Solving coordination failure with “all-or-none” group-level incentives

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.      

Specialists and citizens all: A reply to Boettke,Koppl, and Holcombe

Peter Boettke (2007) argues that economists need not act pluralistically in order for pluralism to thrive in the marketplace of economic ideas. From a market process perspective, Boettke sees intellectual diversity and openness as catallactic outputs, not inputs—emergent by-products of academic specialization and trade. To expect individual scholars to behave in a pluralistic manner is unnecessary and “completely inappropriate” since it detracts from their central task: “to commit themselves to an approach and pursue it doggedly, even in the face of great doubt and resistance by one’s peers” (Boettke 2007). This paper proposes a Smithian revision of Boettke’s position. The author argues that scholarly pluralism is best understood as a constitutional rule of academic life—a virtue ethic that promotes learning and intellectual freedom by mitigating tyranny and autarky in the republic of science. Drawing from the writings of Adam Smith, Friedrich Hayek, Deirdre McCloskey, Bruce Caldwell, James Buchanan, Don Lavoie, and Boettke himself, the author argues that scholarly pluralism has been, and continues to be, a necessary condition for the flourishing of Austrian economists as free, responsible, efficacious thinkers.     

From weight watchers to state watchers: Towards a narrative of liberalism

Alan Kahan’s Mind vs. Money: The War between Intellectuals and Capitalism (Transaction Publishers, 2010) treats intellectuals as a class and tells of intellectuals’ yearning to play the role of cleric and aristocrat. Kahan says that intellectuals are necessarily alienated from “capitalism.” In this essay, I discuss Kahan’s erudite and insightful—though sometimes exasperating—work, and I take the opportunity to develop some ideas on the topic, ideas in line with Hayek’s thought.     

Exchange and evolution

This paper offers an extension of the distinction of [Kohn, Cato Journal, 24:303–339 (2004)] between the two paradigms of modern economic theory—value and exchange—as derived from the generic–operant framework of [Dopfer and Potts, The general theory of economic evolution, Routledge, London, (2007)]. I argue that Austrian and evolutionary economics can be analytically unified about a general framework of rule coordination and change that I shall call the generic value paradigm. This is an analytic generalization of Kohn’s “exchange paradigm” that will allow us to redefine his conception of the “value paradigm” as the operational value paradigm in terms of the economics of known and fully exploited opportunities. The generic value paradigm, in turn, underpins the economics of the growth of knowledge and the evolution of the economic order as an open-system process due to the origination, adoption, and retention of novel generic rules. Austrian economics is then circumscribed as a special case of the more general “generic” analysis of the coordination and evolution of economic rules.      

Regulation of the evolution of the architecture of a network by tensors operating on coalitions of actors

Socio-economic networks, neural networks and genetic networks describe collective phenomena through constraints relating actions of several actors, coalitions of these actors and multilinear connectionist operators acting on the set of actions of each coalition. We provide a class of control systems governing the evolution of actions, coalitions and multilinear connectionist operators under which the architecture of the network remains viable. The controls are the “viability multipliers” of the “resource space” in which the constraints are defined. They are involved as “tensor products” of the actions of the coalitions and the viability multiplier, allowing us to encapsulate in this dynamical and multilinear framework the concept of Hebbian learning rules in neural networks in the form of “multi-Hebbian” dynamics in the evolution of connectionist operators. They are also involved in the evolution of coalitions through the “cost” of the constraints under the viability multiplier regarded as a price.     

Agreeing on generalized Darwinism: a response to Geoffrey Hodgson and Thorbj?rn Knudsen

I thank Geoffrey Hodgson and Thorbj?rn Knudsen for their thought-provoking response to my latest generalization of Darwinism, and welcome their proposal to cooperate, after many years of our independent searches. I agree with them that our searches contain more similarities than both they and I had previously seen, but consider our remaining differences—especially in the terms employed and in the definitions of the terms we both employ, including “information,” “instructions,” “programs,” and “Lamarckism”—more important than they do. Their response also exaggerates or distorts some of my arguments. All this needs to be clarified before our cooperation can start.     

Capital growth in a global warming model: will China and India sign a climate treaty?

Global warming is now recognized as a significant threat to sustainable development on an international scale. One of the key challenges in mounting a global response to it is the seeming unwillingness of the fastest growing economies such as China and India to sign a treaty that limits their emissions. The aim of this paper is to examine the differential incentives of countries on different trajectories of capital growth. A benchmark dynamic game to study global warming, introduced in Dutta and Radner (J Econ Behav Organ, 2009), is generalized to allow for exogenous capital accumulation. It is shown that the presence of capital exacerbates the “tragedy of the common”. Furthermore, even with high discount factors, the threat of reverting to the inefficient “tragedy” equilibrium is not sufficient to deter the emissions growth of the fastest growing economies—in contrast to standard folk theorem like results. However, foreign aid can help. If the slower growth economies—like the United States and Western Europe—are willing to make transfers to China and India, then the latter can be incentivized to cut emissions. Such an outcome is Pareto improving for both slower and faster growth economies.     

Commitment to a strategy of uniform pricing in a two-period duopoly with switching costs

This paper studies decisions by firms of whether to attempt “behavior-based” price discrimination in markets with switching costs by using a two-period duopoly model. When both firms commit themselves to a pricing policy and consumers are “sophisticated” and have rational expectations, there is a dominant strategy equilibrium with both firms engaging in uniform pricing. Both firms are better off in the uniform pricing equilibrium, compared with the discriminatory equilibrium.      

From contract to mental model: Constitutional culture as a fact of the social sciences

This paper develops the concept of constitutional culture—the attitude, thoughts, and feelings about constitutional constraints and the nature, scope, and function of constitutionalism. Constitutional culture is approached as a complex emergent phenomenon bridging Hayekian cognitive and institutional insights. It can be studied as a mental model, a series of expectations and understandings about the constitutional order, how it is, and how it ought to be. The “map” and “model” approach from Hayek’s Sensory Order (1952) is employed to understand how individuals and (cautiously) groups of individuals at the national level approach constitutionalism. This paper goes beyond the more traditional one-size-fits-all approach where all individuals respond uniformly to incentives, as provided by the constitution qua contract. Instead, constitutionalism is tied up in the individual’s vision of the world, that is, what Hayek (1948) labels “the facts of the social sciences.” The paper concludes with four areas where constitutional culture can further the insights of constitutional political economy: comparative political economy, constitutional stickiness, constitutional maintenance, and the new development economics.     

Intellectual Property Rights and Crop-Improving R&D under Adaptive Destruction

This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R&D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R&D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R&D cost, ex ante firms might prefer an intellectual property regime with or without a “research exemption” provision. The study of the welfare function that also accounts for benefit spillovers to consumers—which is possible analytically under some parametric conditions, and numerically otherwise—shows that the ranking of the two IPR regimes depends critically on the extent of the R&D cost.      

Endogenous structural change and crisis in a multiple time-scales growth model

The slow and endogenous twist of economic macro-structure makes up an important evolutionary feature of capitalist economies, and may be at the root of structural crisis. In this line, a Goodwinian growth model with increasing returns and profit-sharing that tries to picture a simple scenario of the seventies crisis is considered. It is shown that the exhaustion of the Kaldor-Verdoorn “productivity law” can entail, in a nonlinear framework, a “catastrophic” bifurcation from a “high” to a “low” growth path. Slow/fast dynamical systems then allow one to formalize a multiple time-scales dynamics where the growth path is shaped by the structural framework in which it takes place, but has also a long -un feedback. Structural change and crisis appear as long term and endogenous outcomes.     

Self-organized agglomerations and transport costs

This paper investigates the impact of the shape of transport costs on the structure of spatial equilibria. We consider a racetrack economic model in which firms and workers freely locate on the continuous space of a circumference. We present “reasonably” weak conditions on the shape of transport costs under which continuous distributions of firms and workers are never stable equilibria. We also characterize conditions on the shape of transport costs under which discrete distributions are stable equilibria. The results confirm the idea that agglomeration of firms and workers in few cities is a natural outcome of economic interactions.     

Thought experiments, counterfactuals and comparative analysis

This article discusses the problem of “thought experiments” in Austrian economics and takes as a starting point Lawrence Moss’ argument on the divide between the older Austrian economists—for whom thought experiments were crucial—and the new generation that, in Moss’ view, has “abandoned” such methods. The article is an attempt not only to bridge this alleged divide but also to contribute to the development of the Austrian methodology. It is argued that what may be perceived as “abandonment” bolsters rather than precludes the role of thought experiments in the Austrian paradigm. The article identifies an entire family of comparative and counterfactual analysis research strategies available to the Austrians, all enjoying a solid epistemological and methodological grounding. The “comparative-counterfactual analytics” pattern threads together the conjectural histories, spontaneous orders and empirical case studies of the contemporary Austrians, with the classic tradition of older works. Consequently, the recent evolution of Austrian scholarship should not be seen as an aberration or abandonment but as a deliberate, natural and commendable development.

The role of public policy in closing foreign direct investment gaps: an empirical analysis

Using public policy instruments to attract Foreign Direct Investment (FDI) has become standard in most countries, irrespective of their level of development, geographical location or industrial structure. Against this background the paper analyses the suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI-stock. From this baseline model FDI-gaps—measured as the difference between the “estimated actual” inward FDI-stock and the “potential” FDI-stock, which could be realized if a certain “best practice policy” were carried out—are derived. Thereby the analysis focuses on business taxation, public research and development expenditures, the information and communication infrastructure endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each of these location factors in the total industry- and country-level FDI-gap. Moreover, the analysis explores how policy advice depends on the definition of the “best practice policy”.     

Voluntary development of environmental management systems: motivations and regulatory implications

Encouraging firms to develop voluntarily more comprehensive environmental management systems (EMSs) is touted as a policy tool to augment mandatory environmental regulations. Using a unique dataset of environmental management practices of Japanese manufacturers and controlling for self-selection bias in survey responses, we find that proxies for regulatory pressures and consumer pressures are the most important factors that motivate firms toward more comprehensive EMSs. Despite the oft-claimed “voluntary” nature of EMS development, our results show that the government may have a role to play in both directly and indirectly affecting EMS development by firms.      

Misperceiving the value of information in predicting the performance of others

Economic models typically allow for “free disposal” or “reversibility” of information, which implies non-negative value. Building on previous research on the “curse of knowledge” we explore situations where this might not be so. In three experiments, we document situations in which participants place positive value on information in attempting to predict the performance of uninformed others, even when acquiring that information diminishes their earnings. In the first experiment, a majority of participants choose to hire informed—rather than uninformed—agents, leading to lower earnings. In the second experiment, a significant number of participants pay for information—the solution to a puzzle—that hurts their ability to predict how many others will solve the puzzle. In the third experiment, we find that the effect is reduced with experience and feedback on the actual performance to be predicted. We discuss implications of our results for the role of information and informed decision making in economic situations. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9128-y. JEL Classification C91, D83     

Demand competition and investment heterogeneity in industries based on systemic technologies: evidence from the US long-distance telecommunications services industry, 1984–1996

Industries based on systemic technologies are often characterized by a dynamically evolving market structure. The market structure that provides the context for firms’ investment choices itself evolves due to the feedback effect of firms’ investments. In such cases, analyses of investment-performance relationship, purporting to explain sustainable competitive advantages, should ideally account for the endogeneity of the determinants of market structure—technology, demand, and policy—and firms’ investment choices. This paper focuses on the endogeneity of the demand-side determinants of market structure and firms’ demand-side investments under the assumed conditions of constant technology and policy environment. In doing so it contradicts the extant depiction of the evolution of industrial market structure in the above context as primarily caused by the evolution of underlying technological system in response to firms’ endogenous technological investments that generate sustainable competitive advantage for the dominant firms. A dynamic evolutionary model of demand competition captures the competition in the downstream market for basic industry product and its complements in an industry based on systemic technology during its post-interoperability stage. A natural experiment drawn from the US Long-distance telecommunications services industry during 1984–1996 allows testing the hypotheses drawn from the above model in a panel data setting.     

Benefit Transfer Equivalence Tests with Non-normal Distributions

Equivalence testing reverses traditional null and alternative hypotheses—welfare estimates are assumed different unless tests demonstrate that the difference is smaller than a specified tolerance limit. Within benefit transfer, researchers have universally used the “two one-sided t-test” (TOST) equivalence test, an approach that is invalid for non-normal welfare distributions. This paper proposes an alternative based on the difference between independent empirical distributions, denoted the “two one-sided convolutions” (TOSC) test. The TOSC permits valid inference for non-normal distributions. Empirical assessments show large divergences between TOST and TOSC p-values when distributions are non-normal—demonstrating the likelihood of erroneous inference under the TOST.     

Credence Goods,Efficient Labelling Policies,and Regulatory Enforcement

We analyse the optimality of information revelation of hidden attributes of “credence goods” via alternative labelling procedures. When consumers are heterogeneous in their willingness to pay for the hidden attribute, producers can either self-label their products, or have them certified by a third party. The government can impose self or third party labelling requirements on either the “green” or the “brown” producers. Our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information. We extend our analysis to incorporate asymmetric information and cheating by the producers. When corrupt producers can affix spurious labels, the government needs to supplement the labelling policy with costly monitoring activities. We find that mandatory self-labelling schemes generally dominate mandatory third party labelling, unless the “market share effect” greatly exceeds the “incentive-to-cheat effect”.      

The world elasticity of labor substitution across education levels

We estimate the world elasticity of substitution between labor types on a very well-known data set. Using enrollment ratios and government expenditures on education as instruments, the plausible elasticities varying from 2.00 to 3.21 for the “college-completed” definition suggests imperfect substitution between skilled and unskilled labor. Considerably higher values are found for the “secondary” and “primary-completed” definitions. Overall, the higher the threshold for defining skilled labor, the lower the elasticity and less likely is the switch between types of labor. These findings complement micro-evidence and support stronger links between productivity and output for the “college educated” labor definition.