Showing papers in "Journal of Economic Behavior and Organization in 2005"

Four formal(izable) theories of the firm

Abstract: In this essay, I define and compare elemental versions of four theories of the firm. These elemental theories are distilled from important contributions by Hart, Holmstrom, Klein, Williamson, and others. Although these contributions have been widely cited and much discussed, I have found it difficult to understand the commonalities, distinctions, and potential combinations of these seemingly familiar contributions. In this essay, therefore, I attempt to clarify these issues in three steps: I begin with informal summaries of the theories, then turn to simple but formal statements of each elemental theory, and finally nest the four elemental theories in an integrative framework.

How Much Do We Care About Absolute Versus Relative Income and Consumption

Abstract: We find, using survey-experimental methods, that most individuals are concerned with both relative income and relative consumption of particular goods. The degree of concern varies in the expected direction depending on the properties of the good. However, contrary to what has been suggested in the previous literature, we find that relative consumption is also important for vacation and insurance, which are typically seen as non-positional goods. Further, absolute consumption is also found to be important for cars and housing, which are widely regarded as highly positional. © 2004 Published by Elsevier B.V.

Entrepreneurship and the theory of the firm

Abstract: A missing component of several leading theories of the firm, entrepreneurship is key to the growth and survival of firms in a volatile environment, because entrepreneurial judgement is necessary for success in making complex decisions under uncertainty The addition of entrepreneurship is not a minor refinement of the theory of the firm, but represents a radical change The paper summarises the principle changes It suggests that the introduction of entrepreneurship can facilitate the development of an integrated synthetic theory of the firm

The Impact of Endowment Heterogeneity and Origin on Public Good Contributions: Evidence From the Lab

Abstract: Recent experimental research suggests that unpredicted behavior in the lab may result from endowment distribution and origin. We design an experiment to explore the impact of heterogeneous endowments and earned endowments on observed contributions in a linear public good game. Our results suggest that contribution levels were significantly lower when groups had heterogeneous rather than homogeneous endowments, with this finding being independent of the origin of endowment. We did not find, however, that the lack of free-riding in public goods experiments was an artifact of endowment origin. Group members contributed about the same to the public good whether their endowments were earned or not.

Entrepreneurship and network externalities

Abstract: Studies on agglomeration show that economic characteristics explain only a portion of variance in entrepreneurship rates across regions. To complement these studies, I argue that entrepreneurship tends to concentrate geographically, in part, because of the social environment. I suggest that, when making decisions, individuals follow social cues and are influenced by what others have chosen, especially when facing ambiguous situations. Such influence may be described as a non-pecuniary network externality. Using a non-linear path-dependent stochastic process, I build a model of entrepreneurial dynamics showing why communities with initially similar economic characteristics may end up with different levels of entrepreneurial activity.

Managing diversity by creating team identity

Abstract: This paper explores the extent to which team identity can deter shirking and free-riding behavior in a team production setting. Team identity is manufactured and identification is enhanced by a variety of means. Created team identity is chosen over existing team identity to ensure that all subjects recognize their own (and others’) team identity. Subjects then participate in a repeated-play public goods game, framed as a team production problem. Analysis of the experiments compares aggregate team decisions based on the strength of team identity.

Empirical Tests Of Optimal Cognitive Distance

Abstract: This article provides empirical tests of the hypothesis of ‘optimal cognitive distance’, proposed by Nooteboom [Nooteboom, B., 1998. Cost, quality and learning based governance of buyer–supplier relations. In: Colombo, M.G. (Ed.), The Changing Boundaries of the Firm. Routledge, London, pp. 187–208; Nooteboom, B., 2000. Learning and Innovation in Organizations and Economies. Oxford University Press, Oxford], in two distinct empirical settings. Variety of cognition, needed for learning, has two dimensions: the number of agents with different cognition, and differences in cognition between them (cognitive distance). The hypothesis is that in interfirm relationships optimal learning entails a trade-off between the advantage of increased cognitive distance for a higher novelty value of a partner's knowledge, and the disadvantage of less mutual understanding. If the value of learning is the mathematical product of novelty value and understandability, it has an inverse U-shaped relation with cognitive distance, with an optimum level that yields maximal value of learning. With auxiliary hypotheses, the hypothesis is tested on interfirm agreements between pharmaceutical companies and biotech companies, as well as on interfirm agreements in ICT industries.

A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility

Abstract: In this paper, we discuss a scaling approach to business fluctuations. Our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to (re)discover a set of stylized facts which have to be satisfactorily accounted for in their models. Standard macroeconomics, based on a reductionist approach centered on the representative agent, is definitely badly equipped for this task. On the contrary, we show that a simple financial fragility agent-based model, based on complex interactions of heterogeneous agents, is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision.

Aging and decision making: a comparison between neurologically healthy elderly and young individuals

Abstract: We report the results of experiments on economic decisions with two populations, one of healthy elderly individuals (average age 82) and one of younger students (average age 20). We examine confidence, decisions under uncertainty, differences between willingness to pay and willingness to accept and the theory of mind (strategic thinking). Our findings indicate that the older adults’ decision behavior is similar to that of young adults, contrary to the notion that economic decision making is impaired with age. Moreover, some of the demonstrated decision behaviors suggest that the elderly individuals are less biased than the younger individuals.

Does the natural selection mechanism still work in severe recessions?: Examination of the Japanese economy in the 1990s

Abstract: This paper investigates whether the natural selection mechanism (NSM) of economic Darwinism works in severe recessions. Based on micro data, we constructed a comprehensive firm-level panel dataset for Japan from 1994 to 1998 to analyze a firm's entry, survival, and exit and its relationship with TFP. Empirical results show that efficient firms in terms of TFP exited while inefficient ones survived in the banking-crisis period of 1996–1997. Further, this phenomenon is observed mainly for new entrants and contributes substantially to a fall in macro TFP after 1996. These facts strongly suggest a malfunctioning of NSM in severe recessions.

Avoiding the rating bounce: why rating agencies are slow to react to new information

Abstract: Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses, avoiding rating reversals can be more harmful than monitoring credit quality only twice per year.

Division of labor, organizational coordination and market mechanisms in collective problem-solving

Abstract: This paper builds upon a view of economic organizations as problem-solving arrangements and presents a simple model of adaptive problem-solving driven by trial-and-error learning and collective selection. Institutional structures and, in particular, their degree of decentralization, determine which solutions are tried out and undergo selection. It is shown that if the design problem at hand is “complex” (in terms of interdependencies between the elements of the system), then a decentralized institutional structure is unlikely ever to generate optimal solutions and, therefore, no selection process can ever select them. We also show that nearly-decomposable structures have, in general, a selective advantage in terms of speed in reaching (good) locally optimal solutions.

Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness: An Empirical Investigation

Abstract: It has been recently noted that the trade-off between risk and incentives that agency theory predicts turns out to be rather weak. We examine predictions from agency theory on the basis of data from a data set encompassing close to 1000 Danish firms. We find that the relation between performance pay and environmental uncertainty is indeed weak. We examine the relation between delegation and environmental uncertainty, and find that this relation is confirmed. We also examine the multi-tasking agency hypothesis that as risk increases, the flexibility of agents is restricted. We fail to find support for this hypothesis.

Loss aversion without the endowment effect, and other explanations for the WTA–WTP disparity

Abstract: To learn why WTA regularly exceeds WTP in economic experiments involving inexpensive market goods with ample substitutes, the verbal protocol technique was used in a real cash experiment employing a random price auction. Results suggest that the primary reason for the disparity was subjects’ reluctance to suffer a net loss from any transaction, whether purchase or sale, and tendency to consider sale much below assumed market price as a loss. This interpretation indicates a kind of loss aversion, but not the kind envisioned in the endowment effect, which maintains that selling creates a loss and buying creates a gain.

How trade saved humanity from biological exclusion: An economic theory of Neanderthal extinction

Abstract: One of the great puzzles in science concerns the rise of early modern humans and the fall of Neanderthals. A number of theories exist, and many support the biological principle of competitive exclusion. But the evidence for such mechanistic theories in which biology is destiny is limited. In response, this paper develops a behavioral model of Neanderthal extinction. We show how the endogenous division of labor and subsequent trading among early modern humans could have helped them to overcome potential biological deficiencies. We discuss the relation between economics and natural selection, and show how trade may partially offset natural selection.

A puzzle for adaptive theory

Abstract: Over the life cycle aspirations for material goods grow commensurately with consumer wealth. But aspirations for marriage and the number and “quality” of children do not change much. The puzzle is why there is this difference between life domains in the extent to which aspirations adapt to actual circumstances. The findings come from a cohort analysis of 1978 and 1994 survey responses on the good life.

Fairness in bargaining

Abstract: We consider new three player games to test existing models of fairness. Our games consist of a proposer who offers an allocation of $10 between two players, either himself and the responder or the responder and a third party. In each case, the responder either accepts or rejects this allocation. In case of a rejection, the player who was not part of the initial division (the third party and the proposer, respectively) receives a rejection payoff (of $0, $5 or $10, depending on the game). Our results cast some doubt on existing fairness theories.

The logic of financial westernization in the Middle East

Abstract: In the 19th century, financial reforms in the Middle East included the legalization of interest, the establishment of secular courts, and banking regulations, all based on Western models. Exploring why foreign institutions were transplanted, this article shows that Islamic law blocked evolutionary paths that might have generated financial modernization through indigenous means. Sources of rigidity included (1) the Islamic law of commercial partnerships, which limited enterprise continuity, (2) the Islamic inheritance system, which restrained capital accumulation, (3) the waqf system, which inhibited resource pooling, and (4) Islam's traditional aversion to the concept of legal personhood, which hampered private organizations.

Self-governance, polycentrism, and federalism: recurring themes in Vincent Ostrom's scholarly oeuvre

Abstract: This paper addresses Vincent Ostrom's treatment of self-governance, polycentrism, and federalism through which he has generated a coherent vision of political economy. After examining some ontological and epistemological presuppositions that are central to his work, the rest of the paper explores four topical areas: (1) his examination of knowledge, belief, and the requisites for good civic practice; (2) his conceptualization of a polycentric public economy; (3) his articulation of the problem of public administration through his conceptualization of a municipal services industry; (4) his treatment of federalism as a compound republic rather than simply a form of administrative decentralization.

Fairness as a source of hysteresis in employment and relative wages

Abstract: This paper analyses the influence of norms of fairness on wage formation. Fairness is defined by ‘real-wage’ and ‘relative-wage’ norms that relate wage offers to workers’ own current wage and to the wages of other groups of workers, and, to avoid shirking, firms pay fair wages. The wage norms change endogenously, and the result is hysteresis with respect to both employment and the distribution of wages. An extension of the model that allows ‘induced overeducation’ may help explain trends in wage inequality.

Methodological individualism, spontaneous order and the research program of the Workshop in Political Theory and Policy Analysis

Abstract: This paper is an exercise in the archeology of knowledge that seeks to understand the intellectual precursors to the Workshop in Political Theory and Policy Analysis. This perspective reveals that the research agenda of the Ostroms draws significantly from the ideas and themes developed in the first half of the 20th century by Knight, Mises, and Hayek. In so doing, we argue, they usefully deploy and expand the economic way of thinking beyond its traditional boundaries while avoiding most of the criticisms of economic imperialism.

Intra-Generational Trust - a Semi-Experimental Study of Trust Among Different Generations

Abstract: From a public database in Sweden we obtained a subject pool consisting of one group of 20 years old and another group exactly 50 years older. The groups participated in a mail-based trust game, in which the young cohort exhibited more trust than the older one. Subjects significantly preferred to place trust in co-players of their own cohort and of the female sex. When amounts sent and proportions returned in the mail-based game are compared with other trust games conducted in standard laboratory environments, it is found that the mail-based game does not seem to generate extreme distributions.

Myopic prospect theory vs. myopic loss aversion: how general is the phenomenon?

Abstract: Individuals often act myopically in evaluating sequences of investment opportunities. For loss averse decision makers, myopia causes the sequence to look less attractive and might result in rejecting an investment program that would have been accepted otherwise. In this paper, we argue that the relation between myopia and the attractiveness of a lottery sequence is less general than previously suggested in the literature. We extend the concept myopic loss aversion to myopic prospect theory , predicting that for specific risk profiles, myopia will not decrease but increase the attractiveness of a sequence. We support our theoretical predictions by experimental evidence.

Looking for a theory of the firm: Future challenges

Abstract: In this paper we present the main developments of the theories of the firm rooted in Coase’s [Coase, R.H., 1937. The nature of the firm. Economica, New Series 4, 386–405] seminal article. We show that the two important topics of the nature and boundaries of the firm, as well as the internal organization of the firm, give place to essential contributions. We present those contributions and their limits and then their possible developments. Finally we introduce the papers of this issue.

Price uniformity and competition in a retail gasoline market

Abstract: The purpose of this paper is to examine the price uniformity prediction of the competitive market model of retail gasoline pricing using station specific data on gasoline prices from Vancouver, BC. The specified econometric model also generates results that describe the actual pricing pattern in the market and that permit an assessment of tacit collusion and imperfectly competitive non-collusive competition as possible alternative explanations for the results. Contrary to the competitive model, variables measuring brand effects, spatial and product characteristics, local market structure, and time series variation do affect the probability that a station matches the market mode price.

Institutional constraints and organizational changes: the case of the British rail reform

Abstract: This paper analyzes how institutional constraints determine organizational choices and investments decisions. More precisely, we examine how private parties adjust when policymakers impose a mode of organization with no or very little consideration for some major characteristics of the transactions that arrangement is intended to support. Our analysis uses original data related to the reform of the British rail industry. Notwithstanding their specific aspects, the problems raised by the radical transformation of this sector in the mid-1990s carry important lessons about what happens when a misaligned arrangement is implemented in a context that requires interfirm coordination.

Can stable social groups be maintained by homophilous imitation alone

Abstract: A central problem in the biological and social sciences concerns the conditions required for emergence and maintenance of cooperation among unrelated individuals. Most models and experiments have been pursued in a game–theoretic context and involve reward or punishment. Here, we show that such payoffs are unnecessary, and that stable social groups can sometimes be maintained provided simply that agents are more likely to imitate others who are like them (homophily). In contrast to other studies, to sustain multiple types we need not impose the restriction that agents also choose to make their opinions different from those in other groups.

A Hicksian multiplier-accelerator model with floor determined by capital stock

Abstract: This article reconsiders the Hicksian multiplier-accelerator model with the “floor” related to the depreciation on actual capital stock. Through the introduction of the capital variable, a growth trend is created endogenously by the model itself, along with growth rate oscillations around it. The “ceiling” can be dispensed with altogether. As everything is growing in such a model, a variable transformation is introduced to focus relative dynamics of the income growth rate and the actual capital output ratio.

Rich and powerful? : Subjective power and welfare in Russia

Abstract: Does “empowerment” come hand-in-hand with higher economic welfare? In theory, higher income is likely to raise both power and welfare, but heterogeneity in other characteristics can either strengthen or weaken the relationship. Survey data on Russian adults indicate that higher individual and household incomes raise both self-rated power and economic welfare. The individual income effect is primarily direct, rather than through higher household income. There are diminishing returns to income, though income inequality emerges as only a minor factor reducing either aggregate power or welfare. At given income, the identified covariates have strikingly similar effects on power and economic welfare.

Exchange rate dynamics, central bank interventions and chaos control methods

Abstract: We use a simple chartist–fundamentalist model developed by Day and Huang to explore recent chaos control algorithms as potential candidates for central bank intervention rules. We find that methods such as delayed feedback control, OGY and constant feedback have, in principle, the potential to reduce exchange rate variability and deviations from fundamentals even in the presence of large dynamic noise.