A Note to My Undergraduate Students
| Peter Klein |
From a former student:
I was in your Managerial Economics back in Spring 2005. I guess I actually learned something and remembered it. I am going back to school for my MBA and I was able to test out of my basic economics class using the knowledge I gained in your class. Since I actually paid attention to you talking about game theory, I was able to save myself from taking an extra graduate class.
Pay attention now, save $$$ later!
Robust Competitive Advantage
| Peter Klein |
Rich Makadok, during an AoM session on “Real Options and Competitive Advantage,” made an interesting point about the concept of sustained competitive advantage (SCA). The modifier sustained is typically taken to mean “persisting over a long period of time.” As Rich noted, however, the initial formulation of SCA in Barney (1991) doesn’t include a temporal dimension at all. It refers, instead, to imitability: “a firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy” (Barney, 1991, p. 102). Sustained competitive advantage, in other words, refers to value-creating activities that cannot be imitated. The key is entry barriers, not time.
Rich suggested replacing SCA with some other term, like “hard-to-duplicate competitive advantage,” for greater clarity. Here’s my suggestion: robust competitive advantage. What do you think?
CSI: Reform
| Dick Langlois |
My old friend Roger Koppl has an interesting article in Slate on reforming the system of forensic analysis and testimony. He and his coauthor argue for such measures a forensic counsel for the indigent; greater independence of experts from the prosecutorial team; more competition among labs; more statistical analysis to uncover anomalous findings; and the masking of evidence from analysts to reduce cognitive bias.
Roger has started something called the Institute for Forensic Science Administration. Check out his website for links to papers and others materials. (The website also declares that Roger’s Erdös number is 6. As Roger and I have written a couple of papers together, my Erdös number must be no greater than 7.)
Megawatt Ghemawat
| Peter Klein |
Five things you didn’t know about Pankaj Ghemawat:
1. He entered Harvard College at age 16 and graduated in three years.
2. He entered Harvard Business School’s PhD program at age 19 and graduated in three years.
3. After a year at McKinsey he was hired by Michael Porter into the HBS strategy group and later became, at age 31, the youngest full professor in HBS history.
4. He has authored or co-authored more than 50 HBS cases.
5. He looked about the same at age 19 as he looks today. (I have seen the photographic evidence).
This was discussed yesterday at an AoM session honoring Pankaj with the BPS Division 2008 Irwin Outstanding Educator Award. Jan Rifkin and Anita McGahan hosted a semi-roast in his honor, at which they revealed that Pankaj’s college nickname was “Megawatt Ghemawat” (the authenticity of this story could not be verified, however). Pankaj explained that he started writing his own cases out of fear, lacking the confidence to teach other people’s cases to demanding Harvard MBAs. Eventually he decided that cases were interesting in themselves and led to new research questions and new answers to old questions.
His website is ghemawat.org. He now lives in Spain where he holds the Anselmo Rubiralta Chair of Strategy and Globalization at the IESE Business School, University of Navarra. He blogs at the HBS Discussion Leader site. His Foreign Policy article “Why the World Isn’t Flat” gained a lot of attention when it appeared last year.
Rival Teams and Non-Rival Knowledge
| Dick Langlois |
A recent issue of the Journal of Quantitative Analysis in Sports, an all-electronic Bepress journal, carried a piece provocatively titled “Quantifying NFL Coaching: A Proof of New Growth Theory” by Kevin P. Braig. The paper is a rambling mix of sports anecdotes and goofy math. My favorite of the latter is:
| lim f(x) = 1 first down
x→10 |
But the piece is amusing reading and does make some interesting points.
The title is more than a bit fatuous, of course. What the author has in mind is that one can increase output not only by increasing the inputs but by learning to reorganize the way those inputs are combined. This was the growth theory of Smith and Marshall, of Rosenberg and Mokyr. The only contribution of the New Growth Theory has been to cram a diminished and mechanized version of these ideas into the formalism of the production function — and, of course, to receive credit in the popular mind for the very notion that growth is about the search for new “recipes.” Braig is on firmer ground when he associates himself with Carliss Baldwin‘s notion of designs.
What has this got to do with sports? Consider baseball, which is probably the most modular of major (American) sports. In baseball, the only real way to be more successful is to improve the quality of the players, what Braig likes to call their human capital. This is because the way players interact is relatively hard-wired and invariant among teams. Small adjustments are possible — shifts, bunting strategy — but no one ever redefines how to turn a double play. The so-called moneyball approach has been to find better statistical measures of the effectiveness of player human capital — not to reorganize how the players interact. (In testimony to the almost mystical numerology of this article, Braig finds wonder in the fact that average on-base percentage has remained nearly constant over the live-ball era at about 0.331, exactly the ratio one gets by recognizing that “the hitters’ needs (4 bases) exceed their resources (2 outs) by a 2-to-1 margin.” But this presumes that human capital in batting should somehow exactly keep pace with human capital in pitching — even though there is arguably more room for innovation in pitching. I think a closer examination would find that baseball rulemakers have tweaked subtle rules like the size of the strike zone or the height of the mound to keep the ratio constant.) (more…)
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…)
O&M at the AoM
| Peter Klein |
Ah, Los Angeles . . . land of “tattoos, breast implants, bleached hair, and vacuous egos,” as Nicolai recently wrote on Facebook. And then there are the people not in town for the Academy of Managment meeting!
As readers may know, the AoM is meeting this week in Anaheim. The O&M crowd is well represented, as usual. You can search the online program for your favorite person, subject, or interest area. Below are some of the sessions involving O&Mers, past and present: (more…)
Laptop Bleg
| Peter Klein |
I’m in the market for a new laptop. My current model is a Sony Vaio TR3 and I want to stay in the ultraportable category (under 4 lbs., 12″ or smaller display). For now, I’m sticking with the WinTel platform (sorry, Teppo!).
Sony’s current offering in this category, the TZ, has the right combination of size, weight, and style, but it’s not quite as powerful (in RAM or clock speed) as some alternatives, like the Asus U2 and a few models by HP and Toshiba. I’m not particularly looking for a tablet, though I wouldn’t rule it out. The Lenovo X series is nice, but lacks the Sony’s built-in optical drive. Any suggestions?
Cars for Comrades
| Peter Klein |
A while back we posted a video from an East German Trabant factory that got a lot of hits. A video is worth more than a thousand words on the political economy of socialism, right?
Indeed, the automobile played an important role in the eventual collapse of the communist system, according to Lewis Siegelbaum’s Cars for Comrades: The Life of the Soviet Automobile (Cornell University Press, 2008). As Perry Patterson notes in his review for EH.Net:
As incomes and economic complexity grew over time, the Soviet state found it necessary to produce more and more vehicles of all sorts, and private cars in particular. But policymakers also discovered that the existence of cars generated additional demands for consumer services, and discontent when the economy could not provide them. As Siegelbaum puts the matter, “cars, cars, and more cars seem to have played a particularly large and invidious role in popular disillusionment with Soviet socialism.” Worse perhaps for the Soviet state, private automobiles and the culture that grew up around them also opened up numerous ways for individuals to evade and undermine the official command economy. For example, cars facilitated private conversions, private dealmaking, the generation of “unearned” income from taxi rides, and the unplanned movement of (sometimes stolen) goods.
The quality of Soviet cars was, well, about what you’d expect. The book “provides extensive examples of the mental knots in which the Communist leaders tied themselves, wanting on the one hand to boast about their superiority over the West on all fronts, and being unable and unwilling to match it when it came to cars,” notes the Economist.
My first “serious” research paper, written in Glen Elder’s undergraduate sociology class, dealt with the social and cultural impact of “automobility” in the US, so this subject is near and dear to my heart. (Fortunately, the paper is buried deep in a secret vault and will never see the light of day.)
IBES-AAEA
| Peter Klein |
As the next phase of my Plan for World Domination I’ve taken office as Chair-Elect of the Institutional and Behavioral Economics Section (IBES) of the Agricultural and Applied Economics Association. One of my duties is to organize the section’s sessions for next year’s AAEA annual meeting, 26-28 July 2009 in Milwaukee, Wisconsin. I welcome participation from the O&M crowd so please email me your suggestions for session topics, papers, special formats, themes, or other ideas. Milwaukee is a lovely and interesting town (just ask Alice), so make plans to join us!
The Price of Exclusivity
| Peter Klein |
Whenever I fly first or business class — not nearly often enough — it’s usually an upgrade, and I feel sorry for the rich guys around me who shelled out serious coin partly to avoid sitting next to schmucks like me. Perhaps you’ve been to an expensive restaurant where the food isn’t that good, but the clientele is made up of people who can afford that kind of place and you enjoy the exclusivity. And you’ve heard stories about first-class train compartments that are identical to their second-class counterparts, only more expensive, catering to people who like to be surrounded by other rich people.
Here’s a cool modern example of this phenomenon: a $999 iPhone application that does nothing but announce to the world that you can afford a $999 iPhone application (via Josh). Talk about a separating equilibrium!
Homogeneity and Cooperation
| Peter Klein |
Why are Scandinavians so cooperative? Nicolai and Lasse might suggest it’s their superior moral character. La Porta et al. (1997), Putnam et al. (1992), and others point to Protestantism: hierarchical religions like Catholicism and Islam, it is argued, tend to discourage trust and retard the development of social capital. The Protestants, who already have Max Weber in their corner, seem to be piling it on.
Not so fast, says Kevin O’Rourke in a recent paper, “Culture, Conflict, and Cooperation: Irish Dairying Before the Great War” (Economic Journal, October 2007). O’Rourke compares the Danish and Irish dairy industries before 1914 and argues that cultural and ethnic homogeneity, not religion, explains the success of Danish cooperatives. Unlike recent large-sample econometric work on trust, the paper uses deeper, more robust indicators of cooperation. Key findings:
At first sight, the contrast between Protestant Ulster and the Catholic South (as well as between Denmark and Ireland as a whole) seems a striking confirmation of the LLSV hypothesis that culture matters for the ability to cooperate, and that hierarchical religions such as Catholicism undermine both trust and cooperation. However, on closer examination it appears that politics, not culture, was responsible for the lower Irish propensity to cooperate. Suspicion between Catholics and Protestants, and tenants and landlords, spilled over into Nationalist suspicion of the cooperative movement and hindered its spread, despite the efforts of the [Irish Agricultural Organisation Society] to remain apolitical. To this extent, the results are more consistent with the stress on [ethnolinguistic fractionalisation] in Alesina and La Ferrara (2000) than with the cultural perspective of LLSV, Knack and Keefer (1997) and Zak and Knack (2001).
Denmark benefited from several relevant advantages that Ireland did not enjoy during this period. In particular, it was an extremely homogeneous country, ethnically, religiously and linguistically. There was no conflict over who should own the land, since land reform in Denmark had been underway since the late eighteenth century. . . . Nor was there any ethnic conflict, or disputes over where national boundaries should lie (all such controversies became redundant following the loss of Schleswig-Holstein in 1864). The results suggest that this homogeneity of Danish society is what explains the success of cooperation there.
Rothbard on Big Business
| Peter Klein |
We at O&M are sometimes described as “pro-business.” But this is not correct. We strongly support the economic function of commerce, and we think private ownership of capital, the profit-seeking activities of entrepreneurs and managers, and unfettered markets for consumer goods, factors of production, and financial assets are essential to a strong economy. But that doesn’t mean we admire the behavior and character of every capitalist, entrepreneur, and manager. Indeed, plenty are scoundrels. Empirically, the businesspeople who rise to the top in today’s mixed economy, with its peculiar blend of free markets and state controls, are likely to be those who excel in political entrepreneurship, in “working the system” to their advantage.
Murray Rothbard summarizes this view in a private letter written in 1966:
For some time I have come to the conclusion that the grave deficiency in the current output and thinking of our libertarians and “classical liberals” is an enormous blind spot when it comes to big business. There is a tendency to worship Big Business per se. . . and a corollary tendency to fail to realize that while big business would indeed merit praise if they won that bigness on the purely free market, that in the contemporary world of total neo-mercantilism and what is essentially a neo-fascist “corporate state,” bigness is a priori highly suspect, because Big Business most likely got that way through an intricate and decisive network of subsidies, privileges, and direct and indirect grants of monopoly protection.
Rothbard refers his correspondent to Gabriel Kolko, William Appleman Williams, James Weinstein, C. Wright Mills, and other New Left critics of the corporate state for details. For more on Rothbard’s own views see “Left and Right: The Prospects for Liberty” (1965) and “Confessions of a Right-Wing Liberal” (1968), as well as related essays by Joseph Stromberg and Roy Childs.
Thanks to Randy, and Get Well Soon!
| Peter Klein |
Our thanks to Randy Westgren for some terrific guest blogging this past spring and summer. Randy had a little time left on his guest-blogger clock, and was planning to share some additional thoughts in the coming weeks, but he was involved in a freak carpentry accident this weekend, losing a thumb and forefinger to a circular saw. Fortunately his digits have been reattached but — the academic’s worst nightmare — he can’t write or type, for the short term at least. He’s therefore requested, and been granted, a graceful early retirement.
We’ve greatly enjoyed Randy’s insights and look forward to his continued participation in the comment threads when fully healed. Thanks, Randy, and best wishes for a speedy recovery!
Substitutes in Creating Complementarities
| Lasse Lien |
I have just been reading the Porter and Siggelkow paper in the most recent issue of Academy of Mgmt. Perspectives. The paper summarizes the status of the “complementarity/NK-modelling/activity systems” perspective in competitive strategy. I am anything but an expert in this theory, but I thought I would share one reflection, mainly because it allows me to use the fancy title above.
As many O&M readers will know, a main take-away from this perspective is that an activity system with strong complementarities may enjoy protection against imitation. Some choices in an activity system will presumably be unobservable for outsiders, and getting everything right at once is less likely the more linkages there are between activities. Furthermore, the penalty for failing to get everything right increases with the strength of the complementarities.
My problem is that more and stronger complementarities should presumably speed up learning, because there are more and stronger feedback mechanisms putting pressure to move each activity in the beneficial direction. An increasing number of complementary activities presumably imply that each individual activity is encouraged to move in the “right” direction by many other activities, and stronger complementarities imply stronger pressure from each of them.
So while many and strong complementarities reduce the likelihood of perfect imitation and increase the penalty for imperfection, the rapid learning produced by an improved feedback mechanism may conceivably make the road to perfection rather short. Couldn’t these effects conceivably cancel each other out, or the latter effect even dominate the former? Or in other words — forgive the pun — aren’t these two mechanisms (precise imitation and rapid learning) substitutes in the pursuit of complementarity?
New Center for Economic Documents Digitization
| Peter Klein |
Below is an announcement from the St. Louis Fed about its new digital document library, the Center for Economic Documents Digitization (CEDD). A nice complement to the CORI K-Base, Connie Helfat and Steve Klepper’s FIVE project, and similar resources. Three cheers for the Digital Age!
The Federal Reserve Bank of St. Louis recently introduced the Center for Economic Documents Digitization (CEDD), with a mission to preserve the nation’s economic history through digitization. To date, CEDD has digitized more than 300,000 pages of published material and archival collections from the Federal Reserve System and selected partners — currently, the Brookings Institution, the Government Printing Office and the Missouri Historical Society.
This storehouse of documents includes U.S. government publications, Federal Reserve publications, photographs, manuscripts, and multimedia formats, all available on the St. Louis Fed’s FRASER (Federal Reserve Archival System for Economic Research) website: http://fraser.stlouisfed.org. (more…)
Top Management Scholars, Journals, and Universities
| Peter Klein |
Rankings, rankings, more rankings. . . . If you like to bibliometric analysis of individual researchers, journals, and universities you’ll find more than you can handle in “Scholarly Influence in the Field of Management: A Bibliometric Analysis of the Determinants of University and Author Impact in the Management Literature in the Past Quarter Century” by Philip Podsakoff, Scott MacKenzie, Nathan Podsakoff, and Daniel Bachrach (Journal of Management 34, no. 4 (2008): 641-720). Over 25,000 individual scholars are reviewed, their institutions evaluated, journal impact factors computed, and numbers crunched hither and yon. Some qualitative conclusions:
The findings showed that (a) a relatively small proportion of universities and scholars accounted for the majority of the citations in the field; (b) total publications accounted for the majority of the variance in university citations; (c) university size, the number of PhDs awarded, research expenditures, and endowment assets had the biggest impact on university publications; and (d) total publications, years in the field, graduate school reputation, and editorial board memberships had the biggest effect on a scholar’s citations.
Call For an Annual Adam Smith Festival
| Peter Klein |
In 1990 I was privileged to attend a conference on “Adam Smith and his Legacy” commemorating the 200th anniversary of Smith’s death. The speakers included eight of the twenty Economics Nobel Laureates then living along with Smith scholars such as Andrew Skinner, general editor of the 1976 Glasgow edition of Smith’s Works and Correspondence. The papers were published in this book; you can read my conference report here. Listening to and visiting with the Laureates was fun, though I didn’t learn much about Adam Smith at the conference (most economists — Nobel Laureates included — know and care little about the history of economic thought). There was also an event at Smith’s grave in Canongate Kirk. (Somewhere I have a picture of myself at the site of Smith’s birthplace in Kirkcaldy; it’s basically me standing next to this).
From Gavin Kennedy I learn that Eamonn Butler has called for an annual Adam Smith Festival, to be held each summer in Edinburgh. The city already holds an internationally recognized and highly successful arts festival so it knows how to do this sort of thing. Butler proposes several activities that could be part of a Smith festival then adds, wryly:
[O]ther people will have their own ideas. After all, it would not do for an Adam Smith Festival to be too rigidly planned. How much more appropriate it would be if different people’s initiatives came together — as if led, indeed, by an invisible hand.
Research and Teaching: Friends or Foes?
| Peter Klein |
Administrators at every research university know the mantra, repeated endlessly to parents, funders, and overseers: cutting-edge research and top-notch (undergraduate) teaching go hand-in-hand. But there is surprisingly little work, theoretical or empirical, investigating the relationship. Here is an edited transcript of a discussion between economists Jim Gwartney (Florida State), Dirk Mateer (Penn State), Rich Vedder (Ohio U), and Russ Sobel (West Virginia) about the relationship between research and teaching. They were asked (1) is research needed for good teaching, and (2) can research activity harm teaching?
Higher education has two key missions: transferring existing knowledge to students, and discovering new knowledge. While the two functions are not mutually exclusive, there is a growing awareness that trade-offs exist between them. Does an emphasis on research detract from undergraduate education? Are too much time and money spent on research rather than teaching? Is career advancement (such as tenure) too dependent on research, a la “publish or perish?”
We asked four noted university-based economists to discuss those issues. . . .
Hat tip to Vedder, whose higher ed blog is on my regular reading list.
Neuroeconomics and the Firm
| Peter Klein |
I’m not a big fan of neuroeconomics — Gul and Pesendorfer’s critique seems about right to me — but if you like that field you may be interested in this call for book chapters:
Neuroeconomics and the Firm
Editors:
Mellani Day
Angela Stanton
Isabell WelpeHow can we take advantage of neuroeconomics to inform organizations? Neuroscience can provide us with ways to understand causal relationships; it enables us to identify the biological drivers of beliefs, opportunity perception, opportunity analysis, risk-aversion or risk-seeking, motivation, incentives and reward mechanisms; in other words, we can map the pre-decisional dynamics of the human brain. Neuroeconomics has yielded important new insights and may provide powerful new ways of looking at the firm. (more…)
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