Posts filed under ‘Theory of the Firm’
Prediction Markets and Corporate Governance
| Peter Klein |
Prediction markets have generated a lot of buzz (particularly in the econo-blogosphere). A new paper by Michael Abramowicz and Todd Henderson explores the potential role of prediction markets in corporate governance. The authors are enthusiasts:
Prediction markets can increase the flow of information, encourage truth telling by internal and external firm monitors, and create incentives for agents to act in the interest of their principals. The markets can thus serve as potentially efficient alternatives to other approaches to providing information, such as the Sarbanes-Oxley Act’s internal controls provisions. Prediction markets can also produce an avenue for insiders to profit on and thus reveal inside information while maintaining a level playing field in the market for a firm’s securities. This creates a harmless way around existing insider trading laws, undercutting the argument for the repeal of these laws. In addition, prediction markets can reduce agency costs by providing direct assessments of corporate policies, thus serving as an alternative or complement to shareholder voting as a means of disciplining corporate boards and managers.
For caveats and qualifications regarding the ability of prediction markets to replace entrepreneurial judgment, see this technical report and this non-technical, critical assessment.
Coordination (Games) in Organizations
| Nicolai Foss |
The basic thrust of new institutional economics and contract-theory approaches to organizations and contracts is to conceptualize virtually any issue related to economic organization in terms of solving incentive conflicts. The motivation for this presumably is an underlying argument that in the absence of such conflicts, the first-best can be reached without major obstacles. (more…)
Roundup of Interesting Working Papers
| Peter Klein |
Kathy Fogel, Randall Morck, and Bernard Yin Yeung, “Big Business Stability and Economic Growth: Is What’s Good for General Motors Good for America?” NBER Working Paper 12394. On the relationship between Schumpeterian competition and overall economic performance.
Thomas Malone, Peter Weill, Richard K. Lai, Victoria T. D’Urso, George Herman, Thomas Apel, and Stephanie Woerner, “Do Some Business Models Perform Better than Others?” MIT Sloan Research Paper No. 4615-06. Interesting attempt to classify all 10,970 publicly traded US corporations from 1998 to 2002 according to two dimensions, what asset rights are sold (Creators, Distributors, Landlords, and Brokers) and what type of assets are involved (Financial, Physical, Intangible, and Human). Finds that some types outperform other types on particular performance dimensions, though no single type dominates all other types on all dimensions.
Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000,” NBER Working Paper 12455. Asks why partnerships, rather than corporations, were the dominant business structure before the twentieth century. Uses US and French data to argue that partnerships and corporations are complementary organizational forms.
Knowledge Governance: Call for Papers
| Nicolai Foss |
My co-blogger recently blogged (here) on the newly launched International Journal of Strategic Change Management which has a heavy O&M representation (i.e., Peter, I and former O&M guest blogger Joe Mahoney) on its editorial board . As Peter mentioned, Oliver Williamson has just joined IJSCM as consulting editor.
Joe Mahoney, I and the editor of IJSCM, Patricia Ordonez de Pablos, will edit a special issue of IJSCM on “Knowledge Governance.” (For an attempt to characterize knowledge governance as an emerging field in management, see this paper; forthcoming in a slightly revised version in Organization).
Here is the Call for Papers: (more…)
Interview with James March
| Peter Klein |
The October 2006 Harvard Business Review features an interview with James March, one of the most important organizational theorists of the twentieth century. Here’s an online version (possibly behind a subscription firewall). Here’s a summary from the Jackson Library Blog (which I’m finding more and more useful all the time):
The article is called ‘Ideas as Art’ (pp. 82-89). In the introductory part, the author quotes the University of Chicago professor John Padgett who once wrote: “Jim March is to organization theory what Miles Davis is to jazz.” In the interview, March elaborates on the distinction he makes between the practical managerial needs and concerns and scholarly approach to new ideas. He values ideas which contain “some form of elegance or grace or surprise — all the things that beauty gives you” and not being relevant to the immediate needs of an organization manager in a short run. He also explains the essence of his rather famous and colorfully named theories: “garbage can theory”, “technology of foolishness”, and “hot-stove effect”. The interview reveals not only a great and original scholar but also the multifaceted personality of Jim March, a man with appreciation for literature, a poet himself and an author of several books of poetry. In his own words: “What might make a difference to us, I think, is whether in our tiny roles, in our brief time, we inhabit life gently and add more beauty than ugliness.”
Aside from being a brilliant and original thinker, March is also one of the funniest people I have ever met, a brilliant after-dinner speaker who has as many Wisconsin jokes as Garrison Keillor has Minnesota jokes.
Here’s a longer interview from 2000 by Mie Augier and Kristian Kreiner.
Netflix Tries Crowdsourcing
| Peter Klein |
Movie-rental firm Netflix appeals to the masses for a new recommendation system. Beat the system currently in place and walk away with $1 million.
Economics Nobel
| Peter Klein |
The Nobel Prize in Economics goes to macroeconomist Edmund Phelps. No award this year for organizational economics (Williamson, Hart, Holmström, Milgrom, Alchian, Demsetz) or the economics of entrepreneurship (Baumol, Kirzner).
Reaction from the econo-blogosphere is generally favorable, but subdued. “A safe pick” is the modal comment. Lynne Kiesling adds a little sizzle: “For my money, the value of his work is in dialing down the hubris of the government policymaker who thought that monetary and fiscal policy were dials that they could twiddle to control and manage the economy. Phelps’ work helped to introduce some humility to counter that control-oriented exuberance.” And here’s Tyler Cowen on What It All Means:
The big questions still matter. Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention. Phelps contributed to all of those areas. Normative questions matter. Relevance and breadth triumph over narrow technical skill.
Problems over puzzles, in other words. Three cheers for that.
Russ Roberts provies this list of dead economists who should have won the Prize: Peter Bauer, Frank Knight, Fritz Machlup, Ludwig von Mises, Oskar Morgenstern, Joan Robinson, and Julian Simon.
Great Online Langlois Slides for Org Econ Course
| Nicolai Foss |
Former O&M guest blogger Dick Langlois has posted the slides for his Economics of Organization course online here. There are 237 slides in total. Some of them are composed with considerable artistic acumen (e.g., check out slide #189). Even better than those excellent slides on the same subject I have seen from the hand of my esteemed co-blogger.
Does Transaction Cost Economics Need Opportunism?
| Peter Klein |
During a recent discussion of transaction cost economics a commentator asked: “I am always puzzled by why we need opportunism when we have individuals pursuing their self-interests as a postulate.” Opportunism, of course, is Oliver Williamson’s concept of “self-interest seeking with guile.” In a world of opportunism individuals cannot be assumed to keep their promises, to fulfil their obligations, and to respect the interests of their trading partners unless “safeguards” are in place. The task of economic organization, in Williamson’s terms, is to “organize transactions so as to economize on bounded rationality while simultaneously safeguarding them against the hazards of opportunism.”
But is opportunism just another word for self-interest? Neither Klein, Crawford, and Alchian (1978) nor Grossman and Hart (1986) nor Baker, Gibbons, and Murphy (2002) nor other contemporary treatments of the economic theory of the firm invoke the concept of opportunism. Instead, they rely simply on the economists’ usual notion of self-interested, maximizing behavior. What, then, is the point of introducing opportunism? (more…)
Varieties of Capitalist Development and Corporate Governance
| Peter Klein |
That is the theme for the 2007 Asia-Pacific Economic and Business History Conference at the University of Sydney. As noted in the call for papers: “While the historical study of market economies has been commonplace, there are many aspects worthy of further analysis including the role of savings, human capital, technology, government, and changing markets. Corporate governance has received wide attention in the wake of recent enterprise collapses, yet historians have only begun to research differences in corporate governance over time and among countries.”
The keynote speaker is Doug Irwin, author of several outstanding books on international trade theory and policy.
Is the Corporation a Creature of the State?
| Peter Klein |
Piet-Hein van Eeghen argues in the Journal of Libertarian Studies (1, 2) that the corporation’s “entity status” — from which attributes such as limited liability and perpetuity are derived — is an artificial product of state intervention, a feature of the commercial landscape that wouldn’t exist in a truly free market. I think Eeghen is wrong, partly for failing to distinguish between limited contractual liability (which is achievable through contract) and limited tort liability (which isn’t). Limited contractual liability was a standard feature of joint-stock companies long before limited liability became the default rule in English common and statutory law, as Henry Hansmann (among others) has pointed out.
Anyway, for an interesting and lively debate on the corporation’s status in the free market, see this exchange (and the links therein) between Sean Gabb and Stephan Kinsella.
New Papers: Chandler, Leijonhufvud, Phelps, Summers
| Peter Klein |
The current issue of Capitalism and Society (volume 1, number 2) features an all-star cast. Alfred D. Chandler, Jr., leads off with his newest article, “How High Technology Industries Transformed Work and Life Worldwide from the 1880s to the 1990s” (abstract below). Chandler recently celebrated his 88th birthday, so new Chandler paper — while perhaps not quite as significant as a new Coase paper — is a major event.
In the same issue is a piece by Foss hero Axel Leijonhufvud, “Understanding the Great Changes: A Comment,” which is a comment on Edmund Phelps’s “Understanding the Great Changes in the World: Gaining Ground and Losing Ground since World War II.” The journal also contains a comment on Chandler by Richard Sylla, a paper by Richard Zeckhauser on “Investing in the Unknown and Unknowable,” and a comment on Zeckhauser by Lawrence Summers. (more…)
26 September 2006 at 10:37 am Peter G. Klein Leave a comment
Call for Papers — Special Issue of Human Resource Management
| Nicolai Foss |
With my CBS colleague Dr. Dana Minbaeva and Professor Scott Snell from the School of Industrial and Labor Relations, Cornell University, I will be editing a special issue of the HRM field’s flagship journal, Human Resource Management (!), published by the UMichigan Business School. Here is the Call for Papers.
The subject of this special issue is “Human Resource Management and Knowledge Processes.” The aim is to build theory and conduct empirical work relating to how human resource management practices influence the sharing, building and integration of knowledge in firms. How “people” (and the organizational framework they interact in, including HRM practices) may contribute to the creation of competitive advantage is an increasingly important issue in strategic management. It is also a subject that transaction cost scholars should potentially be able to contribute significantly to. We hope to receive contributions from not only “traditional” HRM scholars but also from strategic management and other scholars with an interest in these issues.
To stimulate interest in the special issue, my Center organized a two-day workshop last week. The program and most of the papers are here.
Returns to University Biotech-Transfer Programs
| Peter Klein |
The Milken Institute has released a new study, “Mind to Market: A Global Analysis of University Biotechnology Transfer and Commercialization.” The study ranks the biotech-transfer programs of North American, European, and Asian universities by a variety of critera. Some general findings:
- Among U.S., Canadian and European universities, the United States leads in invention disclosures, patents filed and granted, licenses executed and licensing income. However, European universities surpass their U.S. counterparts in startups established.
- Research activity has a high rate of return. Each 10-point increase in our research papers score contributes an additional $1.7 million in annual licensing income.
- Investments into offices of technology transfer (OTT) also offer high returns. For every $1 invested in OTT staff, the university receives a little more than $6 of licensing income.
I’m not sure what explains the US-European differences. Incidentally, there are healthy and robust literatures on technology transfer from both transaction-cost and resource-based perspectives. I recommend in particular the work of Rachelle Sampson, Janet Bercovitz, and Joanne Oxley (all of whom were influenced by David Teece’s pioneering papers in this area).
Has Marketing Advanced Beyond the 17th Century?
| Peter Klein |
The Spanish Jesuit Baltasar Gracián y Morales (1601-58) could teach an MBA course in marketing:
Know how to sell your wares, Intrinsic quality isn’t enough. Not everyone bites at substance or looks for inner value. People like to follow the crowd; they go someplace because they see other people do so. It takes much skill to explain something’s value. You can use praise, for praise arouses desire. At other times you can give things a good name (but be sure to flee from affectation). Another trick is to offer something only to those in the know, for everyone believes himself an expert, and the person who isn’t will want to be one. Never praise things for being easy or common: you’ll make them seem vulgar and facile. Everybody goes for something unique. Uniqueness appeals both to the taste and to the intellect.
OK, a bit of a cheap shot against marketing theory, I admit. Then again, if it weren’t for the marketing department — with its “Five Ps” approach to analysis — who would the other business-school departments have to look down on?
Seriously, some of the best work in transaction cost economics has been done by marketing scholars such as Erin Anderson and George John. Erin’s papers “The Salesperson as Outside Agent or Employee: A Transaction-Cost Analysis” (Marketing Science, 1985) and “Integration of the Sales Force: An Empirical Examination” (with David Schmittlein, RAND Journal, 1984) are classics. (HT to Jordan Ballor for the Gracián quote.)
Simon on Hierarchy
| Nicolai Foss |
I have always been surprised and somewhat disturbed by the tendency in Herbert A Simon’s work to elevate hierarchy and organization over markets. Of course, Simon was a liberal democrat — but he was also a great scientist.
The most visible expression of this tendency is probably Simon’s heavily cited 1991 paper in the Journal of Economic Perspectives, “Organizations and Markets.” Another manifestation of the tendency is Simon’s even more (in fact, much more) famous 1962 paper, “The Architecture of Complexity,” in which hierarchical structure is seen as the master-principle for understanding “the architecture of complexity.”
In an interesting paper, “Hierarchy and History in Simon’s ‘Architecture of Complexity’,” UCLA professor Philip Agre argues that Simon’s paper arose as a critique of general systems theory and its attempt to elevate self-organization over any hierarchical principles. He furthermore sees Simon’s argument as very strongly reflecting the general tenor of the times, what may be called McNamaraism (tellingly, Chandler’s Strategy and Structure was also published in 1962); thus, “… the patterns that Simon discerned became visible within the larger context of the time.”
Does Bounded Rationality Justify Paternalism?
| Peter Klein |
Herbert Simon’s notion of “bounded rationality” has long been an important concept in organization theory (March and Simon, 1958; Cyert and March, 1963). More recently, bounded rationality is invoked by Oliver Williamson to explain why real-world contracts are incomplete, and why specialized “governance structures” are needed to handle the coordination and incentive problems produced by unanticipated change. But does bounded rationality have political implications?
John Cassidy’s recent New Yorker article on “neuroeconomics” suggests that because of bounded rationality, and cognitive biases more generally, individuals cannot be trusted to act in their own best interests, and that paternalistic measures such as forced savings and mandatory “cooling off” periods before making large purchases protect people from making foolish and irrational decisions.
Ed Glaeser doesn’t buy it: “[F]laws in human cognition should make us more, not less, wary about trusting government decisionmaking. After all, if humans make mistakes in market transactions, then they will make at least as many mistakes in electing representatives, and those representatives will likely make mistakes when policymaking.” He’s right, of course — a straightforward application of comparative institutional analysis. (Via Russ Roberts)
NB: For some implications of bounded rationality for the modern theory of the firm see this article.
Update: Listen to Glaeser discuss “soft paternalism” here.
Is Selective Intervention Really “Impossible”?
| Nicolai Foss |
One of the most difficult notions in the theory of the firm is surely that of “selective intervention,” and particularly the associated notion of the “impossibility of selective intervention.” These terms were coined by Oliver Williamson to describe attenuation of incentives that accompanies integration (see this book, chapter 6). What Williamson calls “the fiction of selective intervention” refers to the thought experiment of one big firm replicating small firms for all activities “save those for which the expected net gains from intervention could be projected.” If this were possible, all economic activity, Williamson argues, would be organized in a single firm.
What then are the reasons why “selective intervention” thus defined is a “fiction”? (more…)
The Make-and-Buy Decision
| Peter Klein |
Two new papers address bi-sourcing: Why do some firms simultaneously produce their own inputs and purchase the same inputs from external suppliers? Julan Du, Yi Lu, and Zhigang Tao’s “Why Do Firms Conduct Bi-Sourcing?” (Economics Letters, August 2006) uses bargaining theory to show how simultaneously making and buying can mitigate the holdup problem associated with exclusive reliance on an external supplier. Daifeng He and Jackson Nickerson’s “Why Do Firms Make and Buy? Efficiency, Appropriability, and Competition in the Trucking Industry” (Strategic Organization, February 2006) tells a more nuanced story in which “the interaction of efficiency, appropriability and competition concerns” explains simultaneous bi-sourcing. He and Nickerson provide empirical analysis inconsisent with market-power, capacity-constraint, agency-theoretic, and property-rights explanations for the results.
Both papers contribute to a growing understanding that vertical relationships are frequently more subtle and complex than what can be captured by simple “make-or-buy” models. (Even our canonical examples deserve further scrutiny.)
Empirical Work on Modularity
| Nicolai Foss |
Modularity has now been on the agenda of strategic management, organizational theory, and technology studies scholars for more than a decade. One of the first (perhaps the first) discussions of modularity in strategic management is the 1996 Strategic Management Journal paper by Ron Sanchez and former O&M guest blogger Joe Mahoney (“Modularity, Flexibility, and Knowledge Management in Product Organization Design”). This paper was largely theoretical.
However, four years earlier another former O&M guest blogger, Dick Langlois, published a paper in Research Policy (“Networks and Innovation in a Modular System,” with Paul Robertson) that remains among the most downloaded RP papers ever. The empirical basis for this paper was case studies of the micro computer and stereo component industries.
Since these two pioneer contributions, much work has been done on modularity, and much of it with an empirical orientation. However, the kind of empirical approach that is dominant in management — quantitative, cross-sectional work — has been very slow in being applied to issues of modularity. (more…)
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