portfolios of paper projects. It is very common to have paper portfolios that encompass more than 20 ongoing projects. At any rate, that’s about the size of my own current portfolio.
I have also noticed that a lot of these paper ideas don’t seem to ever come to be written, or, at best exist in a fragmentary form. I can relate many anecdotes (some from personal experience!) relating to substantial regret over set-up costs (aka pissing your would-be co-author off). It is possible that this may increasingly become a management problem, certainly on the level of the individual scholar, but perhaps also on the level of university managers (mainly dept. heads).
The question is: Is this (personally and socially) wasteful? The basic problem is that in order to end up with a suitable amount of published papers a certain amount of exploration is necessary. Co-authoring papers is a Hayekian discovery process. It is pretty hard, perhaps particularly for younger, unexperienced colleagues, to make reasoned decisions on how many papers one should initiate and with whom (given the costs of experimentation, i.e., set-up costs, the risk of ruining your reputation, etc.). Reputation mechanisms work imperfectly. Big, but lazy, guys may exploit this, hoping for the rookie to do the job. Problems of procastination and melioration may complicate the decision problem. Etc.
From another point of view, however, not much has really changed. Whereas scholars in the past may have spent much time discussing research issues over the lunch table, etc., the publication pressure that most of us are subject to nowadays means that many discussions that would previously have simply ended over the lunch table are now turned into paper ideas. If that is the case, the process appears much less wasteful — and, importantly, in need of less intenvention by well-intentioned, but (naturally!) misguided university bureaucrats.
Rent and Quasi-Rent
| Steve Phelan |
In a recent paper in the Journal of Business Venturing, Sharon Alvarez attempts to construct a theory of entrepreneurship and the firm. The central question is why new resource combinations are sometimes carried out by entrepreneurs starting new ventures rather than within established firms. (more…)
The Logic of Appropriateness
| Nicolai Foss |
To paraphrase Fritz Machlup, the rational-choice model has been a sort of “universal bogey” for many scholars in sociology, psychology, and management. The nature of the alternative(s) has, however, seldom been clarified. Thus, most models of bounded rationality are really variations on the basis RC model.
However, a much-cited attempt to characterize an actual alternative is James March’s notion of the “logic of appropriateness,” which may be characterized thus:
The logic of appropriateness is a perspective that sees human action as driven by rules of appropriate or exemplary behavior, organized into institutions. Rules are followed because they are seen as natural, rightful, expected, and legitimate. Actors seek to fulfill the obligations encapsulated in a role, an identity, a membership in a political community or group, and the ethos, practices and expectations of its institutions. Embedded in a social collectivity, they do what they see as appropriate for themselves in a specific type of situation” (quoted from this paper).
In in a logic of appropriateness, the agent/actor does not begin by identifying alternatives, preferences, etc. as in the rational choice model, but rather asks, “What kind of situation is this? Who or what am I? What is the appropriate thing to do given who I am?” (more…)
Deconstructing Bob and Jeff
| David Hoopes |
For better or worse the hard-hearted authors at O&M have hurt the feelings of our colleagues in other fields. In the spirit of being more specific about why the bloggers here are so harsh I’d like to take a look at an award-winning paper from the Academy of Management Review (Ferraro, F., Pfeffer, J., and Sutton, R.I., “Economics Language and Assumptions: How Theory Can Become Self-Fulfilling”). In this paper we are told how the language of economics (the assumptions that people are selfish cheats) encourages people to be selfish cheats. Aside: in my opinion sociologists have a much darker image of humankind than economists (if we must make careless generalizations).
As I note in an earlier post, the idea of self-interest is often grossly misrepresented. Perhaps economists can thank themselves for this. I don’t know. However, it is important to examine this component of price theory by looking at its roots. In developing public policy toward government intervention in the allocation of goods (mercantilists vs. free traders in Smith’s day) allowing people to make their own decisions is more efficient than having a handful of people making the decisions for everyone. And even if individuals focus on their own needs the result for society is better than having a few people guessing at what everyone else wants and imposing their guesses.
The starting point of the AMR critique is the ever-present complaint about the economics world telling us all that we need to be selfish and greedy (make decisions based on our own self-interest). From here, our friends in the org. theory camp state, “If people are relentless in the pursuit of their own self-interest and equally relentless in the their lack of concern for others’ interests. . . .” What? Where did that second part come in? A very important bridge theory has been added. If people pursue their own self-interest then they also cannot care about anyone else. Management scholars wonder why their (our) work is not used in public policy debates. Small wonder. (more…)
Demsetz, Coase, Postrel, and Williamson
| David Hoopes |
A recent post by Nicolai ponders Demsetz’s approach to transaction costs. My understanding (interpretation) of Demsetz’s “The Theory of the Firm Revisited” is quite different from Nicolai’s. Here’s how I remember that paper.
One of Demsetz’s complaints about transaction costs economics is that a number of very different events are bundled together under the term “transaction.” Williamson’s take on transaction costs focuses largely on comparative governance costs. How does making sure a supplier doesn’t cheat you compare to making sure your employees don’t cheat you? Coase’s version of transaction costs is very different. Coase tends to talk about a variety of other frictions that can occur independently of governance costs. These are what Demsetz calls management costs. Demsetz thinks (quite correctly) that referring to these two types of costs using the same term is confusing. In his Nobel speech Coase notes how his beliefs were more consistent with Demsetz’s than with those emphasizing governance.
Steve Postrel and I (in disucssing capabilities in SMJ 1999) separate cooperation costs from coordination costs. I think of this as fitting the Williamson versus Demsetz and Coase types of transaction costs (or management costs as Harold says). Costs dedicated to aligning incentives are different from costs of making sure everyone has the same plan. Steve and I go on to differentiate the costs of sharing specialized knowledge from the costs of coordinating. (Notice how I moved from Coase and Demsetz to myself?!).
Back to Harold. Demsetz believes that you needn’t have oppourtunism to have organizations. Postrel (2003) in an earlier version compared knowledge and governance as theories of the firm. Where Demsetz believes firms economize on managerial costs (or Coasian transaction costs) Postrel believes that without opportunism the firm is unnecessary.
I’m more with Harold (at least in my own mind I’m not sure Harold really wants me tagging along).
More on the Noble Prize (or the Economics Prize in Memory of Nobel)
| David Hoopes |
Since the O&Mers have been so quiet about the N prize I guess I’ll ramble a bit. In a comment on one of Peter’s posts I mentioned Demsetz and Alchian. For some reason I had it in my head that A.A. had already won. That’s what I get for staying at UCLA for so long (Alchian had just quit teaching when I got there).
I don’t know why I thought Alchian had won it. “Production, Information costs and Economic Organization” (with Harold Demsetz), American Economic Review 62 (1972): 777-95 is a pretty amazing paper. And “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process” (with Robert Crawford and Bejamin Klein), Journal of Law and Economics (1978) has been very influential. Though I think people think of Ben Klein for that paper. As noted above, Alchian is very well known for (and thought of because of ) “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58 (1950): 211-21.
Having said all that, I think srp is correct in that Alchian’s best chance is going in with Nelson and Winter for evolutionary economics or Demsetz and Williamson or Oliver Hart for theory of the firm. It’s hard to imagine that evolutionary economics is that appreciated. I think Sid Winter is grossly underrated. His body of work in economics and strategy is pretty amazing.
As readers of my posts might guess, I am a pretty big fan of Demsetz. I don’t know that Harold is as productive or quantitative as most award givers might like. Stilger and Coase were pretty big fans. But, Hart and Williamson seem more likely award winners.
Over at orgtheory.net they’ve been discussing sociologists and management people who (in some alternate universe) might win. There are not too many Herb Simons out there.
Why Are Markets So Scary? Some Things (Liberal) Academics Get Wrong
| David Hoopes |
Many people make incorrect assumptions about capitalism. Some would have us believe that capitalism is based on greed, selfishness, and promotes behavior that is completely self-centered. This is a common interpretation of Smith’s advice to allow people to make decisions based on self-interest. Examples are easy to find in the many organization theory-based papers complaining about economics and economists.
Two very good papers can aid in a deeper understanding of the invisible hand. First is James Q. Wilson’s “Adam Smith on Business Ethics.” A central point Wilson makes is that Adam Smith assumed people will behave with a moral sense. Wilson, “A moral man is one whose sense of duty is shaped by conscience; that is, by that impartial spectator within our breast who evaluates our own actions as others would evaluate it.” By suggesting people be allowed to make decisions based on their own self interest Smith was not advocating selfishness and greed. What then was he advocating?
This leads to the second paper, Harold Demstez’s “The Theory of the Firm Revisited.” In the third paragraph Demsetz notes that the debate between mercantilists and free traders was over the role of the government in the economic affairs of the state. “Is central economic planning necessary to avoid chaotic economic conditions?” The great achievement of the perfect competition model, what Demsetz argues should be called perfect decentralization, is its abstraction from centralized control of the economy.
Thus, the central element to capitalism is that decision making is pushed down as far as possible. (more…)
Foss & Klein Chapter on “Organizational Governance”
| Nicolai Foss |
Peter and I often get requests that we blog something of a more introductory nature on organizational economics, the theory of the firm, etc. Until now, we haven’t really had the opportunity.
However, we just completed a draft of a chapter on “Organizational Governance” for the Handbook of Rational Choice Social Research, a major project initiated by sociology professors Rafael Wittek, Tom Snijders and Victor Nee for the Russell Sage Foundations (thus dispelling strange claims by Brayden and others that this is the anti-sociology blog). As the title suggests, the contributors, representing economics (/game theory), anthropology, and sociology are united by their commitment to the rational choice approach. The project involves such luminaries as Avner Greif, Jean Ensminger, Sigwart Lindenberg, and others. You can find the chapter under “Papers.” (more…)
Economic Freedom and Entrepreneurial Activity
| Nicolai Foss |
Christian Bjørnskov and I have just had our paper with the above title accepted for publication in Public Choice. I was very favorably impressed with the review process, which was comparable to the process at the top academy journals in terms of speed and thoroughness. Mail me at njf.smg@cbs.dk if you want a copy of the paper. Here is the abstract:
While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the Economic Freedom Index from the Fraser Institute to ask which elements of economic policy making and the institutional framework are conducive to the supply of entrepreneurship, measured by data on entrepreneurship from the Global Entrepreneurship Monitor. We find that the size of government is negatively correlated with entrepreneurial activity and sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship
Most Overrated Econ or Management Papers
| Nicolai Foss |
Here is a controversial, but perhaps fun, exercise for the O&M readership: nominate a paper that you think is grossly overrated. In operational terms you may think of “overrated” in terms of the ratio of Google Scholar hits to actual content/substance. Remember that you, in contrast to the resident O&M bloggers, have the option and benefit of remaining anonymous. Uninspired? You may draw inspiration from our Pomo Periscope series. (And you are welcome to nominate Ferraro, Pfeffer, and Sutton, Academy of Management Review, 2005. ;-))
Goals or Preferences?
| Nicolai Foss |
My two favorite sociologists are Peter Abell and Sigwart Lindenberg. Both stress rationality (and rationalism), micro-foundations for social science research, and are (not surprisingly) sympathetic to, even admiring of, economics. However, neither is an uncritical admirer of economics.
In “Why the Microfoundations of the Social Sciences Should be Based on Goals Rather than Preferences” (you can find it on this page), Lindenberg argues that economists tend to conflate preferences and goals, or at least leaves open or trivializes the relationship between the two. (more…)
Scientific Progress in Strategic Management?
| Nicolai Foss |
OK, I persist in using O&M for the purpose of shameless self-promotion: I have written “Theory of Science Perspectives on Strategic Management Research: Debates and a Novel View” (I know — not an elegant title) for The Elgar Handbook of Research on Competitive Strategy, edited by Giovanni Battista Dagnino. I will be happy to send you a copy if you drop me a mail at njf.smg@cbs.dk. (more…)
Pioneers of Industrial Organization
| Nicolai Foss |
Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape is the title of a new volume edited by Henk de Jong to be published next month by Edward Elgar. My CBS colleague Peter Møllgaard and I have contributed a chapter on early (meaning pre-1980) IO research in the Scandinavian countries. (more…)
Enacting Privatization
| Nicolai Foss |
Here at O&M we have often criticized and poked fun at ideas on social construction and their derived notions in management, such as Weickian “enactment.” Still, it is a fundamental tenet of classical liberalism that ideas matter and matter crucially (although some classical liberals, notably George Stigler, have argued that ideas matter much less than economists would like to think). One crucial area where ideas would seem to have mattered a great deal is privatization (a term that seems to have been invented by Peter Drucker).
In a paper, “Palace Wars and Privatization: Did Chicago Beat Cambridge in Influencing Economic Policies,” just published in the European Management Review, J. Muir McPherson adds to his earlier work with Bruce Kogut (this paper; for a related idea diffusion paper, see this), and examines the influence of “the epistemic community of American-trained economists” (based on the number of non-US, US and Chicago PhD degrees in a given country) on privatization policies. The dataset encompasses self-collected data on 13,422 economists. The statistical methodology is a hazard model. The results indicate a clear impact of the frequency of US-trained economists on the probability of privatization, but it is also noteworthy that among theUS economists, “As Chicago ideas won out . . . the difference between Chicago economics PhDs and graduates from other schools could no longer be detected from the general influence of US-trained economists on the decision to privatize.”
Spooky CEO Research
| Nicolai Foss |
Research on corporate governance and the importance to value creation of CEOs is becoming increasingly morbid. Check out the abstract of a recent paper by CBS colleague Morten Bennedsen (as the paper doesn’t seem to be online, you will have to write Morten for a copy; mb.eco@cbs.dk):
Estimating the value of top managerial talent is a central topic of research that has attracted widespread attention from academics and practitioners. Yet, studying the impact of managers on firm performance is difficult because of endogeneity and omitted variables concerns. In this paper, we test for the impact of managers on firm performance in two ways. First, we examine whether top executive deaths have an impact on firm performance, focusing on the manager and firm characteristics that are associated to large manager-death effects. Second, we test for the interaction between the personal and professional activities of managers by examining the effect of deaths of immediate family members (spouses, parents, children, etc) on firm performance. Our main findings are three. First, CEO deaths are strongly correlated with declines in firms operating profitability, asset growth and sales growth. Second, the death of board members does not seem to affect firm prospects, indicating that not all senior managers are equally important for firms’ outcomes. Third, CEOs’ immediate family deaths are significantly negatively correlated to firm performance. This last result suggests a strong link between the personal and business roles that top management plays, a connection that is present even in large firms. Overall, our findings demonstrate CEOs are extremely important for firms’ prospects.
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