May 31, 2022
That’s the punchline from a few of the most enjoyable and illuminating papers I’ve read recently:
1.
Chiaro Farronato and Georgios Zervas examine the constraints that reputation imposes. Their results are consistent much of the work that underpins the self-governance literature. Much of the order we observe is not a result of formal rules, though admittedly this study takes place in the “shadow of the law.” An excerpt from their abstract:
1.
“We investigate the informativeness of hygiene signals in online reviews, and their effect on consumer choice and restaurant hygiene. We first extract signals of hygiene from Yelp. Next, we find causal evidence that consumer demand is sensitive to these hygiene signals. We also find suggestive evidence that restaurants that are more exposed to Yelp are cleaner along dimensions for which online reviews are more informative.”
2.
Also examining reputation is another group of NBER co-authors.
1.
“We analyze a field experiment conducted on AngelList Talent, a large online search platform for startup jobs. In the experiment, AngelList randomly informed job seekers of whether a startup was funded by a top-tier investor and/or was funded recently. We find that the same startup receives significantly more interest when information about top-tier investors is provided. Information about recent funding has no effect. The effect of top-tier investors is not driven by low-quality candidates and is stronger for earlier-stage startups. The results show that venture capitalists can add value passively, simply by attaching their names to startups.”
Investments in reputation matter. So does the discipline of continuous dealings. The results remind me of this paper.
3.
Peter Boettke, Rosolino Candela, and Peter Jacobsen integrate economic calculation and transaction cost arguments. This is a very exciting theoretical project that invites more research. The biggest takeaway is their redefinition of transaction costs as “the costs of engaging in economic calculation.” As they note, their emphasis on subjective transaction costs is consistent with many of the points that Scott Burns and I make here. It’s also complementary to the innovative argument of Piano and Rouanet found here.
4.
One of the most fascinating new papers you’ll come across is Ennio Piano’s “Organizing High-End Restaurants.” In it, Piano applies property rights analysis to explain variation in ownership patterns among restaurants. His theory explains why high-end restaurants tend to be chef-owned and it even explains who does what tasks to bring you a gourmet meal.
5.
Julio Elias, Nicola Lacetera, and Mario Macis illuminate the role that economic education might play in shaping peoples’ attitudes toward commercial society. At least that’s my takeaway. Their abstract:
1.
“Price surges often generate social disapproval and requests for regulation and price controls, but these interventions may cause inefficiencies and shortages. To study how individuals perceive and reason about sudden price increases for different products under different policy regimes, we conduct a survey experiment with Canadian and U.S. residents. Econometric and textual analyses indicate that prices are not seen just as signals of scarcity; they cause widespread opposition and strong and polarized moral reactions. However, acceptance of unregulated prices is higher when potential economic tradeoffs between unregulated and controlled prices are salient and when higher production costs contribute to the price increases. The salience of tradeoffs also reduces the polarization of moral judgments between supporters and opponents of unregulated pricing. In part, the acceptance of free price adjustments is driven by people’s overall attitudes about the function of markets and the government in society. These findings are corroborated by a donation experiment, and they suggest that awareness of the causes and potential consequences of price increases may induce less extreme views about the role of market institutions in governing the economy.”
From the conclusion:
“Despite the large positive impact of explicit cost-benefit considerations on the acceptance of the free price mechanism to organize markets, most respondents, even when assigned to scenarios with salient tradeoffs, did not support a laissez faire´ solution to price surges. This suggests that this opposition is rooted in strong beliefs and norms whose violation could represent a cost to society. Policy choices and organizational practices that reduce the likelihood of price spikes may therefore be supported by the public. For example, the recent interest toward shaping a more diversified supply chains and to allow for “redundancies” in manufacturing capacity or emergency stockpiles by companies and governments, particularly for essential goods (for which we document the strongest opposition to unregulated pricing solutions).
Our work, more generally, contributes to our understanding of how the public perceives market mechanisms and the drivers of the demand for government intervention such as price controls. Price surges do not only occur during emergencies such as pandemics or natural disasters. From ride-sharing companies to airlines, many firms use algorithms that adjust prices up or down depending on demand and supply conditions. In fact, the growing reliance on algorithmic pricing will likely multiply the cases in which automatic adjustments do not align with other societal values.”
One question I have is what behavioral economics adds to these results. Why not simple economic ignorance? Nevertheless, timely given the renewed calls for price controls.
6.
Nicolai Foss, Peter Klein, Lasse Lien, Thomas Zellwegger, and Todd Zenger on “Ownership Competence” was a pleasure to read. A fruitful synthesis of entrepreneurship with the economics of property rights. The paper outlines a promising research agenda too. The “managerial summary”:
1.
“Business owners own with different levels of competence, and differences in ownership competence matter for value creation. We argue that ownership competence consists of competence about what to own (matching competence), competence about how to own (governance competence), and competence about when to own (timing competence). We clarify the role played by each of the three competences for value creation. We also show how the importance of ownership competence for value creation alters depending on ownership concentration, life cycle effects, uncertainty of the environment, and the efficiency of resource markets. With our paper we prepare the ground for a fuller understanding of the strategic role of owners for value creation.”
6.
Dan Smith and Macy Scheck examine how the “logic of the situation” differs between market and government sectors. Feedback does too. In a nutshell, markets punished dishonest behavior, while dishonest behavior in the public sector met with success. Of particular interest to me were the market mechanisms that facilitated credible commitments on the part of whiskey distillers. They write in their conclusion:
1.
“Whiskey distillers, a group of individuals engaging in a business that was disreputable at that time, attempted to engage in dishonest behavior in both the market and in politics. Dishonest behavior in the market was consistently hampered by market competition. Attempts to create a cartel were ineffective in an industry with open competition. Attempts by distillers to engage in fraud via misrepresentation and adulteration were recognized as threats to profit-making. Fraud prompted the development of market mechanisms to better ensure consumers of the authenticity and quality of their products to ensure that the market did not unravel. These market mechanisms included the development of 1) brand names, 2) quality control measures that imparted distinct characteristics to the whiskey, 3) leveraging the reputation of local dealers, and 4) the adoption of sealed bottles.
However, the distillers’ attempts to engage in dishonest behavior in politics, to the
detriment of consumers, were successful. Straight whiskey distillers lobbied for the Bottled-in-Bond Act and the Pure Food and Drug Act to undermine rectifier competition. Contrary to the common claims of widescale adulteration of rectified whiskey with poisonous chemicals, we found that these chemicals were either; 1) not found to be present in reputable chemical analyses, 2) not found in trade recipe books, 3) not commonly known to be dangerous at that time with certainty, 4) found overwhelmingly in locations under alcohol prohibition, or 5) had a niche demand for its intoxicating properties. Rather, straight whiskey distillers leveraged the political process to undermine competition from rectifiers dishonestly.”
8.
Peter Leeson continues to explore a project that might be called “trading with the difficult.” If bandits are hard, shouldn’t trade with the dead be impossible? Actually, no. Clever market participants devise institutional solutions that allow them to grasp the gains from trade. Here’s the abstract, but you’ll have to read the paper for the nitty-gritty:
1.
“Late medieval Englishmen provided for their wellbeing in the hereafter by purchasing intercession for their souls. They traded valuable landed endowments for the promise of posthumous Masses and prayers whose daily observance contractual counterparties agreed to underwrite for decades, centuries, even eternally. Intercessory foundations so contracted were called chantries. Chantry contracts constituted trades with the dead in the sense that the promisees were deceased when the promisors were supposed to perform. I study the special problems that chantry contract promisees faced in enforcing their rights from the grave and analyze the devices they used for that purpose. Chantry founders wary of their fates in the afterlife showed equal concern for the challenges their contracts would encounter in this life long after they were gone. Founders met those challenges by leveraging the economics of incentives to develop a strategy of chantry contract self-enforcement: profit the living, present and future, for monitoring the contractual performance of promisors and promisors’ agents, and for punishing them should they breach. Chantry founders’ strategy was successful, enabling trade with the dead.”
9.
The always-interesting Richard Langlois continues his project on the American corporation in the 20th century. The abstract to “An Elephants’ Graveyard” reads: 
1.
“This paper is an excerpt from a larger book project called The Corporation and the Twentieth Century, which chronicles and interprets the institutional and economic history – the life and times, if you will – of American business in the twentieth century. This excerpt examines the era of industrial deregulation of the late twentieth century. As had been the case with financial deregulation, it argues, industrial deregulation and the internationalization of trade were largely a manifestation of the misalignment of the postwar regulatory regime with the realities of economic growth. This misalignment created profit opportunities for entrepreneurs not only in the realm of technology but also, and perhaps more crucially, in the realm of institutions. In some cases, entrepreneurs would expend resources in order to foment political change. In other cases, technological and institutional innovation, aided at times by the depredations of the regulation itself, would so reduce the available rents of a regulatory regime that its supporting coalition would collapse.”
This book promises to be an important contribution to American economic history.
10.
Rosolino Candela and Peter Boettke argue that Menger’s vaunted Principles contains nascent sketches of an institutional economics—going far beyond the price theory which already make the book a monumental achievement.
Their inspiration is Buchanan’s quote regarding a “conciliation” of traditions in economics that were resurrected in the ‘60’s and ‘70’s:
The diverse approaches of the intersecting “schools” must be the bases for conciliation, not conflict. We must marry the property-rights, law-and-economics, public-choice, Austrian subjectivist approaches.
Here’s the abstract:
“Carl Menger’s objective in his seminal book, Principles of Economics, was to elucidate a unified account of price formation. This raises a question, which motivates our paper: to what extent, if any, can Menger account for production not directly organized by the price mechanism, and therefore a theory of economic organization and its formation through time? We argue that implicit to Menger’s account of price formation is an account not only of institutional formation, but particularly economic organization. Thus, there exists a symbiotic relationship that can be found in Menger between a theory of price formation and a theory of organizational formation, both of which are by-products of an increasing division of knowledge brought about by an increasing scope of market exchange. Moreover, our point illustrates that Menger’s work is an analytical point of departure for a shared understanding of parallel developments in Austrian economics and organizational economics that have followed.”
This paper thus adds to the spate of papers drawing a tight link between Austrian economics and the NIE (1, 2, 3, 4, 5, 6 for examples). They write in the introduction:
“…there exists a symbiotic relationship that can be found in Menger between a theory of price formation and a theory of organizational formation, both of which are by-products of an increasing division of labor and an increasing division of knowledge brought about by an increasing scope of market exchange.”
And:
“Rather than regard price formation as being instantaneous, institutional and organizational
arrangements emerge precisely to erode the transaction costs that would otherwise preclude the exchange of property rights, and hence the creation of exchange ratios (i.e. pricing of goods and services). Moreover, instead of regarding such transaction costs as constraints, the avoidance of which dissipate existing wealth, transaction costs are the fundamental basis for the emergence institutional and organizational innovation that facilitate the discovery of knowledge of otherwise unrealized gains from trade.”
Other connections: Rosolino and Pete continue to develop their (correct!) argument that “opportunity costs be regarded not as constraints to which individuals passively respond. Rather they are the reciprocal of choice itself.” The paper also contains parallels to Foss et al.’s recent theorizing on “ownership competence.” To my tastes, this line of research is the most promising in theoretical Austrian economics.
Read the whole thing for a masterful walk through the history of thought!