Saturday, 18 April 2015

Chicago's best ideas: "contract law, transaction costs, and the boundary of the firm"

If you have an hour free this weekend one way to spend it would be to watch this video by Anup Malani, professor at the University of Chicago Law School, talking about "Contract Law, Transaction Costs, and the Boundary of the Firm".

[...] describes a number of surprising contract provisions that can be used to tackle the holdup problem, where a buyer and seller agree on a price for a future date, but the seller later demands a higher price. He also discusses how contract law can affect the scope and ownership of firms.

In 1937, Ronald Coase asked: if markets are so efficient at allocating resources, why are so many resources allocated within firms? His answer was that market allocation entailed transactions costs and, when these were very high, transactions will take place within firms.

Oliver Hart, with Sanford Grossman and John Moore, suggested the holdup problem could be overcome if the buyer owns a key asset of the seller or the seller's whole firm, which can prevent the seller from holding up the buyer. Hart, Grossman, and Moore transformed Coase's theory of how large firms were into a theory of who owns firms. Since then, there have been numerous efforts to demonstrate that asset ownership or integration is not necessary to overcome the holdup problem.

Friday, 17 April 2015

From the comments: Surely this can't be right

Eric Crampton left the following comment on the Surely this can not be right post:
I'm likely to credit or blame for that particular part. I'll walk it through more slowly.

1. Goods that are nonrivalrous in consumption may still be underconsumed relative to an unattainable blackboard optimum even if they are excludable.
2. The good in question here, the improved performance of the polity when there's better vigilance against rorts, corruption and the like, is non-rivalrous and is also non-excludable.
3. Journalism is one way of producing that vigilance.
4. Viewers of Campbell Live believe that his show is one of the more important sources of that watchdog role; others note that there are still many alternatives, and that the merits of this particular show are more debatable.
5. Where the high demanders for the programme each only count as one viewer under the current funding model that ties advertising to the provision of the non-rivalrous but potentially excludable tv programming, and where the high demanders aren't sufficiently valuable to advertisers relative to the viewership that might watch alternatives, the programme will fail absent alternative funding.
6. High demanders can and should use mechanisms like PledgeMe to fund the programme directly.
My response would be to deal with points 2 and 3 to argue that journalism as a useful consumable end product is not a public good - my point is the previous post. Let me use an example to make my point. Take a free-to-air television transmission. This you could argue is a public good but even if it is, its a pretty useless one without a tv on which to watch it. So to get a useful end product you need to bundle the transmission with a tv. TVs are private goods which effectively makes the transmission a private good.

I would argue the same for journalism in general. Whether journalism in conveyed to the public via tv or newspapers or radio or whatever, for the journalism to become a consumable good you need to bundle it with some other good, eg, a tv, a radio etc. These other goods are private goods and thus the need to bundle the journalism with these goods effectively makes the journalism a private good as well.

This is not to say that journalism doesn't have neighbourhood effects, its just too say it isn't a public good.

For those of you who think Campbell Live should be saved take note of point 6.

Surely this can not be right

In an article "Helping journalism can harm it" in The New Zealand Initiative's Insights Newsletter (Insights 13: 17 April 2015) Jason Krupp writes,
Regardless, they may have a point. Journalism has public good aspects to it – the threat that an investigative journalist uncovers a rort or corruption helps to discipline politicians, which provides benefits even to those who do not help to pay for it by watching or reading. Many people might free-ride rather than contribute.
This can not be right. What Krupp is describing isn't a public good but a good with neighbourhood effects. That is, there are positive (in this case) externalities to journalism but this is not enough to make journalism a public good.

If journalism really is a public good then how is it that newspapers, for example, can generate income by selling their papers or putting material behind paywalls. Paywalls and selling papers mean that journalism is excludable. These things wouldn't generate income otherwise. The important point here is that the journalism and the newspaper/website are bundled, you need both to get a useful product and you can exclude by using the newspaper/website.

Natural disasters: insurance costs vs. deaths

In a posting with the above title at the Conversable Economist blog Timothy Taylor writes,
The natural disasters that cause the highest levels of insurance losses are only rarely the same as the natural disasters that cause the greatest loss of life. Why should that be?
This doesn't seem that odd to me. Insurance claims are large when you get a lot of expensive, well insured property being damaged. But one reason for things like buildings being expensive is that they are well built and can withstand, to a large enough degree, the effects of a disaster without killing the people inside them. Cheap poorly build buildings give rise to less expensive insurance claims but suffer greater damage in a disaster and thus kill a great number of people as a result.

Taylor then gives two lists:
The first list shows the 40 disasters that caused the highest insurance losses from 1970 to 2014 (where the size of losses has been adjusted for inflation and converted into 2014 US dollars). The top four items on the list are: Hurricane Katrina that hit the New Orleans area in 2005 (by far the largest in terms of insurance losses), the 2011 Japanese earthquake and tsunami; Hurricane Sandy that hit the New York City area in 2012; and Hurricane Andrew that blasted Florida in 1992. The fifth item is the only disaster on the list that wasn't natural: the terrorist attacks of September 11, 2001. 
The Christchurch quake comes in 8th on this list,

The second list is
[...] a list of the top 40 disasters over the same time period from 1970 to 2014, but this time they are ranked by the number of dead and missing victims. The top five on this list are the Bangladesh storm and flood of 1970 (300,000 dead and missing); China's 1976 earthquake (255,000 dead and missing), Haiti's 2010 earthquake (222,570 dead and missing), the 2004 earthquake and tsunami that hit Indonesia and Thailand (220,000 dead and missing), and the 2008 tropical cyclone Nargis that hit the area around Myanmar (138,300 dead and missing). 
Taylor notes that there is little overlap between the two lists.
Only two disasters make the top 40 on both lists: the 2011 Japanese earthquake and tsunami, and Japan's Great Hanshin earthquake of 1995.
His reasoning for the lack of overlap is a more sophisticated version of the argument I gave above.
[...] the effects of a given natural disaster on people and property will depend to a substantial extent on what happens before and after the event. Are most of the people living in structures that comply with an appropriate building code? Have civil engineers thought about issues like flood protection? Is there an early warning system so that people have as much advance warning of the disaster as possible? How resilient is the infrastucture for electricity, communications, and transportation in the face of the disaster? Was there an advance plan before the disaster on how support services would be mobilized?

In countries with high levels of per capita income, many of these investments are already in place, and so natural disasters have the highest costs in terms of property, but relatively lower costs in terms of life. In countries with low levels of per capita income, these investments in health and safety are often not in place, and much of the property that is in place is uninsured. Thus, a 7.0 earthquake hits Haiti in 2010, and 225,000 die. A 9.0 earthquake/tsunami combination hits Japan in 2011--and remember, earthquakes are measured on a base-10 exponential scale, so a 9.0 earthquake has 100 times the shaking power of a 7.0 quake--and less than one-tenth as many people die as in Haiti.
In other words being a high income country which can afford good building codes, resilient infrastructure and a quick and quality disaster response is big factor is reducing deaths from natural disasters. In short, being rich saves lives. Another plus for the effects of economic growth.

Is history is more or less bunk? 3

I ended the post Is history is more or less bunk? 2 with two questions to do with why Gary Becker's argument that competitive labour markets would force employers to keep their prejudices out of their business decisions does not work in this case and what social mechanisms could be at work to perpetuate the discrimination we see in the labour markets. I emailed these questions to the author of the paper, Cornelius Christian, and he has kindly given his permission for me to reproduce his answers below:
Gary Becker's model, I think, is only part of the story. I am quoting from Gavin Wright's Sharing the Prize (p. 76-77), which is about the Civil Rights movement:

"segregation in such facilities as lunch counters, restaurants, and hotels was rarely required by law, and when statutes or municipal ordinances did exist, enforcement was generally at the discretion of proprietors... Businessmen feared that serving blacks, particularly in socially sensitive activities such as eating and sleeping, would result in the loss of white customers."

In the conclusion of the chapter, Wright says the following:

"The interpretation advanced in this chapter is that southern businessmen were locked into a low-level equilibrium, the stability of which was bolstered by the fact that they did not see it that way themselves. Both as firms and as downtown collectivities, businesses balanced the loss of black consumer spending against anticipated losses of white patronage."

Now, regarding present-day labour market outcomes, there is possibly a similar mechanism operating.

Regarding your question on a social mechanism, I am currently in the process of developing a model, and then subjecting it to empirical tests. I hope to have that done very soon!

Thursday, 16 April 2015

In which I agree with Paul Krugman

No, seriously!

I have in the past argued that the benefits that flow from trade are not due to what we export but rather from what we import. I have argued, for example, that Imports good; exports bad and have asked Looking for new tools to help exporters: Why? and have noted that Protectionists are to economics what astrologers are to astrophysics, and so on. This, it seems, is not a view shared by many commentators. How often do we see calls to do things to help exports but not things to help importers? When the exchange rate is "high" we are told something must be done since it hurts our exports. No mention is made of help it gives to those of us who import.

Now thanks to Jim Rose at the Utopia – You Are Standing In It! blog I see I am not the only economist who thinks like this. It turns out that Paul Krugman, of all people, takes the same view.

The following comes from Krugman's paper "What Do Undergrads Need to Know About Trade?", 'The American Economic Review', Vol. 83, No. 2, Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association, (May, 1993), pp. 23-26:
Even more fundamentally, we should be able to teach students that imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import things it wants. Exports are not an objective in and of themselves: the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment. (p. 24)
We need to be able to teach this seemingly simple point not only to students but also the likes of commentators, journalists and politicians etc.

Is history is more or less bunk? 2

Further to my previous post I have now found a copy of the paper The Economist was talking about, “Lynchings, Labour and Cotton in the US South” (pdf) by Cornelius Christian.

In the paper Christian notes that in the short term the advantage of lynchings to whites was via the labour market. The evidence presented by Christian demonstrates that lynchings prevented black workers from fully participating in the labour market to the advantage of white workers. Lynchings cause blacks to migrate away, not too surprising, lowering labour supply and increasing wages for white labourers.
Using the fact that world cotton prices are exogenous from a single county’s perspective, I find that cotton price shocks strongly predict lynchings. More precisely, one standard deviation decrease in the world cotton price results in a 0.095 to 0.16 standard deviation increase in lynchings within a cotton-producing county. The findings are robust to the inclusion of controls, and to the use of tests with white-on-white lynchings and California lynchings. Cotton price shocks also do not predict legal executions of blacks, suggesting motives for lynching were different. These ffects are more pronounced in counties that had railroads in 1890, suggesting that links to world markets and greater local labour demand had an impact on lynchings. Disenfranchisement attempts such as the poll tax and literacy tests do not strengthen this effect, suggesting the substitutability of informal violence with formal institutions as a way to control workers. All this is indicative that greater numbers of lynchings served, at least in part, as a way of controlling black workers.

Using these observations as a guide, I claim that lynchings had labour market effects that benefitted white workers. During years of low cotton prices, wages are low. When whites lynch blacks, this causes other blacks to migrate out of a county, thus reducing labour supply and increasing wages. I show in my data that lynchings predict greater black out-migration, and higher state-level agricultural wages. A one standard deviation increase in lynchings within a county leads to 6.5 to 8 % more black out-migration, and a 1.2 % increase in state-level wages.
Given these short-run effects what are the long-run outcomes?
I then turn to the long-term effects of lynchings, starting with the Civil Rights era. Although lynchings became very rare in the 1930s, discrimination against blacks continued. I focus on the 1964 Mississippi Summer project, a campaign to register African Americans to vote - the campaign’s organisers encountered violence and discrimination throughout the summer. I show that Mississippi counties with more 1964 violence also had more lynchings in the past. Using datafrom the 2008-2012 American Community Survey, I also show that lynchings in the past predict white-black wage and income gaps today. This is robust to the inclusion of various controls and state fixed effects. Furthermore, I test the sensitivity of the coefficient estimates to control variables using Altonji, Elder, and Taber (2005) statistics. My results are shown to be robust to these tests, strongly suggesting that labour market discrimination has persisted from lynchings to the present day.
The modern-day and Mississippi Summer results suggest that the effects of lynchings persist up until the present day. This is consistent with a mechanism in which discrimination continues to affect African Americans. Such prejudice starts with lynchings of African Americans, and subsequently manifests in violence when Civil Rights community organisers went to Mississippi in 1964. It continues to affect contemporary black incomes, relative to their white neighbours.
If labour market discrimination today, driven by prejudice from the past,  is the cause of the income gap between blacks and whites then there are a couple of questions to ask. First is there some social mechanism at work to perpetuate the discrimination? and second what is preventing Becker type effects from reducing the gap? Gary Becker pointed out many years ago a competitive labour market provides strong incentives to keep our prejudices out of our business decisions. The force of competition will make even the most racist/sexist/homophobic/ employer see that by hiring only heterosexual men of Anglo-Saxon descent, they limit the talent pool accessible to them, which is not good business. What market imperfections are preventing such competitive forces working in the South?

An interesting paper which shows history is not bunk and has relevance even today.

Oliver Hart - reference points and the theory of the firm

This series of videos, from sabanciuniversity, cover a talk given by Oliver Hart (Andrew E. Furer Professor of Economics at Harvard University) on the topic of "Reference Points and the Theory of the Firm". If you're into the theory of the firm - and lets face it, who isn't? - then these videos are well worth the time to watch. Each one is around 12-13 minutes long.

Wednesday, 15 April 2015

Shares in companies are an old idea

It turns out that shares are more than 700 years old, at least. From the BBC website comes this picture of what is the oldest known share in a company. In 1288, Stora Enso issued this share giving a bishop an eighth of a copper mountain.

Is history is more or less bunk?

The Economist magazine reports on a paper given at the recent Economic History Society's annual conference in the U.K. This work suggests history matters and matters for a long time. The paper looks at the effect of lynchings before 1930 in the U.S. on income distribution today.
The first, by Cornelius Christian of Oxford University, looks at the consequences of the lynching of black Americans between 1882 and 1930. Mr Christian found that this history of racial violence still echoes down the decades. He also found that the higher an area’s lynching rate before 1930, the wider the income gap between blacks and whites remained in 2008-12, even when adjusted for factors such as the education and employment levels of a local area. A high rate of lynching widens this gap by as much as 15% in some cases.
While an interesting empirical result, the question this raises is What is the mechanism that brings this effect about? Just how can something like lynchings 80-120 years ago be affecting income distribution today? It is not obvious what the link is. We need a theory to explain the data.

Why would a firm want to become a multinational?

A question asked at the Federal Reserve Bank of St. Louis. Another way to think about the question is to ask why is it worthwhile to carryout a cross border transaction within the boundaries of a firm rather than by using the market? Three reasons are given:
Ownership Advantage

Multinational firms usually develop and own proprietary technology (the Coca-Cola formula is patented and kept extremely secret) or widely recognized brands (such as Ferrari) that other competitors cannot use. Multinationals often are technological leaders and invest heavily in developing new products, processes and brands, while usually keeping them confidential and protected by intellectual property rights. Maintaining stronger protection of these elements helps firms enjoy greater profits from innovation.

Localization Advantage

Multinationals usually try to build facilities that produce and sell their products in locations near the consumer (the Polish consumers of Coke in our example). This helps reduce transportation costs or helps the company fit in better with local tastes and needs. Proximity to demand also helps firms adapt their products and services to different markets. At the same time, they also may take advantage of lower production costs (for example, labor costs, energy, sometimes even lower environmental standards) or more abundant production factors, such as expert engineering or greater raw materials). For example, the Polish affiliate of Coca-Cola also owns bottling plants in the Beskidy Mountains region of Poland, which is rich in mineral water for making other beverages.

Internalizing Benefits

Finally, multinationals want to internalize the benefits from owning a particular technology, brand, expertise or patents that they find too risky or unprofitable to rent or license to other firms. Enforcing international contracts can be costly or ineffective in countries in which the rule of law is weak and court procedures are long and inefficient. In these cases, the company also may risk losing its ownership advantage, which it has created at a substantial cost.
In house production can lower the cost of the transaction and lessen the likelihood of hold-up that could occur when using another firm. When a transaction can be specified clearly enough to be written into a contract so that any possible problems can be dealt with via court proceedings then an outside contractor or firm can be utilised. But where, say quality is hard to control via contract since the nature of "high quality" can not be specified precisely enough to make a contract enforceable in court, then in house production is more likely.

Tuesday, 14 April 2015

How long do firms live?

Many commentators, even today, argue that the economy and the nation are controlled by powerful, large, very long lived corporations. John Kenneth Galbraith is perhaps the most (in)famous economist who argued along these lines. He argued that in the industrial sectors of the economy, which are composed of the largest corporations - think S&P 500 companies, the principal function of market relations is, not to constrain the power of the corporate behemoths, but to serve as an instrument for the implementation of their power. Moreover, the power of these corporations extends into commercial culture and politics, allowing them to exercise considerable influence upon popular social attitudes and value judgements. That this power is exercised in the shortsighted interest of expanding commodity production and the status of the few - the 1% - is, in Galbraith's view, both inconsistent with democracy and a barrier to achieving the quality of life that the "new industrial state" with its affluence could provide to the many. Galbraith argued that we find ourselves living in a structured state controlled by these large and all powerful corporations. Control over demand and consumers is exercised via the use of advertising which creates a never ending consumer "need" for products, where no such "need" had existed before. In addition, as Princeton University Press said in its advertising for a new edition of Galbraith's "The New Industrial State",
The goal of these companies is not the betterment of society, but immortality through an uninterrupted stream of earnings.
I have always thought that an implication of these ideas is that large firms, e.g. those in the S&P 500, would be very long lived. After all given the amount of control that these firms apparently have over their markets and the economy at large its hard to see how they could ever go bankrupt or be taken over. They are, after all, able to ensure "immortality through an uninterrupted stream of earnings." Thus these firms would have a long life.

Given this I was interested to see this comment by Bourlee Lam at The Atlantic:
[...] Richard Foster, a lecturer at the Yale School of Management, has found that the average lifespan of an S&P company dropped from 67 years in the 1920s to 15 years today. Foster also found that on average an S&P company is now being replaced every two weeks, and estimates that 75 percent of the S&P 500 firms will be replaced by new firms by 2027.
I just don't see how a 15 year (or even a 67 year) life span is in anyway consistent with the story that Galbraith tried to tell. Such a short life time looks more like support for a Schumpeter like "creative destruction" interpretation of the life cycle of business firms.

Just to show how short a life span 15, or even 67 years, is note:
Cho and Ahn (2009: 160-1) state “The oldest company in the world is known to be a Japanese construction company, Kongo Gumi, which was founded in 578 and thus existed for 1431 years. [However a footnote at this point states “Kongo Gumi went bankrupt in 2006 and was acquired by Takamatsu group, thus depending on the definition of corporate death it may be excluded from a long-lived company” According to Wikipedia (, “As of December 2006, Kong Gumi continues to operate as a wholly owned subsidiary of Takamatsu”.] There are also several other companies which are reported to have existed over 1000 years such as Houshi Ryokan (Japan, Innkeeping, founded in 717), Stiftskeller St. Peter (Austria, restaurant, founded in 803), Chateau de Goulaine (France, vineyard, founded in 1000) and Fonderia Pontificia Marinelli (Italy, bell foundry, founded in 1000)”.
  • Cho, Dong-Sung and Se-Yeon Ahn (2009). ‘Exploring the Characteristics of the Founder and CEO Succession as Causes of Corporate Longevity: Findings from Korean Long-Lived Companies’, Journal of International Business and Economy, 10(2) Fall: 157-87.

EconTalk this week

Phil Rosenzweig, professor of strategy and international business at IMD in Switzerland and author of the book Left Brain, Right Stuff: How Leaders Make Winning Decisions talks with EconTalk host Russ Roberts about his book. The focus of the conversation is on the lessons from behavioral economics--when do those lessons inform and when do they mislead when applied to real-world business decisions. Topics discussed include overconfidence, transparency, the winner's curse, evaluating leaders, and the role of experimental findings in thinking about decision-making.

A direct link to the audio is available here.

Monday, 13 April 2015

Modelling science as a contribution good 2

Continuing on with the Kealey and Ricketts paper, Modelling science as a contribution good we see that in section 7.2 Kealey and Ricketts discuss "Science and the firm". They write,
The contribution good model requires that scientists are able to gain financial rewards from the common pool of science. The institutional mechanisms that enable these rewards to be claimed are not modelled explicitly but are simply assumed to exist. The contribution good model of science has direct relevance, therefore, for research programmes in business structure and organisation. In modern Institutional Economics the firm is seen (i) as a substitute for relatively high costs of transacting in the market, after Coase (1937); (ii) as a means of coping with uninsurable uncertainty and continual change, after Knight (1921); and (iii) as a vehicle for instigating technological innovation, after Schumpeter (1934, 1943). The conversion of scientific knowledge into new tradable goods and services confronts obvious transactional difficulties between scientists and technologists, technologists and entrepreneurs, and entrepreneurs and financiers. Cooperation between these elements entails high costs of transacting and is likely to involve the formation of firms with internal labour markets and specially designed incentive arrangements to mitigate them. Hansmann’s (1996) proposition that ownership rights tend to be assigned to the group that faces the highest transactions costs might suggest, for example, the development of scientist-owned firms or firms with significant control rights in the hands of the knowledge creators and users.
There are a number of reasons for thinking that the development of scientist-owned firms could occur.

Within the property rights (also often referred to as the incomplete contracts approach) approach to the firm Brynjolfsson (1994) and Rabin (1993) show that there are adverse selection and moral hazard reasons why a scientist-entrepreneur may have to form their own firm to develop their ideas. In Rabin (1993) Rabin shows that adverse selection problems can be such that, in some situations, an informed party (the scientist-entrepreneur in this case) has to take over or form a firm to show that their information is indeed useful. For Rabin an informed party has information about how to make a firm more productive but can't reveal the information to the owners of a current firm. If the information is revealed the current firm can produce using it without any payment to the informed party. If the information is not revealed why should the firm believe the information is in fact useful? Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information but if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets or setting up his own firm.

The Brynjolfsson (1994) model on the other hand works within a moral hazard framework. Brynjolfsson considers a situation where an scientist-entrepreneur has some expertise needed to run a firm but no value can be created without both the knowledge asset of the scientist-entrepreneur and the physical assets of a firm. He assumes that no comprehensive contract can be written between the entrepreneur and the firm. If the scientist-entrepreneur does not own the firm and he makes an investment in effort and creates value, he can be subject to hold-up by the other party since he needs the firm's physical assets. If the scientist-entrepreneur owns the firm then clearly the hold-up problem ceases to exist. The most obvious interpretation of Brynjolfsson model is as a model of a labour-owned firm (scientist-owned firm in this case). Brynjolfsson argues that it is optimal to give the entrepreneur ownership of the physical assets of the firm since he has information that is essential to its productivity. This result is obviously just an application of Hart and Moore’s proposition that an agent who is ‘indispensable’ to an asset should own it (Hart and Moore 1990). Here, firms are owned by the indispensable human capital (a scientist), or, as is more usual, by a small section of the human capital, e.g. a partnership between a number of scientists.

The above arguments support the Kealey and Ricketts notion that scientist-owned firms are a viable form of governance to allow the scientists to capture the returns from their work. However we should ask if there are limits to such arguments? Walker (forthcoming) suggests their may be such limits. In this model the reference point approach to contracts (Hart and Moore 2008) is applied to the modelling of a human-capital based firm. First a model of firm scope is offered which argues that the organisation of a human-capital based firm depends on the "types" (a crude interpretation of a "type" in this context could be the kind of scientist involved in the project, e.g. chemist, microbiologist or may be both.) of human capital involved. Having a homogeneous group of human capital leads to a different governance structure for a firm than that of a firm which involves a heterogeneous group of human capital. For a homogeneous group of human capital, say just chemists, a labour (scientist) owned firm is viable but for a heterogeneous group, say chemists, microbiologists and physicists, ownership by the owners of the firm's non-human capital may be optimal (that is an investor-owned firm may develop). This is because the more heterogeneous the human capital, the more likely it is that some groups will be "aggrieved" (a party is aggrieved when they do not receive the payoff they think they should) and will therefore "shade" on their performance (i.e. they put in a low level rather than a high level of performance) thereby creating deadweight losses. A firm which involves heterogeneous human capital will more more unstable due to the greater amount of a aggrievement/shading and will therefore require some "glue"”, in the form of non-human capital of some kind, to keep the human capital together and thus keep the firm viable. Given the importance of this glue to the firm, ownership of the firm by the owner of the non-human capital is likely.

Thus while it is possible that Kealey and Ricketts are right that scientist-owned firms will develop such a governance arrangement is not the only possibility. What is likely is that we would see what we see today in terms of firm's governance structures with a range of different governance structures being utilised depending on the exact circumstances.

  • Brynjolfsson, E. (1994). Information assets, technology, and organization. Management Science, 40, 12, pp. 1645–62.
  • Hart, O.D. and Moore, J. (1990) Property rights and the nature of the firm. Journal of Political Economy 98(6): 1119–1158.
  • Hart, O.D. and Moore, J. (2008). Contracts as reference points, Quarterly Journal of Economics, 123(1), 1–48.
  • Rabin, M. (1993). Information and the control of productive assets, Journal of Law, Economics, and Organization, 9(1), 51–76.
  • Walker, P. (forthcoming). Simple Models of a Human-Capital-Based Firm: a Reference Point Approach, Journal of the Knowledge Economy.

Modelling science as a contribution good

is the title of a recent paper by Terence Kealey and Martin Ricketts in the journal Research Policy (Volume 43, Issue 6, July 2014, Pages 1014–1024).

The paper makes a contribution to "the new economics of science" in that it argues that science is not a pure public good, as is often believed, but is, rather, a contribution good. Pure public goods are both non-excludable and non-rival. A contribution good, in contrast, is like a club good in that it is non-rivalrous but at least partly excludable. The excludability is due to the fact that not everyone is a member of the "club". To be a member of the "club" you have to be able to understand the science at issue. Also consumption is tied to contribution. If you want to be able to make use of the science you need to have mastered the underlying material which normally means you have to be trained as a scientist - you are a member of the "club". This in turns means you will be contributing to the subject.

The important problem here is not, as is the case for public goods, that of free riding but rather being able to create a critical mass of scientists. The club must be of a size large enough to generate both private and social gains.

The abstract reads
The non-rivalness of scientific knowledge has traditionally underpinned its status as a public good. In contrast we model science as a contribution game in which spillovers differentially benefit contributors over non-contributors. This turns the game of science from a prisoner's dilemma into a game of ‘pure coordination’, and from a ‘public good’ into a ‘contribution good’. It redirects attention from the ‘free riding’ problem to the ‘critical mass’ problem. The ‘contribution good’ specification suggests several areas for further research in the new economics of science and provides a modified analytical framework for approaching public policy.

Sunday, 12 April 2015

Just when you thought things couldn't get any worse in Venezuela ....

it looks like they have.

Andrew Rosati writes at Bloomberg Business
Venezuela, which already has the world’s fastest inflation rate at a reported 69 percent in December, could see that rate more than double this year as it struggles to respond to falling oil prices.

“We may end up this year with inflation at close to 200 percent,” Alberto Ades, co-head of global economics research at Bank of America, said in an interview on Bloomberg Surveillance Friday.
Annual inflation could rise to as much as 150 percent in 2015, and climb as high as 250 percent if the Central Bank included factors currently being omitted in the official statistics, he said.
But interestingly the inflation numbers have not been released so far this year.
The central bank, which typically releases inflation data each month, has yet to publish any information for this year.


“It’s a strictly a political decision,” Asdrubal Oliveros, director of the Caracas-based consultant Ecoanalitica, said Friday in an interview, referring to the data delays. “It’s not like they’ve stopped calculating inflation. The director of the Central Bank knows what the rate is.”
Not releasing the numbers is not a good look. It does suggest that they are bad and the government doesn't want people to know just how bad.

Part of the problem is that Venezuela relies on oil for the vast majority of its foreign-exchange earnings and the price of oil is dropping. Its almost half of what it was last year.
Venezuela has received an average $45.21 a barrel for its exports so far this year compared with $88.42 in 2014, according to the oil ministry. The nation relies on oil for about 95 percent of its foreign-currency earnings.
Loss of foreign exchange means that imports have to be cut.
Venezuela has responded to falling oil prices by reducing imports, which dropped 18 percent in January compared with the same month last year, BofA Merrill Lynch Global Research said in a report on April 7.

“The Maduro administration is in the midst of undertaking one of the largest import adjustments in Venezuelan history,” the bank said, adding that many of the country’s economic problems are “to a large extent self-inflicted.”
and the economy is suffering,
He [Alberto Ades] forecast the economy would shrink 4 percent. “Venezuela is in a dire crisis.”

The 50 percent drop in oil prices in the past year has buffeted Venezuela’s economy and forced it to reduce imports, exacerbating shortages of everything from shampoo to beef. On the black market, the bolivar has weakened 74 percent in the past year to about 257 bolivars per dollar, compared with the official rate of 6.3 for priority imports.
Are we watching an economy implode simply because of its government's policies?