Category: Behavioral Law and Economics

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Talent Flow and the Theory of the Firm

Both Vic Fleisher and Shubha Ghosh in their thoughtful commentary about Talent Wants to Be Free invoke the theory of the firm to raise question about the extent of desirable freedom in talent and knowledge flows. In its basic iteration, the theory of the firm suggests that arms-length contracting will not be optimal when one party has the ability to renegotiate and hold the other party up, which is the conventional rational for the desirability of talent controls. This is what I describe in the book as the Orthodox Model of employment intellectual property: firms fear making relational investment in employees and then having the employees renegotiate the contract under a threat of exit. Firms respond through mobility restrictions aimed at eliminating the transaction costs of this kind of opportunism. In the book, I accept, at least for some situations, this aspect of the benefits and confidence that are created for firms in internalizing production and ensuring ongoing loyalty by all players. The orthodox model thus explains post-employment controls as necessary to encourage optimal investment within the corporation. More company controls = more internal R&D and human capital investment. The new model developed in the book doesn’t deny these benefits but argues that the orthodox model is incomplete. The Dynamic-Dyadic Model asks about the costs and benefits when controls are employed.  It suggests that yes, often, protecting human capital and trade secret investments is often in the immediate interest of a company, but that too much control becomes a double-edged sword. This is because of both the demotivating effects on employee performance when lateral markets are reduced and because over-time, although information leakage and job-hopping by talented workers may provide competitors with undue know-how, expertise, and technologies, constraining mobility reduces knowledge spillovers and information sharing that outweigh the occasional losses. The enriched model is supported by a growing body of empirical evidence that finds that regions with less controls and more talent freedom, such as California, have in fact more R&D investment, quicker economic growth and greater innovation.

Vic is of course right that one solution to this problem is to recreate high-powered (market-like) incentives for performance within the firm. This is an aspect that I am greatly interested in and I analyze it in Talent Wants to Be Free as the question of whether controls and restrictions can effectively alternate with the carrots of performance-based compensation, vesting interests, loyalty inducing work environments, employee stock options and so forth. I too like Shubha am a fan of Hirschman’s Exit, Voice, and Loyalty and have found it useful in analyzing employment relations. I view the behavioral research as shedding light on these questions of what these intra-firm incentives need to look like in order to preserve the incentive to innovate. In a later post I will elaborate on the monitoring and motivational tradeoffs that exist in individual and group performance.

More generally, though, the research suggests that at least in certain industries, most paradigmatically fast-paced, high-tech fields, innovation is most likely when the contracting environments have thick networks of innovators that are mobile (i.e. Silicon valley) and firms themselves are horizontally networked. The flow of talent and ideas is important to innovation and rigid boundaries of the firm can stifle that interaction even with the right intra-firm incentives. The benefits in terms of innovation rise in these structures of denser inter-firm connections, but also, the costs of opportunism that drive the conventional wisdom are in fact lower than the traditional theory of the firm would predict. This is because talent mobility is a repeated game and at any given moment, a firm can be on either side of the raiding and poaching.   Policies against talent controls have the effect of reducing the costs of opportunistic renegotiation by ensuring the firm can hire replacement innovators when it loses its people. To push back on Vic’s phrasing, talent wants to be appreciated and free. MIT economist Daron Acemoglu’s analysis of investments and re-investments in workers as a key ingredient of production and growth is helpful in understanding some of this dynamic. People invest in their own human capital without knowing the exact work they will eventually do, just as companies must make investment decisions in technology and capital funds without always knowing who they will end up hiring. Acemoglu describes the positive upward trajectory under these conditions of uncertainty: When workers invest more in their human capital, businesses will invest more because of the prospects of acquiring good talent. In turn, workers will invest more in their human capital as they may end up in one or more of these companies.  The likelihood of finding good employers creates incentives for overall investments in human capital.

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Human Capital Law and Innovation Policy

This is a thrilling week for Talent Wants to Be Free. I am incredibly honored and grateful to all the participants of the symposium and especially to Deven Desai for putting it all together. It’s only Monday morning, the first official day of the symposium, and there are already a half a dozen fantastic posts up, all of which offer so much food for thought and so much to respond to. Wow! Before posting responses to the various themes and comments raised in the reviews, I wanted to write a more general introductory post to describe the path, motivation, and goals of writing the book.

Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids and Free Riding comes at a moment in time in which important developments in markets and research have coincided, pushing us to rethink innovation policy and our approaches to human capital. First, the talent wars are fiercer than ever and the mindset of talent control is rising. The stats about the rise of restrictions over human capital across industries and professions are dramatic.  Talent poaching is global, acquisition marathons increasingly focus on the people and their skills and potential for innovation as much as they look at the existing intellectual property of the company. And corporate espionage is the subject of heated international debates. Second, as a result of critical mass of new empirical studies coming out of business schools, law, psychology, economics, geography, we know so much more today compared to just a few years ago about what supports and what hinders innovation. The theories and insights I develop in the book attempt to bring together my behavioral research and economic analysis of employment law, including my experimental studies about the effects of non-competes on motivation, my theoretical and collaborative experimental studies about employee loyalty and institutional incentives, and my scholarship about the changing world of work, along with theories about endogenous growth and agglomeration economies by leading economists, such as Paul Romer and Michael Porter, and new empieircal field studies by management scholars such as Mark Garmaise, Olav Sorenson, Sampsa Samila, Matt Marx, and Lee Fleming. Third, as several of the posts point out, these are exciting times because legislatures and courts are actually interested in thinking seriously about innovation policy and have become more receptive to new evidence about the potential for better reforms.

As someone who teaches and writes in the fields of employment law, I wrote the book in the hopes that we can move beyond what I viewed as a stale conversation that framed these issues of non-competes, worker mobility, trade secrets and ownership over ideas  as labor versus business; protectionism versus free markets (as is often the case with other key areas of my research such as whistleblowing and discrimination). A primary goal was to shift the debate to include questions about how human capital law affects competitiveness and growth more generally. Writing about work policy, my first and foremost goal is to understand the nature of work in its many evolving iterations. Often in these debates we get sidetracked. While we have an active ongoing debate about the right scope of intellectual property, under the radar human capital controls have been expanding, largely without serious public conversation. My hope has been to encourage broad and sophisticated exchanges between legal scholars, policymakers, business leaders, investors, and innovators.

And still, there is so much more to do! The participants of the symposium are pushing me forward with next steps. The exchanges this week will certainly help crystalize a lot of the questions that were beyond the scope of the single book and several new projects are already underway. I will mention in closing a couple of other colleagues who have written about the book elsewhere and hope they too will join in the conversation. These include a thoughtful review by Raizel Liebler on The Learned FanGirl, a Q&A with CO’s Dan Solove, and other advance reviews here. Once again, let me say how grateful and appreciative I am to all the participants. Nothing is more rewarding.

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Announcing Symposium on Orly Lobel’s Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids, and Free Riding

Talent Wants to be FreeThink you have enough to read? Think again! I am honored to announce that Concurring Opinions will host a symposium on Orly Lobel’s book, Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids, and Free Riding. The event will run from Monday, November 11 to Friday, November 15. I came to know Professor Lobel’s work as I shared some of my thoughts on intellectual property, property theory, and technologically mediated creation in her seminar, Work, Welfare, and Justice, in 2008. I was thinking about who owns your email? What about work place creation? Who owns what you come up with at work? Does it matter whether you used company technology to create and learn? Professor Lobel was digging into related questions, and it has been a blast seeing her run with them. Now we have the pleasure of her book. The accolades have been coming in from academics in law and other fields as well as the business world. Business Week, Fortune, and Harvard Business Review have run articles by Professor Lobel that draw on the insights from the book.

Professor Lobel argues that as we move deeper into a world driven by human capital and talent is in increasing demand, we have to understand that a lock-down approach to innovation is a losing strategy. Nonetheless:

Many companies embrace a control mentality—relying more on patents, copyright, branding, espionage, and aggressive restrictions of their own talent and secrets than on creative energies that are waiting to be unleashed.

Unlocking talent, setting it free as she puts it, sets up a system where everyone wins. Will our discussants or you agree? I think so, but I am sure there will be new ideas and challenges during the event. Our panelists include Professor Lobel as well as:

Matt Bodie

Anupam Chander

Danielle Citron

Catherine Fisk

Vic Fleischer

Brett Frischmann

Shubha Ghosh

Ron Gilson

Peter Lee

Frank Pasquale

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Rent books on Amazon? Hmm.

As I work away on 3D printing I am looking at regulation literature. Ayres and Braithwaite’s Responsive Regulation is available on Amazon for 34.99 for Kindle or you can rent it starting at $14.73 (no kidding, it is that precise). There is a calendar and you can select the length of the rental (3 months comes out to $22.30 and to Amazon’s credit hover over a date and the price appears rather than having to click each date). On the one hand this offering seems rather nifty. Yet I wonder what arguments about market availability and fair use will be made with this sort of rental model for books in play. And this option brings us one step closer to perfect price discrimination. Would I see the same rental price as someone else? Would I need some research assistant to rent for me? Would that person’s price model be forever altered based on some brief period of working for a professor? What about librarians who rent books for work (I suppose work accounts would be differentiated but the overlap between interests may shift what that person sees on a personal account too). Perhaps Ayres and Braithwaite’s regulation pyramid is needed yet again.

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Stanford Law Review Online: Privacy and Big Data

Stanford Law Review

The Stanford Law Review Online has just published a Symposium of articles entitled Privacy and Big Data.

Although the solutions to many modern economic and societal challenges may be found in better understanding data, the dramatic increase in the amount and variety of data collection poses serious concerns about infringements on privacy. In our 2013 Symposium Issue, experts weigh in on these important questions at the intersection of big data and privacy.

Read the full articles, Privacy and Big Data at the Stanford Law Review Online.

 

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The Dignity of the Minimum Wage?

[A brief note of apology: it’s been a terrible blogging summer for me, though great on other fronts.  I promise I’ll do better in the coming academic year. In particular, I’d like to get back to my dark fantasy/law blogging series. If you’ve nominations for interviewees, email me.]

WorkDetroitThis is one I’ve been meaning to write for a while.

One of the major lessons of the cultural cognition project is that empirical arguments are a terrible way to resolve value conflicts. On issues as diverse as the relationship between gun ownership and homicide rates, the child-welfare effects of gay parenting, global warming, and consent in rape cases, participants in empirically-infused politics behave as if they are spectators at sporting events. New information is polarized through identity-protective lenses; we highlight those facts that are congenial to our way of life and discounts those that are not; we are subject to naive realism.  It’s sort of dispiriting, really.  Data can inflame our culture wars.

One example of this phenomenon is the empirical debate over minimum wage laws. As is well known, there is an evergreen debate in economics journals about the policy consequences which flow from a wage floor.  Many (most) economists argue that the minimum wage retards growth and ironically hurts the very low-wage workers it is supposed to hurt. Others argue that the minimum wage has the opposite effect. What’s interesting about this debate -to me, anyway- is that it seems to bear such an orthogonal relationship to how the politics of the minimum wage play out, and the kinds of arguments that persuade partisans on one side or another. Or to put it differently, academic liberals in favor of the minimum wage have relied on regression analyses, but I don’t think they’ve persuaded many folks who weren’t otherwise disposed to agree with them. Academic critics of the minimum wage too have failed to move the needle on public opinion, which (generally) is supportive of a much higher level of minimum wage than is currently the law.

How to explain this puzzle?  My colleague Brishen Rogers has a terrific draft article out on ssrn, Justice at Work: Minimum Wage Laws and Social Equality. The paper urges a new kind of defense of minimum wages, which elides the empirical debate about minimum wages’ effect on labor markets altogether. From the abstract:

“Accepting for the sake of argument that minimum wage laws cause inefficiency and unemployment, this article nevertheless defends them. It draws upon philosophical arguments that a just state will not simply redistribute resources, but will also enable citizens to relate to one another as equals. Minimum wage laws advance this ideal of “social equality” in two ways: they symbolize the society’s commitment to low-wage workers, and they help reduce work-based class and status distinctions. Comparable tax-and-transfer programs are less effective on both fronts. Indeed, the fact that minimum wage laws increase unemployment can be a good thing, as the jobs lost will not always be worth saving. The article thus stands to enrich current increasingly urgent debates over whether to increase the minimum wage. It also recasts some longstanding questions of minimum wage doctrine, including exclusions from coverage and ambiguities regarding which parties are liable for violations.”

I’m a huge fan of Brishen’s work, having been provoked and a bit convinced by his earlier work (here) on a productive way forward for the union movement. What seems valuable in this latest paper is that the minimum wage laws are explicitly defended with reference to a widely shared set of values (dignity, equality). Foregrounding such values I think would increase support for the minimum wage among members of the populace.  The lack of such dignitary discussions in the academic debate to date has level the minimum wage’s liberal defenders without a satisfying and coherent ground on which to stand. Worth thinking about in the waning hours of Labor’s day.

 

 

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The Pervasive Effect of Priors: Part Four

A New York Times front page last week prominently featured a story, U.S. Opens Spigot After Farmers Claim Discrimination, that shows many people in a very bad light indeed.   A small, focused program intended to compensate a small number of people, true victims of discrimination in farm lending, has mushroomed for various reasons into a huge money pit, “compensating” those who may very well not have suffered discrimination.

Even those who generally think well of government would, I think, be hard pressed not to be distressed by this story.   Government responded to political pressures to include more and more people, and require less and less documentation, resulting in a multi-billion dollar giveaway. I want to focus here on views of those taking “advantage” of the compensation scheme to seek compensation when they were not injured.

Different people have different views as to how people respond to incentives in general and monetary incentives in particular.  Some think anyone would ‘do anything for a buck’ – including have children, get/not get married, get more healthcare, or file specious discrimination claims.   Some people might think some subset of people (‘greedy’? ‘rational’? more on that later) would do anything for a buck.  Some people might think that incentives matter ‘at the margin’ but that someone could not be persuaded to do something very much ‘against his nature.’

There’s also a role for self-deception here: a person who is motivated by a monetary incentive may not want to admit this, and therefore might convince herself that she was doing the incentivized act because it was right/what she really wanted to do, not because of the incentive.  Which view a person has depends in part on how she sees herself: what does she see herself as being willing to do for money? It may also depend on her broader view as to whether ‘being willing to do many things for money’ is a bad thing or a good (“rational”) thing.

With respect to what motivates somebody else, a person may think ‘this person is like me—one of ‘us.’  ‘If she is doing x, her motivation is probably what mine would be.’  Obviously, people are not monolithic, and equally obviously, there will be enormous differences in the monetary opportunities people have and how they experience and react to them.  There are many things nobody would do no matter how much money was being offered.      Read More

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The Pervasive Effect of Priors: Part Three

Last week’s marathon bombings got me thinking about how people form narratives about bad events, both big and small.

My partner Eric and I were traveling in Portugal in a rented car.  The car only took diesel fuel, and we had difficulty figuring out whether particular pumps dispensed diesel.   Eric tried to use one pump, which didn’t seem to fit.  We asked an attendant, who seemed quite surly.  He shoved the ill-fitting pump into the car.  About 20 minutes later, on the highway, the car stopped working.   The repair people who came to help us told us that the car had been filled with regular fuel.

Eric and I decided that the attendant had disliked us, perhaps because we were American, and had done this on purpose.  My sister heard this story; her take was that surely the attendant just made a mistake. She asked ‘don’t you prefer to think of it that way’?  Eric and I didn’t, but she did.

One suggestion that’s been made about the marathon bombings is that they could have been stopped given what the FBI knew or had reason to know about the elder brother.    Is this comforting—or not?  Do we prefer to think somebody knew enough, but didn’t act on their knowledge? Or would we prefer to think that it could not have been stopped? Read More

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The Pervasive Role of Priors: Part Two

Continuing the thread from my previous post, available here, on how prior beliefs and ways of viewing the world affect one’s conclusions:

One person who commented on my prior post noted that people have priors as to how much justification is needed for government action.  I completely agree with this.  I think that in many cases, that prior is importantly related to, and to some extent caused by, another prior, about what sort of people are in government.

I was brought up thinking that people who went into government were generally “good” – that they went into government to do what they thought of as the right thing, and that in many cases, what they thought was the right thing was pretty good.  I recall watching the Alan Alda movie The Seduction of Joe Tynan, which I remember as being about a “good” politician completely compromising his principles to retain power, and feeling both sad and startled.

In a sense, my prior has stayed with me, even though I know of many-probably thousands at this point- examples to the contrary.  I recall reading fairly recently (over at Marginal Revolution) about a government decision to keep the speeding limit on a stretch of highway too low.  The low speed limit causes accidents, but yields lots of revenue from speeding tickets, presumably the motivation for keeping the limit as it is.  My reaction was a bit of shock and dismay. Read More

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The Pervasive Role of Priors: Part One

Thanks to Larry for inviting me to guest-blog. It’s every academic’s dream, I think, to have a built-in audience for her thoughts. And given the caliber of this blog and the readership it attracts, I could scarcely have a better one.

One subject I’ll be blogging on is my general view that people’s prior beliefs and other aspects of how they view and take in the world explain a huge amount, much more than is usually acknowledged. They (people’s priors) help explain why there are so many debates that never get anywhere.  Both sides might have terrific arguments, yet nobody is persuaded.

And people keep on making the same sorts of arguments, even knowing this. Sometimes they wonder why more people aren’t persuaded. It’s a bit like the old joke about the person who goes to a foreign country and doesn’t know the language, so he tries to communicate in his own language and, when he’s not understood, he just tries again, repeating what he said . . . but louder.

I recently went to a very interesting colloquium co-sponsored by the Federalist Society and the Liberty Fund on Behavioral Law and Economics.  One big issue discussed was the relationship between behavioral law and economics and law, including most importantly paternalistic justifications for law that behavioral l & e might provide.  Michael Bloomberg’s attempt to ban sales of large sizes of soda was much on people’s minds.

One thing I very much wanted to get out of the discussion was an understanding of the other participants’ priors as well as my own. Here are some initial thoughts.

Read More