More (Almost) Live Blogging
October 15, 2011 Leave a comment
Day 2 afternoon was McQuinn time. I presented the third keynote, “Managing Derived Judgment: Information, Incentives, and Bias.” Building on earlier work distinguishing original and derived judgment and applying the judgment framework to nonmarket decision making, I discussed some problems of providing appropriate incentive structures for delegates — employees, bureaucrats, borrowers — to engage in entrepreneur-like behavior within organizations. Besides the usual problems of assigning decision rights and providing effective monitoring schemes, I noted that subordinates exercising derived judgment on behalf of resource owners often suffer from asymmetric gains a losses, a well-known application of prospect theory. When you rent a car, the best that can happen for you is that you return it in decent shape. If you wreck the car, then (depending on your insurance coverage), you could be liable for substantial damages. The goal is to avoid loss, not take any risky actions that could increase the value of the car. Likewise, elected officials rarely benefit from taking actions that improve public well-being, but they may suffer substantial losses if something bad happens on their watch. Most politicians practice loss aversion, not some version of expected utility maximization. I discussed some means of encouraging productive entrepreneur-like behavior by delegates in the face of potential loss aversion — carefully balancing gains and losses, deemphasizing the status quo, minimizing the stigma of failure, and so on.
The final session featured our own Per Bylund presenting his paper on the division of labor and the emergence of the firm. Echoing Stigler (1951), Per developed a theoretical model of how firms are created by entrepreneurs to create and exploit a more intense division of labor. Discussant (and conference co-organizer) Nicolai Foss noted similarities between Per’s ideas and earlier work by Demsetz, Richardson, Leijonhufvud, and others, agreeing with Per that this aspect of production has been neglected in both neoclassical and transaction cost theories of the firm.