Posts filed under ‘Theory of the Firm’
Conference on Austrian Economics and the Firm
| Peter Klein |
Last week I attended an interesting discussion conference sponsored by the Atlas Foundation, “Austrian Market-Based Approaches to the Theory and Operation of the Business Firm.” Former O&M guest blogger Dick Langlois was there, as were Pete Boettke and Fred Sautet of The Austrian Economists, Tony Woodlief of the Market-Based Management Institute, Saras Sarasvathy, Peter Lewin, Ivan Pongracic, Anthony Evans, and several others. (A selection of papers, written for the conference, will appear in the Review of Austrian Economics.)
The participants clearly believe the Austrian tradition has something of value for researchers and teachers in business administration. There may also be Austrian lessons for practitioners, though there was less consensus on exactly what these lessons are and how they should be communicated. One theme that emerged clearly from the discussions was the depth and variety of the Austrian approach. Despite a shared commitment to the general framework of the Austrian school there were many disagreements about core theoretical issues and much uncertainty about what these ideas imply for firm boundaries, strategy, entrepreneurship, and public policy. (more…)
Congratulations to Drs. Chambers, Chapman, and Xue
| Peter Klein |
Three PhD students whose dissertation committees I chaired or co-chaired completed their work this semester. Molly Chambers (University of Missouri) studied the emergence of “new generation” cooperatives in Renville County, Minnesota and developed a conceptual model of team or “collective” entrepreneurship. The new generation cooperative is a patron-owned firm characterized by closed membership, appreciable and partially transferable equity shares, binding delivery obligations, and an emphasis on value creation, rather than the protection of existing rents — a model designed to mitigate the problems of vaguely defined property rights that characterize traditionally organized cooperative. Molly used a survey and structured interviews to compare the effects of transaction costs, ownership costs, and spawning conditions on the development of the Renville cluster during the 1990s. (more…)
Taxis and Limos
| Peter Klein |
Murray Rothbard told a story about his first encounter with the terms taxis and cosmos, used by Hayek to distinguish “planned” from “spontaneous” orders. Upon seeing a lecture announcement Rothbard’s wife Joey exclaimed, “Look, Hayek’s giving a lecture on taxis!” As life-long New Yorkers they naturally assumed Hayek meant the yellow ones with lights on the roof.
Even Rawley, a PhD Candidate in strategy at Berkeley, is doing interesting work on taxis (the yellow ones). I recently read his paper “Diversification and Adaptation: How Organization Drives Taxi Firm Performance,” which exploits a change in taxicab regulation to perform a natural experiment on the effects of related diversification on firm performance. Until the mid-1990s US taxi firms were prohibited from entering the market for limousines (the airport kind, not the stretch kind). As those restrictions were relaxed, taxi firms began to diversify into the limo market. Rawley uses Census data to show that diversifying taxi firms were less efficient and less likely to adopt computerized dispatching systems than non-diversifiers, which he interprets as a story of costly organizational adaptation. (more…)
The Dark Side of Capital Pooling
| Peter Klein |
The great advantage of joint-stock companies, whether public or private, is the ability to create value by pooling capital. Unfortunately, capital pools can also be channeled to activities that destroy value. (HT: Against Monopoly.)
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!
Athey on Organizational Complementarities
| Peter Klein |
Harvard’s Susan Athey has won the John Bates Clark medal. Commentators are hailing her age (one of the youngest Clark medalists at 36), gender (the first female winner), and reputation (profiled in the New York Times as a 24-year-old PhD candidate). Here I’ll offer a few remarks about one of her most important papers for organizational scholars, “An Empirical Framework for Testing Theories About Complementarity in Organizational Design” (with Scott Stern). (An NBER version of the paper is here; as far as I know it is still unpublished.)
I blogged recently about complementarities among organizational form, technology, and market conditions. Athey and Stern’s paper tackles the problem of measuring complementarities among organizational practices. If particular practices occur in clusters (as modeled, for example, by Holmstrom and Milgrom, 1994), it is difficult to estimate the marginal impact of adopting any particular practice. Moreover, the endogeneity of the decision to adopt individual practices makes it difficult to judge whether practices are in fact complementary (i.e., performance enhancing). Athey and Stern develop a method for identifying complementarities by constructing “activity-specific instruments” that control for unobserved heterogeneity. The proposed approach, which jointly estimates the adoption decision and the productivity effect of organizational practices, is becoming increasingly influential in the empirical literature on organizational design. (more…)
Communication Channels, Asset Specificity, and Some Humor
| Chihmao Hsieh |
First off, I’d like to thank Nicolai and Peter for adding me on as a guest blogger at O&M. I have admired it from afar. Hopefully I can introduce other provocative topics universal to the esteemed readership, but also practice my more text-oriented sense of humor. Ergo, this opening post…
Last week I gave a lecture to my undergrad class that included remarks about the differential ability of communication channels in handling messages of varied complexity or “equivocality.”
The research cited (Lengel and Daft, 1988) during the lecture categorizes communication channels into 3 groups: email, fax, voice mail; telephone and video conferencing; and face-to-face interaction. I independently argued that these 3 categories distinctly varied in terms of their relation to asset specificity: excepting underdeveloped countries, email, fax, and voice mail each involve investments low in asset specificity (no need for shared location, no need for shared timing); (more…)
The Division of Labor in Artistic Production
| Peter Klein |
Delegation, agency, team production, monitoring, group entrepreneurship — these issues and more suffuse David Galenson’s new paper on the division of labor in artistic production, “Painting By Proxy: The Conceptual Artist as Manufacturer.”
In 1958, the French philosopher Etienne Gilson observed that painters are related to manual laborers by a deep-rooted affinity that nothing can eliminate, because painting was the one art in which the person who conceives the work is also necessarily the person who executes it. Conceptual innovators promptly proved Gilson wrong, however, by eliminating the touch of the artist from their paintings: in 1960 the French artist Yves Klein began using living brushes — nude models covered with paint — to execute his paintings, and in 1963 Andy Warhol began having his assistant Gerard Malanga silkscreen his canvases. Today many leading artists do not touch their own paintings, and some never see them. This paper traces the innovations that allowed a complete separation between the conception and execution of paintings. The foundation of this separation was laid long before the 20th century, by conceptual Old Masters including Raphael and Rubens, who employed teams of assistants to produce their paintings, but artists began exploring its logical limits during the conceptual revolution of the 1960s and beyond. Thus by the end of the twentieth century Jeff Koons explained that he did not participate in the work of painting his canvases because he believed it would interfere with his growth as an artist, and Damien Hirst defended his practice of having his paintings made by assistants on the grounds that their paintings were better than his. Eliminating the touch of the artist from painting is yet another way in which conceptual innovators transformed art in the twentieth century.
The paper is gated for NBER subscribers here.
New Paper by Hart and Moore
| Peter Klein |
I blogged previously about Oliver Hart’s work (with John Moore) on “partial contracts.” The paper has been revised and retitled “Contracts as Reference Points” and is available for NBER subscribers here. Abstract:
We argue that a contract provides a reference point for a trading relationship: more precisely, for parties’ feelings of entitlement. A party’s ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcome to uncertainty, but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments, and elucidates why “employment” contracts, which fix wage in advance and allow the employer to choose the task, can be optimal.
Organizational Innovation: Evidence from Food and Agriculture
| Peter Klein |
Just in time to address some of the issues raised in Nicolai’s provocative post, my colleagues Harvey James, Mike Sykuta, and I have revised our paper, “Markets, Contracts, or Integration? The Adoption, Diffusion, and Evolution of Organizational Form,” which focuses on organizational innovation in US agriculture. Here is the abstract:
The rise of contract farming and vertical integration is one of the most important changes in modern agriculture. Yet the adoption and diffusion of these new forms of organization has varied widely across regions, commodities, and farm types. Transaction cost and other modern theories of the firm help explain the advantages of contracting and integration over reliance on spot markets and commodity brokers. However, these theories do not address the variation in adoption rates of new organizational forms. This paper lays out a more dynamic framework for understanding the evolution of organizational practices in U.S. agriculture, drawing on theories of the diffusion of technology and organizational complementarities. Using recent trends as stylized facts we argue that the agrifood sector is characterized by strong complementarities and that identifying and describing these complementarities more fully sheds considerable light on the organizational structure of agricultural production. We illustrate our arguments with case studies from the oilseed, poultry, and hog industries.
This is a draft, and comments are most welcome.
Empowerment at Netflix
| Peter Klein |
Strong delegation, despite potential drawbacks, can be effective in particular circumstances. DVD-by-mail pioneer Netflix has gone this route, with apparent success:
Netflix’s time off rules — or lack thereof — are part of a broad culture of employee autonomy instilled in the company when [CEO Reed] Hastings founded it a decade ago. The executives trust staffers to make their own decisions on everything — from whether to bring their dog to the office to how much of their salary they want in cash and how much in stock options. Workers are treated, as Chief Talent Officer Patty McCord likes to say, as adults.
“We want our employees to have great freedom — freedom to be brilliant or freedom to make mistakes,” Hastings said.
Curiously, there is nothing in the news story about how output is measured, how employees are compensated, or other elements of the firm’s organizational architecture. What happens, for instance, when employees make mistakes? As argued by Brickley, Smith, and Zimmerman in their 1995 article (and textbook), decentralization works only when bundled with appropriate compensation and performance evaluation systems. Or, in the words of that great philosopher, Spider-Man’s Uncle Ben, “With great power comes great responsibility.”
Thanks to Eddie Garrett for the tip.
Vertical Agriculture
| Peter Klein |
I’ve done some work on vertical integration in agriculture (e.g., this paper). But I learned only recently about vertical agriculture — growing crops inside a skyscraper. (HT: Creativity Exchange.)
At first I thought vertical farming couldn’t possibly be the highest-valued use of land in densely populated urban centers like New York or Hong Kong. Then again, if government ethanol subsdidies continue driving up the price of corn (poor people beware!), you never know.
Vaguely Defined Property Rights
| Peter Klein |
The shareholder model of the firm has come under increasing criticism from a variety of quarters. Stakeholder approaches argue that employees, suppliers, customers, community members, and others with relationships to the firm should have their preferences taken into account. Theories of worker empowerment, “flatter hierarchies,” and similar approaches advocate delegating decision rights to employees, not top management. Models of loose and open collaboration treat the firm as simply a node in a cluster or network of firms, with decision authority widely dispersed throughout the larger structure.
All these approaches, despite their differences, reject the standard shareholder model in which the firm’s owners, as residual claimants, possess unique rights of decision management and control. And yet, there is a substantial literature on the organizational costs of alternative models, particularly those in which residual claims are not alienable, separable from other agent roles in the organization, or marketable. These costs have not been widely appreciated in the literature on stakeholder management, worker-managed teams and firms, and the like.
My colleague Mike Cook, a specialist in cooperatives, describes these as costs of “vaguely defined property rights.” Mike argues that cooperatives, partnerships, and similar structures are plagued by two kinds of free-rider problems, a horizon problem, a portfolio problem, a control problem, and an influence costs problem, all because their equity shares are not alienable assets that trade in secondary markets. Consider each in turn. (more…)
The Danger of Under-Management
| Peter Klein |
As we’ve noted before, the hype about flatter hierarchies, modular organizational architectures, worker-managed teams, and the like tends to obscure the costs of decentralization or, conversely, the benefits of hierarchy. Sure, we can worry along with Bob Sutton about abusive bosses. But what about bosses who exercise too little authority?
WebWorkerDaily is running an open thread on under-management. Notes Anne Zelenka:
Books like The Starfish and The Spider: The Unstoppable Power of Leaderless Organizations promote the idea that decentralized loosely-managed organizations can be more successful than hierarchical traditionally managed organizations. Starfish organizations, so the claim goes, work mainly via flat and collaborative peer networks, not by the practice of top-down leadership or management. This might make you think that management isn’t necessary in the new world of work and business enabled by the web. Yet even so-called starfish organizations like Wikipedia and Craigslist rely on some sort of governance structure and effective leadership to succeed.
CORI’s Contracts Database: More Documents, Faster
| Peter Klein |
Researchers in organizational economics and strategy who rely on CORI’s online contracts database — and c’mon, who doesn’t? — will be happy to know that the collection is growing faster than ever before:
SEATTLE — (BUSINESS WIRE) — QL2 Software today announced that the Contracting and Organizations Research Institute (CORI), one of the world’s leading research organizations on contracts, has deployed QL2’s flagship product, WebQL. CORI will leverage the on-demand power of WebQL to automate the Web data extraction process from the Securities and Exchange Commission’s (SEC) database, EDGAR, to enhance the Institute’s knowledge base of contract information (K-Base). As a result of the implementation, CORI has been able reduce the document upload process to CORI’s K-Base from 15 hours to two hours; a productivity increase of 750% per day.
Based at the University of Missouri-Columbia, CORI’s goal is to build upon its collection of more than 250,000 contracts and other documents of interest to support studies conducted by academic researchers and professional clients focused on best practices as well as economic enterprise structure. Prior to QL2, document search and collection was being performed manually by students at the University, a process of copying and pasting new filings which often took more than 15 hours per EDGAR-filing day. Students also served as taxonomists, responsible for assigning each document to a particular category or associating it with certain search terms.
“WebQL allowed us to replace a slow, tedious and costly process with an automated solution that dramatically improves the speed, quality and consistency of the data extracted from EDGAR,” said Dr. Michael Sykuta, Associate Professor of Agribusiness and Director of CORI. “The solution has also helped reduce the drain on our network bandwidth, processing capacity and archival storage, and allowed the students to focus on processing and categorizing the documents downloaded by the WebQL-enhanced system. With nearly 50,000 documents waiting to be reviewed, we are certainly ahead in our data extraction and downloading.”
We hope users will enjoy the increasing breadth of the collection (and appreciate our contribution to the Marxist process of labor displacement). And if you haven’t seen CORI’s new search interface, you’re in for a treat.
Brayden King, Fabio Rojas at Missouri
| Peter Klein |
If you’re within driving distance of the University of Missouri campus in Columbia please join us for two upcoming seminars. Brayden King of BYU and orgtheory.net will present his paper with Gordon Smith, “Contracts as Organizations,” in the CORI seminar series April 11. Indiana University’s Fabio Rojas (also blogging at orgtheory.net) will present work on social movements and networks in an April 16 seminar jointly sponsored by McCEL and the Division of Applied Social Sciences. Visitors are welcome. (Contact me for details.)
Ben Klein’s Reply to Coase
| Peter Klein |
Ben Klein’s new paper, “The Economic Lessons of Fisher Body – General Motors,” appears in the February 2007 issue of the International Journal of the Economics of Business. He is not about to give Ronald Coase the last word. Indeed, Klein writes, the newest evidence on the history of the relationship between Fisher and GM confirms his earlier claim that GM’s acquisition of Fisher in 1926 was a response to opportunistic behavior by Fisher. This evidence
sheds new light on the conduct underlying these events, most importantly on how Fisher Body accomplished its holdup of General Motors in 1922. . . . The analysis presented in this paper reconciles [my] previous evidence of Fisher Body’s reluctance to locate its body plants adjacent to GM assembly facilities and Fisher Body’s reduction in its capital to sales ratio with [Coase’s] new evidence regarding contract restrictions on the use of inefficient production technology and the lack of mis-located plants. In the process we not only more fully explain what happened in the Fisher Body-General Motors relationship but also provide significant insights into the economics of holdup behaviour. The conclusion that Fisher Body held up General Motors not only stands, but is substantially strengthened by the analysis because Fisher’s conduct is shown to be consistent with what we would expect from economics.
What of Coase’s contention that there was no holdup, and that the entire case illustrates economists’ tendency to disregard the facts? (more…)
TCE Workshop in Bergen, 15-16 November 2007
| Nicolai Foss |
In 2004, my colleagues at the Norwegian School of Economics and Business Administration, professors Sven Haugland and Svein Ulset, and I organized a “Nordic Workshop on Transaction Cost Economics in Business Administration.” Oliver Williamson and my co-blogger gave keynote speeches. The best papers, including a paper by Williamson, were published in a special issue of the Scandinavian Journal of Management in 2005.
With Professor Arne Nygaard, Sven Haugland and I now plan a new workshop, no longer “Nordic,” on the application of TCE in business administration. (more…)
Aoki on Institutional Change
| Peter Klein |
The April 2007 issue of the Journal of Institutional Economics (3:1) features Masahiko Aoki’s paper “Endogenizing Institutions and Institutional Changes.” Abstract:
This paper proposes an analytical-cum-conceptual framework for understanding the nature of institutions as well as their changes. First, it proposes a new definition of institution based on the notion of common knowledge regarding self-sustaining features of social interactions with a hope to integrate various disciplinary approaches to institutions and their changes. Second, it specifies some generic mechanisms of institutional coherence and change — overlapping social embeddedness, Schumpeterian innovation in bundling games, and dynamic institutional complementarities — useful for understanding the dynamic interactions of economic, political, social, organizational, and cognitive factors.
Other papers from the same issue that look interesting include “Hayek and Popper on Ignorance and Intervention” by Celia Lessa Kerstenetzky, “Why Are Cooperatives Important in Agriculture? An Organizational Economics Perspective” by Vadislav Valentinov, and David Reisman’s review of Richard Swedberg’s New Developments in Economic Sociology.
Helping Your Kids: It’s Not How Much You Praise, But How
| Peter Klein |
Direct evidence against the Alfie Kohn approach to child-rearing (and, of course, incentive compensation more generally): Praising kids for who they are (e.g., telling them they’re smart) may actually reduce their performance in school, while praising them for what they do (hard work, diligence, effort) makes them perform better. Here’s the link, courtesy of Joshua Gans.
(Apologies to Mike Jensen and Kevin Murphy for my title.)
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