EC 475-Senior Seminar, Meehan Spring 2002- Page 1
THE ECONOMICS OF ORGANIZATION
EC 475Professor Meehan
Senior Seminar Spring 2002
Text: There will be a text for the seminar this year. The text is:
James Brickley, Clifford Smith, and Jerrold Zimmernan, Managerial Economics and Organizational Architecture, 2nd ed., (McGraw-Hill/Irwin, 2000). Referred to as BSZ in the reading list.
In the past, I have relied completely on outside journal articles and put them in a course-pack. I decided to use a text this year because this particular text provides a good approach to the middle third of the course. Some friends at other institutions have used it and found that the students liked it. I will use the text for somewhere between a third to a half of the course. I will continue to assign journal articles and other readings for the other sections of the course. Some of these articles can be found in a course-pack that is available from the bookstore.
To keep the cost down, I have asked to bookstore to get as many used copies of the text as possible. [The cost of a used copy is about $78 vs. $108 for a new copy.] In addition, I have shifted as many of the journal articles as I could to e-reserve to keep the cost of the course-pack down and the cost of the course materials within reason. Finally, I have put hard copies of soome articles on reserve because they were not available electronically and I couldn't get them in the course-pack.
I will note on the reading list what articles are available on e-reserve and the articles that are in the course-pack, and the articles that are on the standard reserve.
There is another text that is not required but you may be interested in purchasing, particularly if you are interested in a rigorous presentation of the economics of business strategy. I will assign a couple of chapters from this text. It is:
David Besanko, David Dranove, and Mark Shanley, Economics of Strategy, 2nd ed. (John Wiley & sons, Inc., 2000). Referred to as B,D&S on the reading list.
Case Studies:
I am also assigning three case studies. One is a case that I wrote and it will be handed out in class. Another is a Harvard Business School Case, General Dynamics: Compensation and Strategy (A) that can be purchased at the bookstore for $3.95 (I will write a set of questions for you to answer). The third case will be a short paper on the incentive (agency) issues that exist in commercial sword fishing. The issues are referred to in the book, the Hungry Ocean (Hyperion: 1999) by Linda Greenlaw. The book is available in the bookstore for $14 new and $10.50 used.
Class Participation: This course is a seminar. Its success depends on the participation of everyone. Therefore, you are expected to do all of the readings and participate in class discussions. If necessary, I will call on individuals to participate. Missing one class means you have missed a week of class participation which can have a serious impact on your class participation grade. Serious illness or death in the family are the only reasons that I will excuse. Missing class for any other reason is your choice but it will affect your class participation grade. The class participation grade will be based on the quality of participation was well as the quantity of participation. At mid semester I will assign a tentative class participation grade so you can get some sense as to how well you are doing.
Grade: Your final grade is based on your performance on three short papers (8 to 10 pages--Times, 12 pt.-60%), three case studies (20%), and class participation (quality and consistency-20%). Randomly, I will start class by asking you to write a short answer to a couple of questions. These will be collected and graded. They will count towards your class participation grade. I reserve the right to give a final exam on the last day of class.
Papers: The first two papers will be case studies based on a topic of your choosing. In these papers you are asked to use the theory of organizations learned in this course to explain some aspect of organizations that you are familiar with. The purpose of these papers is to get you to think about why various institutions and organizations exist. Students initially think that they have little, or no, experience that they can call upon to write these papers. With a little reflection, however, most students come up with several interesting topics to write about. Most papers are written about contracts that the students have experience with (or knowledge about). The compensation patterns that students have observed in their summer jobs is another source of ideas for papers. Parents jobs or businesses has also been a source of many papers. Don't feel bound by these topics; let your imagination run free. If you have any doubt about whether your topic is acceptable, please consult with me.
The third paper requires that you choose one oftwo topics related to the recent events surrounding Enron's collapse.
The first option is to write a paper on what role of the board of trustees played in the Enron problems. Did they do their job in overseeing and monitoring Enron’s executives? Were the outside board members truly independent? What about the board members that served on the important committees? What role did the large institutional investors play in the governance of the corporation? CALPERS (the California State Retirement Fund) had a fairly large holding in Enron. They are one of the most active institutional investors in the corporate governance movement. They frequently take an active role in monitoring the performance of the boards of companies they hold stock in. They don’t get involved in the day-to-day management issues but they will set guidelines for the number of independent directors and other governance issues. In this case they did not play much of a role. Did they miss some poor governance practices? At the end of the paper, you should make some recommendations for improving the board performance. Support your recommendations by explaining how the changes you recommend would have improved the board’s performance in monitoring Enron.
The second option is to explore the pros and cons of an auditing firm like Arthur Andersen having both a consulting division and an auditing division within the same company. Are there any efficiency (business) justifications for a company to provide both services to their clients? Are there any potential conflicts of interests? Would you support regulations that prevent the accounting firms from owning business-consulting units? Or, would you suggest alternative models that would allow the accounting firms to exploit the economies of joint ownership while avoiding the conflicts of interest? You must support your arguments.
Later on in the course I assign several articles that use the "event study" methodology. A
good (and brief) review of the methodology used in these studies can be found in:
R. Schweitzer, "How Do Stock Returns React to Special Events?" Business Review
(Federal Reserve Bank of Philadelphia, July/August 1989) - This paper is on
reserve.
Speakers: I have arranged for the following outside speakers to participate in seminar this
Spring. Each speaker hassuggested some readings that I will assign one week in advance.
February 25th. Scott Masten, Professor, The Graduate School of Business, The University of Michigan. His topic will be"Continuing in the Information Economy." Scott will look at some of the Contracts used by Microsoft.
March 4th. Mark Gildersleeve, C'77, President of WSI Corporation. His topic will be
"Chaos Theory: Issues in Managing Knowledge-Based Firms."
April 1st. Dana Russian, C'79, and Ryan Fleur. Dana istrumpet player with the Beacon
Brass Quintet, the Boston Pops, the Pro Arte Chamber Orchestra, the Boston Ballet, and the Boston Lyric Opera. Ryan is the Directoor of the Pro Arte Chamber Orchestra and has worked with the New York Philharmonic, the San Francisco Symphony, and other symphonies. Their topic will be "Why Isn't an Orchestra More Like a Businness? The Economics of How Orchestras' Are
I.Introduction
B, S, & Z, Chapter 3
F. Hayek, “The Use of Knowledge in Society,” American Economic Review Vol. 35
(September 1945), pp. 519-530. E-Reserve
II.Contracting (Formal and Informal Methods)
1.The Theory
B, D&S, pp.109-138 and 141-165. Course-Pack
A. Kronman, "Contract Law and the State of Nature," Journal of Law Economics, and Organizations (Spring 1985) pp. 5-32. Course-Pack
2.The Evidence
A.The Relationship Between Transaction-Specific Investments and Length of Contract
P. Joskow, "Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants," Journal of Law, Economics, and Organizations (Spring, 1985) pp. 33-80. Course-Pack and Reserve.
B.Non-Price Clauses
S. Masten and K. Crocker, "Efficient Adaptation in Long-Term Contracts: Take-or Pay Provisions for Natural Gas," American Economic Review (December 1985) pp. 1083-1093. E-Reserve and Reserve.
C.Informal Methods
D. Allen and D. Lueck, "The 'Back Forty' on a Handshake: Specific Assets, Reputation, and the Structure of Farmland Contracts," Journal of Law, Economics, and Organization (April, 1992), pp. 366-376. Course-Pack and Reserve.
PSI/Exxon Coal Company. This case will be handed out in class.
III.The Make-or-Buy Decisions
1.The Nature of the Firm and Efficient Boundaries
2.Intermediate Modes
A. Franchising
B. Klein, “The Economics of Franchise Contracts”, Journal of CorporateFinance: Contracting, Governance, and Organization 2 (1995) pp. 9-38. Course-Pack
3.Vertical Integration
S. Masten, J. Meehan, and E. Snyder, "The Costs of Organization," Journal of Law, Economics, and Organization (Spring 1991), pp. 1-25. Course-Packand Reserve.
IV.Corporate Governance
1. Ownership
H. Hansmann, "Ownership of Firm," Journal of Law, Economics, and Organization (Fall 1988), pp. 267-304. Course-Pack
O. Hart, "An Economist's Perspective on the Theory of the Firm," Columbia Law Review (1989), pp. 1757-1774. Lexis/Nexis
T. Stewart, "Brain Power: Who Owns It...How They Profit From It," Fortune (March 17, 1997), pp.105-110.Reserve.
2.Separation of Ownership and Control
E.F. Fama and M. Jensen, "Separation of Ownership and Control," Journal of Law
and Economics (June 1983) pp. 301-325. Course-Pack and Reserve.
E.F. Fama and M. Jensen, "Agency Problems and Residual Claims," Journal of Law and Economics (June 1983) pp. 327-349. Course-Pack and Reserve.
B, S & Z, Chapter 10
3.Nonprofit Organizations
H. Hansmann, "The Role of Nonprofit Enterprise", Yale Law Journal, April [1980], pp.835-901. Reserve.
4.Clubs
H. Hansmann, The Ownership of Enterprise, pp.182-194. Course-Pack
5.Professional Leagues (Baseball)
L. Davis, “Self-Regulation in Baseball, 1909-1971,” Jim R. Noll, ed., Government and the Sports Business (Brookings Institution, 1979), pp. 349-386. Course-Pack.
- The Board of Directors and the Role of Independent Directors
S. Bhagat and B. Black, “The Uncertain Relationship Between Board Composition and
Firm Performances,” The Business Lawyer Vol. 54 (May 1999), pp. 921-963.
Lexis/Nexis
S. Bhagat, D. Carey, & C. Elson, “Director Ownership, Corporate Performance, and
Management Turnover”, The Business Lawyer,Vol. 54 (May, 1999), pp. 885-919. Lexis Nexis
7.Shareholder Voting and Role of Institutional Investors
H. Demsetz and K. Lehn, "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy (1985) pp. 1155-1177. E-Reserve and Reserve.
R. Romano, “Less is More: Making Shareholder Activism a Valued Mechanism of
Corporate Governance,” Yale Law School Working Paper #241 (2000). This paper
can be found on line at
This will give you an abstract. Press the download button and you can download a copy of the full text.
V.The Internal Control of the Firm
- B,S,&Z, Chs. 11, 12, & 13
- Compensation of Employees
B, S, & Z, Chs. 14, 15, & 16.
"General Dynamics" Compensation and Strategy (A), "HBS Case 9-494-048 I will hand out a set of questions for this case.
VII.Incentives and Managerial Remuneration
M. Jensen and K. Murphy, "CEO Incentives: It's Not How Much You Pay, But How"
Harvard Business Review. no. 3 (May-June, 1990) pp. 138-153. Reserve
VIII.The Market for Corporate Control
A.Takeovers: The Theory
B.Takeovers: The Evidence
Gregg Jarrell, James Brickley, and Jeffrey Netter, "The Market for Corporate Control:
The Empirical Evidence Since 1980," Journal of Economic Perspectives (Winter,
1988) pp. 49-68. E-Reserve and Reserve.
Mark Mitchell and Kenneth Lehn, "Do Bad Bidders Become Good Targets?" Office of
Economic Analysis, Securities and Exchange Commission Journal of Political
Economy (1990), pp. 372-398. E-Reserve and Reserve.