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BUSINESS ECONOMICS AND FIRM BEHAVIOR II: ADVANCED TOPICS IN STRATEGY AND THE THEORY OF THE FIRM 2017 Ph.D Seminar – Bocconi University Instructor: Professor Nicolai J Foss (nicolai.foss@unibocconiit) ABOUT THE COURSE: OBJECTIVES AND OVERVIEW The objective of this seminar is to discuss a number of advanced topics in theory of the firm of distinct relevance for management research. As the main example of management research we will make reference to strategy research throughout the course. The course builds directly on earlier PhD courses on Strategy, Microeconomics and the Theory of the Firm, and extends these in various ways. The overall framing is the firm in strategy research, as captured by, for example, resource-based and knowledge theories. These theories locate the sources of competitive advantages at various analytical levels; thus, competitive advantages may reside at the level of individual resources as well as in how these resources interact. We will use a number of the

insights that previous PhD courses have conveyed to analyze such ideas. For example, we will look at ideas on complementarities and implicit (or, relational) contracts as ways of analyzing firm-level resources. Additionally, we will look at behavioral assumptions and what role such assumptions play in different theories, explicitly going beyond the assumptions about cognition and motivation that characterize most of the economics of the firm. We end by discussing empirical application The sessions in this course are as follows: 1. 2. 3. 4. 5. 6. The Theory of the Firm in Strategy Research: Overview of recent developments Microfoundations. Bounded Rationality and the Theory of the Firm. Implicit Contracts and Prosocial motivation. Complementarities and Modularity. Empirics of the Theory of the Firm. REQUIREMENTS The course builds rather directly on the Ph.D-courses that you have already completed or are currently following, specifically “Strategy Foundations” (Prof. Williams),

“Microeconomic 1 Analysis” (Prof. Panico), and “Business Economics and Firm Behavior I” (Prof Fosfuri) I assume that you are in possession of the skill set that you are supposed to learn in these courses. As is the case for other courses in the program, I expect you to come to class having read and analyzed the readings for the week, and prepare to discuss questions listed for the week. Expect to be cold-called. Any one of you may be asked to summarize any given paper You are expected to be present at all 12 sessions. Absence from one session can be accepted, if valid reasons are provided. ABOUT THE INSTRUCTOR A Danish citizen, Nicolai J(uul) Foss (b. 1964) is a Professor (“Ordinario”) of Organization Theory and Human Resource Management at the Bocconi University, Milano. He was a professor at the Copenhagen Business School until 2016. He has held part-time and visiting professorships at the Warwick Business School, Norwegian School of Economics, Lund University, Luiss

Guido Carli-Roma, ERC Rennes, and Agder University. He founded the Center (now Department) of Strategic Management and Globalization at the Copenhagen Business School in 2005, and served as its Director/HoD until 1 April, 2015 building it from a 5 faculty center to a currently 19 faculty (and 11 PhD students) department. He directed the “Strategic Management and Globalization” World Class Environment at CBS (2008-2015) and is a co-director of the new “Human Capital, Organization Design and Performance” World Class Environment at CBS (20142016). Foss has served as a member of the Senate of the Copenhagen Business School, as a panel member of the European Research Council, Bocconi University Tenure Review Committee. He serves on the Board of Directors of the Strategic Management Society, and is one of the very few Danish social science members of Academia Europaea. Educated as an economist from the Copenhagen University (1989), Foss received his PhD degree from the Copenhagen

Business School in 1993, where he has been Assistant, Associate and Full Professor, before he moved to Bocconi University 1 September 2016. Encompassing 185 journal articles, 101 book chapters and 23 books (edited as well as monographs), his work has been published in the Academy of Management Review, Academy of Management Journal, Organization Science, Strategic Management Journal, Journal of Management, Journal of International Business Studies, Journal of Management Studies, and several other leading journals. He has published books with leading publishers, such as Cambridge University Press and Oxford University Press. Foss’ work has been cited by leading scholars in economics and management, including Erik Brynjolfsson, Giovanni Dosi, Kathleen Eisenhart, Robert Gibbons, Robert Grant, Paul Milgrom, Richard Nelson, Ikujiro Nonaka, C.K Prahalad, Andrew Pettigrew, Oliver Williamson, Sidney Winter, and many others About a dozen of his papers have been reprinted in research handbooks,

and several of his articles and books are translated into Chinese, Russian, and Spanish. His google scholar citations are above 22,000 He was listed as the “best Danish economist” by the Danish newspaper, Børsen, in 2013, 2014, and 2015. 2 TIME AND PLACE The class will adjourn as follows:    April 12th and 13th: from 8.45 to 1200am with a 15 minutes break at 1015 May 17th and 19th: from 8.45 to 1200am with a 15 minutes break at 1015 May 24th and 26th: from 8.45 to 1200am with a 15 minutes break at 1015 Information about meeting room will be forwarded later. TEACHING STYLE, COURSE GRADE, AND EXAM Lectures and discussion on the basis of lectures and the reading material is the main teaching method. It is essential that you read the texts I will not walk you through them in detail, but they are the basis for the lectures and the discussions. Expect to be cold-called Your grade is based on two components: A. Class participation This covers both your level of activity

and what you actually bring to the table in terms of substantive comments, questions, etc. This counts 30% B. An essay Thus, a written essay/paper is required for the completion of this course You should choose a topic that interests you and match the topic with one or more of the theories we cover in this seminar. Given this you can either develop a theoretical paper, much like what would be in the Academy of Management Review, with theoretical propositions. Or, you can discuss the potential and the challenges of empirically engaging with your chosen topic from the perspective of one or more of the theories discussed in the course. The length of the paper should be minimum 10 pp, exclusive of references, tables, etc. You will be evaluated on the comprehensiveness of the literature review, the degree of integration and synthesis applied to the extant literature, and the thoughtfulness of your appraisal. The paper is to be sent to me in electronic format (please use Word rather than

pdf) by 15 June 2016. This counts 70%. SESSION OVERVIEW April 12: Session I The Theory of the Firm in Strategy Research: Overview and Recent Developments Session overview: The economic theory of the firm, particularly transaction cost economics and agency theory, has been highly influential in macro-management research, notably in strategy. The economics of the firm has also met with critique on the part of, e.g, scholars who work on the knowledge-based view of the firm. However, increasingly earlier controversies have given way to attempts to align competing theories and to “adjust” the economics of the firm by taking differential 3 capabilities, learning etc. into account In this session we consider Williamsonian transaction cost economics and various recent extensions of TCE Discussion questions:  What is the relevance of the “Coasian questions” (i.e, what explains the existence, boundaries and internal organization of the firm) for the strategy field?  How do

insights from TCE allow us to understand capability formation in firms?  Would you expect economic organization to influence the discovery of new problems (and not “just” solving new problems)? Readings:  Williamson, O.E 1991 Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36: 269-296  Argyres, N. & Zenger, T 2012 Capabilities, transaction costs, and firm boundaries Organization Science, 23: 1643-1657.  Mayer, K. & N Argyres 2004 Learning to Contract: Evidence from the Personal Computer Industry. Organization Science, 15: 394-410  Nickerson, J. & Zenger, T 2004 A knowledge-based theory of the firm: The problemsolving perspective Organization Science, 15: 617-632 Supplementary readings:  Foss, N.J & Klein, PG 2010 Critiques of Transaction Cost Economics In Klein, PG & Sykuta, M., eds The Elgar Companion to Transaction Cost Economics Edward Elgar

http://econpapers.repecorg/bookchap/elgeechap/4136 5f25htm  Argyres, N., Felin, T, Foss, NJ & Zenger, T 2012 The Organizational Economics of Organizational Capability: a Research Agenda. Organization Science 23: 1213-1226 (2012) April 13: Session II: Microfoundations Session overview: Over the last decade, microfoundations have become highly influential in macro-management. In this session we characterize microfoundations in terms of origins, content and implications for research practice. Discussion questions:  Are microfoundations simply organizational behavior theory?  What are the microfoundations of organizational capability?  What are the microfoundations of TCE, agency theory and property rights theory?  How do we get from micro to macro in these theories? 4  What are the challenges for empirical research raised by microfoundations? Readings:  Felin, T., Foss, NJ, & Ployhart, R 2015 Microfoundations for Management Research Academy of

Management Annals 9: 575–632.  Jepperson, R. & Meyer, JW 2011 Multiple levels of analysis and the limitations of methodological individualisms. Sociological Theory, 29: 54-73 Supplementary Readings:  Udehn, L. 2002 The Changing Face of Methodological Individualism Annual Review of Sociology, 28: 479-507.  Hodgson, G. 2007 Meanings of Methodological Individualism Journal of Economic Methodology, 14: 211-26.  May 2013 issue of Academy of Management Perspectives, symposium on "Microfoundations.” May 17, Session III Bounded Rationality and the Theory of the Firm Session overview: Organization theory often point to bounded rationality as a fundamental assumption, but, except for transaction cost economics, bounded rationality has not been highlighted much in organizational economics. Discussion questions:  TCE builds from bounded rationality. If you look at Simon (1955), how much of that seminal paper do you see reflected in TCE?  Ditto for Ocasio?  Go to

this wiki page: https://en.wikipediaorg/wiki/List of cognitive biases Identify a cognitive bias that is not discussed in any of today’s readings and think about how it may influence contractual behavior. Readings:  Simon, H.A 1955 A behavioral model of rational choice Quarterly Journal of Economics, 69: 99-118.  Ocasio, W. 1997 Towards an attention-based theory of the firm Strategic Management Journal, 18: 187-206.  Foss, N.J & Weber, L 2016 Putting Opportunism in the Back Seat: Bounded Rationality, Costly Conflict and Hierarchical Forms. Academy of Management Review, 41: 61-79 5 Supplementary readings:  Knudsen, T. & Levinthal, DA 2007 Two faces of search: Alternative generation and alternative evaluation. Organization Science, 18: 39-54  Foss, N.J & Stea, D “Putting a Realistic Theory of Mind into Agency Theory: Implications for Reward Design and Management in Principal-Agent Relations,” European Management Review, 11: 101-116 (2014). May 19,

Session IV Contracts and Prosocial Motivation Session overview: Organizational psychologists have sometimes hinted that motivations may differ between organizations and markets, while organizational economics have essentially assumed that motivations are similar across alternative modes of organization.) In this session, we look at recent attempts to grapple with (pro-social) motivation in the context of organizations (Fehr & Fischbacher and Lindenberg & Foss). We contrast these with standard agency theory (simplified version in the Eisenhardt paper). Discussion questions:  Are there (beneficial) organizational behaviors that are inherently difficult to observe, measure and reward? How should such behaviors be called forth? How would you go about measuring them in a questionnaire?  Suppose firms in an industry have access to the exact same physical and human resources and management systems. Would you still expect performance heterogeneity to emerge? Readings: 

Eisenhardt, K.M 1989 Agency theory: An assessment and review Academy of Management Review  Fehr, E. & Fischbacher, U 2002 Why social preferences matter – the impact of non-selfish motives on competition, cooperation and incentives. Economic Journal, 112: C1–C33  Lindenberg, S. & Foss, NJ 2011 Managing Motivation for Joint Production: The Role of Goal Framing and Governance Mechanisms.” Academy of Management Review 36: 500525 Supplementary Readings:  Kreps, D.M Corporate culture and economic theory In Alt, J & Shepsle, K, eds 1990 Contributions to Positive Political Economy. Cambridge: Cambridge University Press  Koszegi, B. 2014 Behavioral Contract Theory Journal of Economic Literature, 52(4): 1075-1118.  Gottschalg, O. & Zollo, M 2007 Interest alignment and competitive advantage Academy of Management Review, 32: 418-437. 6 May 24, Session V Complementarities, Economic Organization and Firm Performance Session overview: Notions of “fit” and

“synergy” can be captured by the notion of “complementarity.” Introduced in the 1990s by Milgrom and Roberts (but drawing on earlier in lattice theory), complementarity theory has become highly influential. It is closely related to the also fashionable “NK-model” (Levinthal). In this session, we discuss how complementarity links to the theory of the firm (as discussed in previous PhD classes) and to the analysis of performance heterogeneity. Discussion questions:  In what sense are incentives and property rights complements?  Link complementarities to the resource-based analysis of sustained competitive advantage.  How would you get a grip on complementarity in organizations by means of a questionnaire instrument? Readings:  Brynjolfsson, E. & P Milgrom 2013 Complementarity in Organizations In Robert Gibbons and John Roberts, eds. 2013 The Handbook of Organizational Economics Princeton: Princeton University Press.  Ennen, E. & Richter, A 2010 The

Whole Is More Than the Sum of Its Parts Or Is It? A Review of the Empirical Literature on Complementarities in Organizations. Journal of Management, 36: 207-233.  Levinthal, D. 1997 Adaptation on Rugged Landscapes Management Science 43 (7): 934– 950. Supplementary Readings:  Furlan, A., Cabigiosu, A and Camuffo, A 2014 When the mirror gets misted up: Modularity and technological change. Strat Mgmt J, 35: 789–807  Grandori, A. 1997 Governance Structures, Coordination Mechanisms and Cognitive Models. Journal of Management and Governance, 1: 29-47 7 May 26, Session VI: Empirics of the Theory of the Firm Session overview: Organizational economics has typically maintained a close contact to empirical, often managerial, reality, and the origin of the field lies in empirical anomalies and puzzles (e.g, why firms exist, the efficiency rationales of vertical integration, the separation of ownership and control, etc.) Serious empirical testing does not commence until

approximately the mid-1980s However, since then thousands studies have engaged in empirical testing of key tenets of organizational economics, mainly transaction cost economics. There is also a fair amount of “clinical” research, that is, small-N research. Yet, organizational economics also raise fundamental challenges, related to the presence of multiple analytical levels, complementarities, and difficult-toobserve variables. In this session we look at both small and large N empirical organizational economics. Readings:  Baker, G.P and Gil, R 2013 Clinical papers in organizational economics In Robert Gibbons and John Roberts, eds. 2013 The Handbook of Organizational Economics Princeton: Princeton University Press.  Masten, S.E & Saussier, S 2000 Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting. Revue d’Economie Industrielle, 92: 215-236.  Foss, N.J 2003 Selective Intervention and Internal Hybrids: Interpreting and

Learning from the Rise and Decline of the Oticon Spaghetti Organization.” Organization Science 14: 331349 Supplementary readings:  Joskow, P. L 1985 Vertical Integration and Long Term Contracts: The Case of Coal Burning Electric Generating Plants. Journal of Law, Economics, and Organization, 1: 33–80  Whinston MD. 2003 On the transaction cost determinants of vertical integration Journal of  Law, Economics & Organization 19: 1-23. Poppo, L. & Zenger, T 1998 Testing alternative theories of the firm: transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services. Strategic Management Journal, 19: 853-877 8