Monday, October 12, 2009

A bit about the new nobel prize winners in economics

Here's a news story about the announcement of the prize. I've met Williamson before, on more than one occasion. He doesn't look like that, as I recall, though the last time I saw him must have been more than 15 years ago. On the other hand, I think most of you look quite different than the pictures you've got posted on your blogs. So maybe it's just me.

On a listserv I participate in for learning technologists and librarians, not for economists, there was a flurry this morning about Elinor Ostrom's contribution. From what I gather, she has done fundamental work on "governance" to address the "Tragedy of the Commons." This book review on her book Governing the Commons gives an accessible overview. The original Tragedy of the Commons problem dealt with livestock grazing on a commons where overgrazing was possible, in which case the tragedy is that with too much grazing there is nothing left and both the livestock and the grassy area die out. A very similar problem exists for fisheries, forests, and endangered species that are (used to be) hunted as big game. But the conceptual problem has broader applicability. Her more recent work talks about an information commons (think of the Internet), where some feel "information should be free" but others have worked hard to privatize the information for economic gain. Those issues are very much with us right now. Perhaps the tragedy of the commons notion also applies to our class discussion and maybe it will matter to the peer mentoring program we come up with. So it is certainly timely for our class to become aware of her work.

Moving on to the other winner, Oliver Williamson is know as one of the pioneers in the field called transaction cost economics. His particular focus was on the question - when does the firm have a particular set of inputs/services integrated within the firm? Alternatively, when does the firm subcontract out for those services. As a simple example to illustrate the question, the Union used to have Campus Food Service only. There were numerous complaints about quality of offering, however and the place became lightly trafficked. Ultimately they went to a Food Court model in the basement, where the suppliers are commercial entities, but they retained the in house Food Service offering in the Ballroom on the second floor.

Williamson's general finding is that for transactions that involve lots of "specific assets" - expertise that can't be found elsewhere in the marketplace - that should be done in house to avoid what is called the "hold up" problem. Hold up happens when the owner/possessor of the specific assets demands to renegotiate the contract. That person has a lot of bargaining power. The bargaining can be costly and cause delay. On the other hand, if the service is generic (think"fast food") then that should be outsourced to the market.

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