Crafting Internal Hybrids: Complementarities,Common Change Initiatives,and the Team-Based Organization

Hybrid governance forms that seek to meld the virtues of both market control and traditional hierarchical control are alluring. Comparatively little research, outside of the M-form literature, has examined internal hybrids - hierarchical forms infused with elements of market control. This paper contends that common change initiatives, such as TQM, re-engineering, autonomous work teams, and group-based rewards, are appropriately viewed as attempts to craft internal hybrids by selectively infusing elements of market control within hierarchy. However, these change initiatives are often implemented in isolation and, as a consequence, violate patterns of complementarity that sustain traditional hierarchy or support the stable infusion of market control.The paper argues that these violations of complementarity often spiral hierarchies toward fundamental transformation. The clear trajectory of these transformations is to quite radically disaggregated organizations structured around teams. The paper presents both theory and evidence supporting the existence of complementarities among these common change initiatives.     

Do formal contracts and relational governance function as substitutes or complements?

Relational exchange arrangements supported by trust are commonly viewed as substitutes for complex contracts in interorganizational exchanges. Many argue that formal contracts actually undermine trust and thereby encourage the opportunistic behavior they are designed to discourage. In this paper, we develop and test an alternative perspective: that formal contracts and relational governance function as complements. Using data from a sample of information service exchanges, we find empirical support for this proposition of complementarity. Managers appear to couple their increasingly customized contracts with high levels of relational governance (and vice versa). Moreover, this interdependence underlies their ability to generate improvements in exchange performance. Our results concerning the determinants of these governance choices show their distinct origins, which further augments their complementarity in practice. Copyright © 2002 John Wiley & Sons, Ltd.     

Explaining the variance of price-dividend ratios

I report a bound on the variance of the-dividend ratios anda decomposition of their variance into terms that reflect changesin dividend growth and discount rates. The specification isnot restrictive. The test statistics do not require constructionof ex post present values; instead, they are restrictions onmeans, variances and covariances of price-dividend ratios, dividendgrowth, and discount rates. I consider implications for themean price-dividend ratio, and I evaluate whether a low meandiscount rate can rationalize the mean and variance of price-dividendratios. The results do not indicate any striking rejectionsof present value models. However, the bulk of the variance ofprice-dividend ratios must be accounted for by changing forecastsof discount rates, and discount rates must possess some unusualcharacteristics.     

Ex Post Evaluation of Enforcement: A Principal-Agent Perspective

Summary  This paper discusses a number of methodological challenges that ex post evaluation of competition policy faces. We argue that imprecise measurement and simplified analysis not only lead to unreliable results, but also trigger behavioural responses by competition authorities. Because evaluation works as an incentive scheme, it has an immediate impact on the way agencies operate. Faced with simplistic assessment, authorities may be tempted to be overly interventionist, to spend too many resources and to ignore relevant information. Therefore, a careful design of methodologies is important to ensure that ex post control does not bring about the very ills it is supposed to cure. The views expressed are those of the authors and do not necessarily reflect those of DG Competition or the European Commission.     

Opportunity Discovery, Problem Solving and a Theory of the Entrepreneurial Firm

abstract When should an entrepreneur employ a market to help discover and exploit opportunities, and when should the entrepreneur create a firm to do so? If a firm is created, how should it be organized? In this paper we argue that opportunities equate to valuable problem‐solution pairings, and that opportunity discovery relates to deliberate search or recognition over this solution space. As problem complexity increases, experiential (or ‘directional’) search via trial‐and‐error provides fewer benefits, and cognitive (or ‘heuristic’) search via theorizing becomes more useful. Cognitive search, however, requires knowledge sharing, when knowledge is distributed among specialists, that is plagued by a knowledge appropriation hazard and a strategic knowledge accumulation hazard. Markets, authority‐based hierarchy, and consensus‐based hierarchy then have differential effects on the efficiency of opportunity discovery given the complexity of the associated problem. Those entrepreneurs with exceptional capabilities of opportunity recognition can efficiently adopt authority‐based governance over a wider range of complexity. We thus combine the two major modes of opportunity discovery – search and recognition – onto one framework that can explain different entrepreneurial organizational forms, resulting in an entrepreneurial theory of the firm.     

Price formation on stock exchanges: the evolution of trading within the day

Prior analyses of prices of the NYSE and other exchanges findthat transitory price volatility is greater at the open of tradingthan at the close. We extend this line of research by using40 years of hourly Dow Jones 65 composite price index data toestimate transitory volatility throughout the trading day. Ourresults indicate that transitory volatility steadily declinesduring the trading day. We find a similar intraday decline intransitory volatility for a 2-year sample of the individualfirms in the Dow Jones 30 Industrials Index. The results areconsistent with the hypothesis that trading aids price formationand do not support the argument that particular trading mechanismsare the source of greater volatility at the open of trading.     

Envy,comparison costs,and the economic theory of the firm

An economic theory of the firm must explain both when firms supplant markets and when markets supplant firms. While theories of when markets fail are well developed, the extant literature provides a less than adequate explanation of why and when hierarchies fail and of actions managers take to mitigate such failure. In this article, we seek to develop a more complete theory of the firm by theorizing about the causes and consequences of organizational failure. Our theory focuses on the concept of social comparison costs that arise through social comparison processes and envy. While transaction costs in the market provide an impetus to move activities inside the boundaries of the firm, we argue that envy and resulting social comparison costs motivate moving activities outside the boundary of the firm. More specifically, our theory provides an explanation for ‘managerial’ diseconomies of both scale and scope—arguments that are independent from traditional measurement, rent seeking, and competency arguments—that provides new insights into the theory of the firm. In our theory, hierarchies fail as they expand in scale because social comparison costs imposed on firms escalate and hinder the capacity of managers to optimally structure incentives and production. Further, hierarchy fails as a firm expands in scope for the simple reason that the costs of differentially structuring compensation within the firm to match the increasing diversity of activities also rises with increasing scope. In addition, we explore how social comparison costs influence the design of the firm through selection of production technologies and compensation structures within the firm. Copyright © 2008 John Wiley & Sons, Ltd.