_______________________________________________________________________
Bureau
of Economic and Business Research
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2001 Abstracts for Working Papers
01-0100
The relationship between economic development, human
development and financial intermediation is examined using regression analysis.
The Human Development Index (HDI) is used as a measure of the improvement of the
human condition. Gross Domestic Product is
used as a measure of the improvement in the economic condition.
Various measures of money and financial market development are used to measure
monetary and financial depth. A sample of 118 countries is divided into four subsamples
ranging from highly developed to least developed countries based on GDP per capita.
The findings suggest that development of financial market depth is important in
explaining human development even before it becomes important in explaining economic
development.
01-0101
This paper explores why Barnard’s teachings resonate intensely with current students of
management at various levels in our management educational system.
I argue that Barnard combines the two cultures of science and art and that it is
the aesthetic reading of Barnard (1938) that explains the intensity of students’
responses to his work. Barnard’s book
offers an intense, structured and coherent art form that depends on students using their
capacities and readiness to apprehend the aesthetic experience of management based on the
author’s intimate habitual interested experience.
01-102
The monetary
instrument problem is examined in an endowment economy model with various stochastic
disturbances, with minimizing the variance of inflation as the policy objective.
Following current developments in the theory of fiscal determination of the price
level, for different monetary policies, active or passive fiscal policy is specified to
guarantee a unique equilibrium. The
responses of inflation to various structural disturbances in the constant money growth
rate-passive fiscal (the active monetary-passive fiscal regime, or the conventional
regime where Ricardian equivalence and Quantity Theory of Money hold) and the constant
interest rate-active fiscal regime (the passive monetary-active fiscal regime, or the
regime where fiscal policy determines the price level) are explained based on monetary
and fiscal policies’ role in financing government deficit changes and satisfying the
government budget constraint in each regime, which is different from the explanations of
past research following Poole. One of the
interesting findings is that an increase in the steady state real value of nominal
government debts (bonds) reduces the variance of inflation in the passive monetary-active
fiscal regime.
01-0103
The following essay is a
reappraisal of the role of the smooth test proposed by Neyman (1937) in the context of
current applications in econometrics. We revisit the derivation of the smooth test and put it into the
perspective of the existing literature on tests based on probability integral transforms
suggested by early pioneers such as R.A. Fisher (1930, 1932) and Karl Pearson (1933,
1934) and the other tests for goodness-of-fit. Our
discussion touches data-driven and other methods of testing and inference on the order of
the smooth test and the motivation and choice of orthogonal polynomials used by Neyman
and others. We review other locally most powerful unbiased tests and look at their
differential geometric interpretations in terms of Gaussian curvature of the power
hypersurface and review some recent advances. Finally, we venture into some applications in econometrics by
evaluating density forecast calibrations discussed by Diebold, Gunther and Tay (1998) and
others. We discuss the use of smooth tests
in survival analysis as done by Peña
(1998), Gray and Pierce (1985) and in tests based on p-values and other probability
integral transforms suggested in Meng (1994). Uses in diagnostic analysis of stochastic
volatility models are also mentioned. Along
with our narrative of the smooth test and its various applications, we also provide some
historical anecdotes and sidelights that we think interesting and instructive.
01-0104
(Forthcoming: Journal of Econometrics, 2001)
The 20th century
began on an auspicious statistical note with the publication of Karl Pearson’s (1900)
goodness-of-fit test, which is regarded as one of the most important scientific
breakthroughs. The basic motivation behind
this test was to see whether an assumed probability model adequately described the data
at hand. Pearson (1894) also introduced a
formal approach to statistical estimation through his method of moments (MM) estimation.
Ronald A. Fisher, while he was a third year undergraduate at the Gonville and
Caius College, Cambridge, suggested the maximum likelihood estimation (MLE) procedure as
an alternative to Pearson’s MM approach. In
1922 Fisher published a monumental paper that introduced such basic concepts as
consistency, efficiency, sufficiency – and even the term “parameter” with its
present meaning. Fisher (1922) provided the
analytical foundation of MLE and studied its efficiency relative to the MM estimator.
Fisher (1924a) established the asymptotic equivalence of minimum X²
and ML estimators and wrote in favor of using minimum X² method rather
than Pearson’s MM approach. Recently,
econometricians have found working under assumed likelihood functions restrictive, and
have suggested using a generalized version of Pearson’s MM approach, commonly known as
the GMM estimation procedure as advocated in Hansen (1982).
Earlier, Godambe (1960) and Durbin (1960) developed the estimating function (EF)
approach to estimation that has been proven very useful for many statistical models.
A fundamental result is that score is the optimum EF.
Ferguson (1958) considered an approach very similar to GMM and showed that
estimation based on the Pearson chi-squared statistic is equivalent to efficient GMM.
Golan, Judge and Miller (1966) developed entropy-based formulation that allowed
them to solve a wide range of estimation and inference problems in econometrics.
More recently, Imbens, Spady and Johnson (1998), Kitamura and Stutzer (1997) and
Mittlehammer, Judge and Miller (2000) put GMM within the framework of empirical
likelihood (EL) and maximum entropy (ME) estimation.
It can be shown that many of these estimation techniques can be obtained as
special cases of minimizing Cressie and Read (1984) power divergence criterion that comes
directly from the Pearson (1900) chi-squared statistic.
In this way we are able to assimilate a number of seemingly unrelated estimation
techniques into a unified framework.
01-0105
Exemplary teaching is of limited use unless other teachers can learn from the exemplars
and improve their teaching effectiveness. One
objective of this paper is to use The Attentional & Interpersonal Style (TAIS)
inventory to identify and analyze the characteristics of exemplary university teachers of
finance. A second objective is to use the
significant characteristics f exemplary teachers (Ets) to help colleagues improve their
teaching effectiveness and improve student learning.
The literature associated with exemplary teaching is constructed on a foundation of
empirical research that is based on student learning and assessment of teaching. Lowman concluded exemplary college teachers excelled in at least one
of two dimensions: the ability to create intellectual
excitement in students and/or interpersonal rapport with students.
A two-pronged approach was used to identify exemplary teachers of finance. One group of Ets was nominated by the chair or head of finance departments from a large sample of American universities. A list of 17 criteria were developed to identify the Ets. Another group of Ets was identified in a Business Week survey of MBA students. We compared these two groups of Ets with a sampling of finance department colleagues who had not been nominated for the ET status as well as with a group of department chairs/heads.
Using
TAIS inventory, we discovered that the exemplary teachers of finance were more aware of
how others react, extroverted, likely to express support, controlling or in charge,
confident and eager to multitask. In
addition, the Ets wrote a brief explanation of why they felt they were recognized as
exemplary teachers. These comments provided
rich insights into the multi-dimensional characteristics of
these outstanding teachers. Using the
six significant TAIS characteristics and the Ets accompanying suggestions and
recommendations, we were able to provide guidance for all finance teachers about how to
improve their teaching effectiveness and student learning.
The paper concludes by suggesting the
addition of a third dimension to Lowman’s two-dimensional model of effective college
teaching. The third dimension is identified
as confident adaptability. A
three-dimensional exemplary teacher space is presented and the insights are
discussed.
01-0106
Skills associated with functional literacy carry important implications for consumers.
Yet, past research on functionally illiterate consumers is almost non-existent.
In this study, a variety of methods, such as in-depth interviews and observations
in a shopping environment of students enrolled at an adult education center, were used to
understand functionally illiterate consumers. The
findings suggest a high degree of concrete thinking exemplified by dependence on aural
and visual information, use of numbers as concrete information, intuitive processing,
lack of planning and emphasis on contextual learning, as well as dependence on others and
maintenance of self-esteem in service encounters. Behavioral
outcomes observed include perceptual decision-making, and high loyalty to retail outlets.
These themes were accentuated at lower levels of functional literacy, where
extreme dependence on others and the use of rudimentary defensive practices to avoid
negative experiences were common. These data
suggest a model of decision-making with little effort spent on evaluation of alternatives
and most effort spent on perceptual-level processes such as locating a product and
reading price information. Interviews of
comparison groups of functionally literate poor consumers and consumers with English as a
second language provided similarities and contrasts that isolate the effects of
functional illiteracy on consumer behavior. The
results were interpreted theoretically within the framework of the Elaboration Likelihood
Model. This research raises questions about
the almost constant assumption in past consumer behavior of a certain level of generic
ability that consumers possess. Whereas the
model of a cognitive miser has been prevalent in consumer behavior, the model that best
describes functionally illiterate consumers is one of a cognitive survivor.
Important practical implications for marketers and policy makers are also
discussed.
01-0107
A stochastic process impinges on an agent and a principal in distinct ways.
From the agent’s perspective the process is noise that interferes with his
perception of productivity states, leading him to sometimes take actions that are in
retrospect mistaken. From the principal’s
perspective the noise is in fact the productivity of the agent’s action, and he would
like to coordinate the agent’s actions with the process.
01-0108
A
continuous-time private-information insurance contract is analyzed.
The special case analyzed is equivalent to a credit equilibrium. Defection from the contract and its equivalent credit equilibrium
using smooth-pasting methods is analyzed. The
contract and its equivalent standard credit equilibrium cannot be made immune to
defection. Immunity from defection can be
reinstated by constructing a constrained
insurance contract as described in [3], but the insurance value provided is reduced below
that of the full-information case.
01-0109
This note analyzes settings in which there is McCall-type search, but when searchers
accept a job, the job is removed from the distribution of jobs as well as the searcher
being removed. The basic intuition is that
the best jobs get taken first, a kind of cream-skimming.
This leaves a pool of worse jobs on subsequent rounds, adding to the pressure to
accept lower-payoff jobs sooner rather that later. In
its most extreme form, the number of initial jobs matches the number of workers and all
jobs are accepted on the first round.
01-0110
In an economy with a continuum of individuals, each individual has a stochastic,
continuously evolving endowment process. Individuals
are risk-averse and would therefore like to insure their endowment processes.
It is feasible to obtain insurance by pooling endowments across individuals
because the processes are mutually independent. We
characterize the payoff from an insurance contracting scheme of this type, and we
investigate whether such a scheme would survive as an equilibrium in a noncooperative
setting.
01-0111
This
paper introduces a decomposition methodology to analyze the determinants of the
gender gap in employment rates. In
particular, we investigate the degree to which the gender gap in employment
rates is driven by differences in the male/female entry rates into part-time and
full-time employment or driven by differences in the male/female exit rates from
employment. We also investigate how
the size of the gender gap and the relative importance of entry and exit rates (i)
vary over the life-cycle, and (ii) depend on demographic characteristics,
including marital status, number of children in the family, education, and race.
We find that the employment gender gap is driven primarily by the higher
exit rates of women from full-time employment and to a lesser extent by the
transitions of women from part-time employment.
Further, the pattern of part-time employment differs across the genders:
For men, part-time employment is a transient state between successive bouts of
full-time employment; for women, it is a more persistent state and a precursor
to a withdrawal from the labor force. Finally,
we find that the qualitative nature of the gap differs across demographic
groups: The pattern of employment
transitions of women with post-graduate education is the most similar to that of
their male counterparts, while the corresponding pattern of women with only a
high-school education is the most dissimilar.
01-0112
This paper surveys and examines the sources of fluctuations in inflation and
output in Turkey. Using a dynamic open economy aggregate supply – aggregate
demand model with imperfect capital mobility and structural vector-autoregressions,
the authors consider real oil price, supply, balance of payments, real demand,
and monetary disturbances. Empirical
results indicate that inflation is driven by monetary and real demand
disturbances while output is mainly driven by aggregate supply disturbances.
The historical decomposition shows that a substantial portion of
inflation is aggregate demand-driven core inflation.
A credible disinflation program accompanied by structural reform is
likely to stabilize the economy with little output costs.
01-0113
The possibility of obtaining a ‘theory’ of money is questioned, where a
theory is taken to mean an explanatory framework using a small number of
observables. The root of the
problem lies in the maximizing nature of economic agents.
Money is means to effect transactions and savings; what will be used as
money depends upon such a miscellany of factors that no ‘theory’ can be
expected to emerge. A critical
examination of the Quantity Theory, both as a theory and as a testable
proposition, supports this claim.
01-0114
The stability of an economic policy regime depends in large measure on
either its successful authoritarian imposition or on the general acceptance by
society of the distributional status quo of assets and/or income. Although
Argentina's convertibility Plan ("Currency Board" system) brought
price stability and growth to the country, the inability or unwillingness of the
government to attain a fiscal adjustment threatened its survival. The
"fight for shares" in this "conflict society", which was
inherited from previous regimes, was never resolved. We show that this
fight previously left unresolved through inflationary finance, was left
unresolved through the rapid growth of indebtedness under the Convertibility
Plan. From 1999 on, the contradictions of the Plan had become obvious and
it was clear that the key to future stable economic growth was dependent on
finding a way to turn the "conflict society" into a "consensus
society." The construction of such a society is still a pending task
for Argentina.
01-0115
Turkey has experienced high and persistent inflation
for more than twenty years. This
paper attempts firstly to survey the extremely broad literature on theories of
inflation, in order to be able to classify, understand and discuss the dynamics
of inflation more carefully. It is
mainly argued that inflation may be interpreted as a net result of sophisticated
and continuous interactions of demand-side (or monetary) shocks, supply-side (or
real) shocks, price-adjustment (or inertial) factors and political processes (or
institutional factors). The second
aim of the paper is to compare the existing empirical studies on Turkish
inflation, by considering their sample period, data frequency, empirical
methods, modeled macroeconomic variables and main results.
Most of the studies reviewed here seem to have focused primarily on
demand-side determinants (e.g., monetary growth and budget deficits), and
partially on some supply-side factors (e.g., nominal exchange rates and oil
prices). On the other hand, the
components, degree and effects of inflation inertia need to be investigated in
more detail. It is also noted that,
in the future, the modeling attempts of the inflationary dynamics in Turkey
would profit from the so-called “new political macroeconomics” because the
role of the political process and institutions is not a weak explanatory factor
of inflation that is easily ignored.
01-0116
The standard root-b1 test is widely used for testing skewness.
However, several studies have demonstrated that this test is not reliable
for discriminating between symmetric and asymmetric distributions in the
presence of excess kurtosis. The
main reason for the failure of the standard root-b1 test is that its
variance formula is derived under the assumption of no excess kurtosis.
In this paper we theoretically derive adjustment to the root-b1
test under the framework of Roa’s Score (or the Lagrange multiplier) test
principle. Our adjusted test
automatically corrects the variance formula and does not lead to over- or
under-rejection of the correct null hypothesis. In a similar way, we also suggest an adjusted test for
kurtosis in the presence of asymmetry. These
tests are then applied to both simulated and real data.
The finite sample performances of the adjusted tests are far superior
compared to those of their unadjusted counterparts.
01-0117
Most of the tests for asymmetry are developed under the null hypothesis of
normal distribution. As is well
known, many financial data exhibits fat tail, and commonly used tests (such as
the standard root-b1 test based on sample skewness) are not valid for
leptokurtic financial data. Also,
the root-b1 test uses the third moment, which may not be robust in
the presence of gross outliers. In
this paper, we propose a simple parametric test for symmetry based on the
Pearson type IV family of distributions, which take account of leptokurtosis
explicitly. Our test is based on a
function that bounded over the real line, and we expect it to be more well
behaved than the test based on sample skewness (third moment).
Results from our Monte Carlo study reveal that the suggested test
performs quite well in finite samples, and it is robust to excess kurtosis.
We also apply the test to stock return data to illustrate its usefulness.
01-0118
This paper develops a flexible parametric approach to
capture asymmetry and excess kurtosis along with conditional heteroskedasticity
with a general family of distributions for analyzing stock returns data.
Engle’s (1982) autoregressive conditional heteroskedastic (ARCH) model
and its various generalizations can account for many of the stylized facts, such
as fat tails and volatility clustering. However,
in many applications, it has been found that the conditional normal or
Student’s t ARCH process is not sufficiently heavy-tailed to account for the
excess kurtosis in the data. Moreover,
asymmetry in financial data is rarely modeled systematically.
Therefore, there is a real need to find an asymmetric density that can be
easily estimated and whose tails are heavier than those of Student’s
t-distribution. Pearson type IV
density is such a distribution, and it is much easier to handle than those that
have been used in the literature, such as non-central t and Gram-Charlier
distributions, to account for skewness and excess kurtosis simultaneously.
Pearson type IV distribution has three parameters that can be interpreted
as variance, skewness and kurtosis; and they can also be considered as different
components of the risk premium. Modeling
simultaneously time-varying behavior of mean, variance, skewness and kurtosis
produces a better explanation of risk than mean-variance analysis alone.
These methodologies can also be used to analyze other financial data such
as exchange rates, interest rates and spot and future prices.
01-0119
One of the main ingredients in forming an international portfolio is the
correlation matrix. The
correlations represent the degree of interdependence across markets.
With the recent globalization of markets and increased volatility, we can
expect these correlations to change over time, and quite possibly to go up.
However, the standard practice in modeling asset return dynamics is to
assume constant correlation. This
parameterization is simple, and it involves a relatively small number of
parameters. However, the validity
of this assumption remains an empirical question.
This paper is concerned with developing a formal test for constancy of
correlation, and applying it to financial markets of the USA, Japan, Germany,
the UK, France and Italy.
01-0120
This paper summarizes and comments on Conner (1991)
which contributes to the strategic management area by providing an historical
comparison of resource-based theory and five schools of thought within
industrial organization economics. Conner
(1991) argues that the fundamental distinction between resource-based theory and
transaction costs theory is that resource-based theory focuses on the deployment
and combination of specific inputs while transactions costs theory focuses on
the avoidance of opportunism. I
offer three responses to this claim. First,
Conner’s distinction was not central to the resource-based literature at the
time the article was published. Second,
I raise concerns about building a resource-based theory of the firm that assumes
away the problems of opportunistic behavior.
Third, I offer an alternative view of the fundamental similarities and
differences between resource-based theory and transaction costs theory.
01-0121
Economic growth and development is a complicated process that falls into the
domain of many disciplines in social sciences and humanities.
It is natural then to study fundamental aspects of economic growth
synthesizing research in relevant fields. In
this short paper, we argue that this has rarely been the case in the economic
growth literature. We briefly
discuss past growth theories and empirics, and present a broad framework to
compare and evaluate work on economic growth from an interdisciplinary
perspective.
01-0122
We construct and estimate a stylized structural model
of the European Union’s budget using recent profiles of the European Union’s
expenditures and revenues. The
model is tested (successfully) by assessing its ability to predict the effects
of the 1995 enlargement on the European budget.
We use the estimated model to predict the re-allocation of the Union’s
expenditures and revenues after the Eastern enlargement.
Our approach differs from that of most of the existing literature in that
we fix the preferences for redistribution of resources among the Union’s
members, rather than fix the current budgetary rules or modify them on the basis
of assumed scenarios. Our estimates
of transfers to the incoming member states exceed those of the rest of the
literature. Our results can be
interpreted in one of two ways: First,
either the European Union, in its collective decision-making process
(that in the future will include the five incoming countries as voting
members), will institute new rules and programs to further reduce the regional
disparities in income, or second, if the current rules and programs are
maintained, then the Eastern enlargement would result in a reduction in the
“depth” of the Union. The
approach we introduce can be more generally applied to the analysis of other
inter-governmental or international organizations.
01-0123
A total of 2514 adults were surveyed regarding their
opinions about ads in either, 1) TV, 2) radio, 3) catalogs, 4) business
classifieds, 5) out-of-home, or 6) advertising in general. Media that allow for
self-selected exposure, where perceived interest in an ad is the basis for
exposure to it, were evaluated much more favorably than more intrusive
advertising media. Catalogs and
business classifieds elicited the most confidence; TV advertising elicited the
least. Confidence in advertising in
general most closely resembled that for TV advertising.
More confidence in advertising was reported by males, people under 35,
and people with less education or lower incomes.
However, media differences generally cut across demographic lines.
01-0124
We develop an integrated approach for analyzing
logistics and marketing decisions within the context of designing an optimal
returns system for a retailer servicing two distinct market segments.
At the operational level, we show that the optimal refund price is not
unique. Moreover, it is such that if both market segments return a purchased
product, then neither segment will receive a full money-back refund; and it is
such that if one or both segments do not return a purchased product, then a
refund premium over the purchase price is possible, but the refund premium will
not be enough to offset a customer’s total net cost of purchase and return. We
also show that any improvement to the returns system that results in increased
logistical efficiency or marketing effectiveness will be accompanied by an
increase in the selling price of the product.
At the strategic level, we show that if the retailer coordinates its
logistics and marketing efforts to improve the overall returns system, then it
will achieve the social optimum; and if the retailer does not coordinate its
efforts, then it will tend to over-invest in the function that leads in
investment, and it will tend to under-invest in the function that follows.
For cases in which coordination is not viable, we establish conditions to
guide when either logistics or marketing should lead in improvement efforts.
01-0125
Exemplary teaching is of limited use unless other teachers can learn from
the exemplars and improve their teaching effectiveness.
One objective of this paper is to use The Attentional & Interpersonal
Style (TAIS) inventory to identify and analyze the characteristics of exemplary
university teachers of finance. A
second objective is to use the significant characteristics of exemplary teachers
(ETs) to help colleagues enhance their teaching effectiveness and improve
student learning.
A two-pronged approach was used to identify exemplary teachers of finance. One group of Ets was nominated by the chair or head of finance departments from a large sample of American universities. A list of 17 criteria were developed to identify the Ets. Another group of Ets was identified in a Business Week survey of MBA students. We compared these two groups of Ets with a sampling of finance department colleagues who had not been nominated for the ET status.
Using the TAIS instrument, we discovered that exemplary teachers were more spontaneous, confident, experimental, in-charge of class, show intuitive empathy to students and take risks in expressing thoughts than their colleagues. In addition, the Ets wrote a brief explanation of why they were recognized as a great teacher. These comments provided rich insights into the multi-dimensional characteristics of these master teachers. More importantly, they provided valuable recommendations to colleagues on how to improve their teaching effectiveness and student learning.
Lowman (1996) concluded that exemplary college teachers excelled in at least one of two dimensions: the ability to create intellectual excitement in students and/or interpersonal rapport with students. Our findings suggest a third component/dimension to the Lowman’s two-dimensional model of effective college teaching that is identified as characteristics needed by Ets to create intellectual excitement and interpersonal rapport. A three-dimensional exemplary teacher space is presented and possible interpretations are developed.01-0126
This paper considers a market in which a firm can engage in partially
relationship specific investments. The
firm does not have the option to engage in investments that are not at all
relationship specific. I show that,
in such a setting, equilibrium investment can exceed the socially optimal level. This is contrary to the intuition obtained from standard
idiosyncratic (i.e., relationship-specific) investment models, in which the
possibility of “hold-up” leads to under-investment.
01-0127
In Lucas and Stokey’s (1983) economy, tax rates inherit the serial
correlation structure of government expenditures, belying Barro’s
(1979) result that taxes should be a random walk for any stochastic
process of government expenditures. To
recover a version of Barro’s ‘random walk’ tax-smoothing outcome, we
modify Lucas and Stokey’s (1983) economy to permit only risk-free debt.
Having only risk-free debt confronts the Ramsey planner with additional
constraints on equilibrium allocations beyond one imposed by Lucas and
Stokey’s assumption of complete markets.
The Ramsey outcome blends features of Barro’s model with Lucas and
Stokey’s. In our model, the
contemporaneous effects of exogenous government expenditures on the government
deficit and taxes resemble those in Lucas and Stokey’s model, but incomplete
markets put a near unit root component into government debt and taxes, an
outcome like Barro’s. However, we show that without ad hoc limits on the
government’s asset holdings, outcomes can diverge in important ways from
Barro’s. Our results use and
extend recent advances in the consumption smoothing literature.
01-0128
Limited observability is the assumption that economic agents can only
observe a finite amount of information. Given
this constraint, contracts among agents are necessarily finite and incomplete in
comparison to the ideal complete contract that we model as infinite in detail.
We consider the extent to which finite contracts can approximate the
idealized complete contracts. The
objectives of the paper are: (i) to
identify properties of agents’ preferences that determine whether or not
finiteness of contracts causes significant inefficiency:
(ii) to evaluate the performance of finite contracts against the ideal
optimal contracts in principal-agent and bilateral bargaining models.
01-0129
This paper examines performance outcomes of resource deployment strategies
and moderating effects of firm-specific experience of top managers and
institutional ownership on profitability of resource deployments.
We find that R&D and marketing deployments have short-lived positive
effects on firm performance. Governance
by institutional investors improves the profitability of marketing
deployments whereas top managers with firm-specific experience improve the
profitability of R&D deployments. Firm-specific
management experience and institutional ownership are complementary in
contributing to entrepreneurial success.
01-0130
Why is property rights theory important for strategic
management? Strategic management
focuses on why certain business firms persistently outperform others.
Property rights theory addresses this key question by analyzing market
frictions. Resource-based theory, a
mainstream theoretical perspective in the discipline of strategic management,
implicitly assumes that resources are secure due to the inherent attributes of
the resources as well as being effectively protected by third-party enforcement
and self-enforcing agreements. Extant
property rights theory enables us to relax these assumptions to take into
account processes where there are struggles in establishing property rights that
will enhance the realized economic value of resources.
Determination of value creation, which is emphasized in resource-based
theory, is informed by a careful examination of property rights.
A case study of oil field unitization (where a single firm is designated
as the unit operator to develop the oil reservoir as a whole) is analyzed to
illustrate these theoretical points. In
particular, widespread failure to achieve oil field unitization in the United
States despite large potential aggregate economic gains shows how asymmetric
information and distributional conflicts over rental shares can limit adoption
of property rights that would enable the “internalization of externalities”
and thereby enhance realized value creation.
This business case highlights that a full resource-based analysis of
value creation that focuses on realized value, and not merely potential
value, must incorporate the role of property rights to internalize externalities
and to solve game-theoretic prisoners’ dilemma problems of common-pool
resources. The case of (the lack of) oil field unitization in the United
States illustrates how difficult it can be to get the institutional details of
the property rights correct for realized value creation.
In an economic world of positive transaction costs, there are frictions
in the development of property rights that can drive a persistent wedge between
potential value and realized value. In
terms of theory development, property rights theory enables us to analyze
distributional conflicts and is a complementary and necessary component to
resource-based analysis of (realized) value creation.
Last
updated December 5, 2001 by Linda Huff
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