Fabio Landini Università Bocconi Ugo Pagano Università di Siena and Central European University Second International GROE Workshop Institutions and Economic Change ID: 642839
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Slide1
Synergy, Conflict and Institutional Complementarities
Fabio Landini Università BocconiUgo PaganoUniversità di Siena and Central European University
Second
International GROE WorkshopInstitutions and Economic Change
20-21 September
Hitchin
Priory, Hertfordshire, EnglandSlide2
Biology and EconomicsTo draw non-misleading analogies between biology and economics we must also take into account the degree of complexity, the complementarities which characterize a particular object of our analysis. In both biology and social sciences we have two types of complementarities:
conflictual and synergetic complementarities.In Biology all the forms of mutualism are typical forms synergic complementarities whereas prey-predator relations or sexual competition offer examples examples of conflictual complementarites. In Social Sciences class conflict, positional consumption and all forms of class conflicts are typical examples of conflictual complementarities whereas the division of labor, economies of scope and of scale are typical examples of synergic complementarities. Slide3
In nature fitness stems from two factors: relative capacity to deal with the environment and to obtain food and other resources;
relative mating success. The concept of natural fitness can thus be split into two components: environmental and sexual fitnesses. The two selection domains are not independent. In the well-known case of the peacock tail, environmental fitness, related to the rapid motility necessary to escape from predators, must be sacrificed to the sexual fitness acquired from the large tail, which is much appreciated by female peacocks. The peacock tail story links the domains of environmental and sexual selection in terms of fitness substitution Conflictual TailsSlide4
Synergic HornsUnlike peacock tails (which are only useful for sexual selection), big horns
are useful in sexual combat and in defence against predators, but they may be a disadvantage because they cause reduced motility. High motility traits can greatly help successful mating and the escape from predators, but they may be disadvantageous in terms of reduced body size and, in particular, horn ramifications. Whilst motility and horns can be useful in both domains, it is likely that motility traits are mainly selected in a process of environmental selection when herbivores must flee from their predators. By contrast, horns are likely to be selected in a process of sexual selection, since they are mainly developed only in males and their shape and position are usually most suited to combat against mating rivals. Slide5
Horns’ ramification and motilityfor agent i: u
(X1, Y1) - u(X2, Y1) ≥ u(X1, Y2) - u(X2, Y2) (1)for agent j: v(Y2, X2) - v(Y1, X2) ≥ v(
Y2, X1) -
v(Y1, X1) (2)Inequality (1): The selection of big horns Y1 in the sexual selection domain makes it more convenient in the natural selection domain to select traits X1 ( low motility and high defence capabilities) relatively to X2 (high motility and modest defence capability). Inequality (2):
The selection of high motility
X
2
by the natural selection agents makes small horns
Y
2
more convenient in the sexual selection domain relatively to big horns
Y
1
Evolutionary complements:
(Low motility
X
1
, Big horns
Y1 ) (High motility X2 ,Small Horns Y2 ) Slide6
Chimps:
Synergies ofdisarmament equilibria Female chimps signal fertility by a strong and prolonged signal. Male chimps find it too costly to fight for exclusive access to females and to make positional investments in their body.The result of chimps’ sexual conflicts is a
disarmament equilibrium.The chimp male’s modest body size
favours high motility and the consequent evolution of a “chimp technology” to gather food in a wide territory, while the variety of food in a large space allows the careful choice of food and requires a less demanding digestive system.In turn the existence of this food gathering technology involves that high motility is beneficial and stabilizes the disarmament equilibrium - a synergetic complementarity between social organization and technology. Slide7
Because of their weak and short fertility signal, female gorillas give gorilla males strong incentives to make positional investments in their body size. The control of a territory gives exclusive access to the females on that territory. The result of gorillas’ sexual conflicts is an armament equilibrium.Dominating a territory is a complementary strategy, requiring complementary traits, such as a powerful digestive system and a very large intestine allowing the digestion of all of the few kinds of food available in a limited space. The gorilla technology to deal with the environment is favoured by the gorilla body chosen in the sexual domain and in turn makes this investment marginally more convenient. Also in the case of gorillas there is a synergetic complementarity
between their social organization and technology.
Gorilla: Synergies of armament equilibriaSlide8
Human society complementarities
In most species, the ‘conflictual tails’ and ‘synergic horns’ types of complementarities co-exist and generate complex evolutionary paths. Similar complementarities exist in human societies.History is at the same time shaped by class struggle (conflictual complementarities) and by the relations between productive forces and the relations of production (synergic complementarities).Class struggles generate chimp-like or gorilla-like conflictual complementarities, that may be reinforced by the synergic complementarities between the resulting institutions and the associated technologies. Different species of capitalism may evolve along alternative institutional-technological paths in different countries.Slide9
Concentrated varieties of capitalismCapitalist concentrate their interests by having single families owning relevant percentages of shares in each firm.
Workers cannot concentrate their interests by concentrating property. They do it mainly by the means of more costly political action forming centralized unionsManagerial hierarchies and firms’ size are limited by the owners’ behavior willing to control the firm. Limitations on skills development by managers and firms size involves that this armament equilibrium has synergetic complementarities with some types of productive forces.Slide10
Dispersed varieties of capitalismCapitalist diversify their interests by holding shares in different firms.
Workers do not concentrate their interests by the means of political action. Unions and Social-Democracy are weak.Managerial hierarchies and firms’ size are not limited by the owners’ interests to control the firm. Limitations on skills development by owners and workers has synergetic complementarities with some types of productive forces.Slide11
Conflictual Complementarities
Concentrated ownershipOrganizedworkers’ interestsDispersedownership
Disorganizedworkers’ interestsSlide12
Synergic complementarities
Specificity and Monitoring Characteristics of AssetsProperty Rights andOrganizational Form
The most specific and difficult to monitor agents can save the greatest amount of agency costs when they control the organization.
:
:
The agents controlling the organization will tend to become the most specific and difficult to monitorSlide13
Two complementarities:Synergic complementarities
Varieties of CapitalismClass StruggleDevelopment of Technology and Productive Forces Conflictual
Complementarities
Slide14
A model of conflicting complementaritiesThree types of (representative) agents:
owners (o), managers (m) and workers (w)A firm is a private ordering characterized by a well-defined structure of authority relations according to which o exercise authority over m, who in turn exercise authority over w. In domain O two main alternatives are available: high concentration of property rights (OH) and low concentration of property rights (OL), i.e. O ={OH, OL}
In domain W agent w can choose between two distinct options:
high concentration of their interests (WH) and low concentration of their interests (WL), i.e. W ={WH, WL} m is assumed to have no class organizations that defend her interests in society but it has different welfare in the different settings.Slide15
Second order jural relations
Power of iLiability of
j
Disability of
i
Immunity of
j
Managers
Owners
Workers
Upstream
DownstreamSlide16
Table of organizations
Owner (o) Worker (w)High Concentration (WH) Low Concentration
(WL
) High Concentration (OH) upstream:
o
’s
power
m
’s
liability
downstream:
m
’s
inability
w
’s
immunity
upstream:
o
’s
power
m
’s
liability
downstream:
m
’s
power
w
’s
liability
Low Concentration
(
O
L
)
upstream:
o
’s
inability
m
’s
immunity
downstream:
m
’s
inability
w
’s
immunity
upstream:
o
’s
inability
m
’s
immunity
downstream:
m
’s
power
w
’s
liability
Slide17
Agents objective functionsuo(
O, W)= πo(O,W,t) + ζo(O)+ zo(O, W) (1)um(O, W)= b + ζm(O,
W)+ z
m(O, W) ( 2)uw(O, W)= s+ ζw(W
)
+
z
w
(
O
,
W
)
+
c
w
(
W
) (3)πo(O
, W, t), b
and
s
are the agents’ economic returns of
o
,
m
w
All profits go to
o
but change with technical
assets
t
.
For the moment
t
is given and study how decisions
are
taken
for
a
given
t
ζ
o
(
O
),
ζ
m
(
O
,
W
),
ζ
w
(
W
) freedom functions of
o
,
m
,
w
z
o
(
O
,
W
),
z
m
(
O
,
W
),
z
w
(
O
,
W
) organizational rents extractions function of
o
,
m
,
w
c
w
(
W
), for
c
w
(
W
H
) =
c
w
> 0 and
c
w
(
W
L
) = 0, is
w
’s
cost of collective action
Slide18
Freedom Functions: ζo(O), ζm
(O, W), ζw(W) Power p: a continuum in the interval [-1,1], where p = -1 stands for full liability to the power of others and p = 1 stands for full exercise of power on others ζ(p) : ζ(1)= ζ, ζ(-1)=-ζ
ζ(0)=0,
where ζ >0 represents the benefit (cost) associated with the exercise (lack) of choice freedom. ζ(0) represents even power.Ownersζo
(
O
)=
ζ
if O = O
H
= 0
if O = O
L
Workers
ζ
w
(
W
)= 0 if W=W
H
-
ζ
if W=W
L
upstream
Managers
downstream
managerdegree
of
choiceSlide19
Organizational rents extractions functions
1) Under the combination (OH, WL), o and m can exploit their position of relative power to extract organizational rents from w. By selecting working conditions that are more favorable to
o than to w
, in fact, m can transfer resources from labor to capital while obtaining a partial compensation for their service. 2) Under (
O
L
,
W
H
)
w
can exploit their immunity position to offer
m
a collusion agreement that goes in the opposite direction, i.e. it makes
m
to transfer resources from capital to labor in exchange for a due compensation. By doing so
m
can improve upon their position and partially compensate for the lack of downstream power.
3) When
both
workers and owners concentrate their interests
(
O
H
,
W
H
)
rents’ managers disappear
.
4)
Organizational rents can be extracted by managers
when both
domains O and W are characterized by low concentration
(O
L
, W
L
)
. In this case, in fact,
m
can enjoy both upstream immunity and downstream power and
m
is better off with respect to all the other possible combinations. Slide20
zu
(L, j)= πL,j(t) = the upstream rent extracted from capital (for j = H, L
)
zd = s – ζ downward rent extracted from labor
Under combination (
O
L
,
W
L
), we assume that
m
can extract only a fraction
ε
of the upstream and downstream rents, where
ε >
0 is a measure of
m
’s decisional authority.
Organizational rent extraction functions Slide21
On the basis of the above assumptions, the conflictual interaction between o and w can be represented in game theoretic form by the triplet Γ ={
I, Θ, u}, where I = {o, w} is the set of players, Θ = O × W is the set of strategy profiles and u = {uo(θ, t), uw(θ)} for θ Θ is the vector function of the players’ payoff, Definition 1. A politics-business arrangement in game Γ corresponds to a pure strategy profile , where θo
O and θw
W is the pure strategy adopted by players o and w, respectively.To every politics-business arrangement corresponds a specific way to resolve the conflict between workers and owners. In particular, game Γ offers a representation of four distinct arrangements, namely {OH, WH}, {OH, WL}, {OL, WH
} and {
O
L
, W
L
}.
Definition 2.
A politics-business arrangement is
a politics-business
variety if the corresponding pure strategy profile is a Nash equilibrium of game
Γ
.
Only
{OH, WH} and {OL, WL} qualify as politics-business varieties.
Politics Business VarietiesSlide22
Table of pay-offs
Owner (o) Worker (w)High Concentration (WH) Low Concentration (W
L)
High Concentration (OH)
π
H,H
(
t
)
+
ζ
, s
–
c
w
[
b
–
ζ
]
π
H,L
(
t
)
+
ζ
+
(
s
–
ζ
)
/
2
,
0
[
b
+
(
s
–
ζ
)
/
2
]
Low Concentration
(
O
L
)
0
, s
+
π
L,H
(
t
)
/
2 –
c
w
[
b
+
π
L,H
(
t
)
/
2
]
π
L,L
(
t
) (1 –
ε
)
,
(
s
–
ζ
)(1 –
ε
)
[
b
+
ζ
+
ε
(
π
L,L
(
t
)
+ s
–
ζ
)]
Slide23
Suppose
ζ <s, ζ <b and s >cw. Then:a) for any t, {OL, WH} and {OH, WL} are never politics-business varieties; b) for any or for any , where Proposition 1
{
OH, WH} is the only politics-busines variety;c) if : andthen two politics business-varieties exist, namely {OH, WH} and {OL, WL}. Slide24
Varieties of capitalism Proposition 1 suggests that, for any type of technology, {OH, WL
} and {OL, WH} are never politics-business varieties. On the contrary, for sufficiently high levels of πL,L(t) and cw, both {OH, WH} and {OL, WL} are politics-business varieties. Hence, in what follows we consider only combinations {OH, WH} and {OL, WL} and focus on the space of parameters in which both are politics-business varieties. To simplify the notation, let us define a new domain P = {PH
, PL}, where
PH =(OH, WH) and PL =(OL, WL) denote a politics-business variety characterized respectively by a high and low degree of interest concentration.
On this basis, we will define
a variety of capitalism as a pair (
P
,
t
),
where
t
stands for the features of technology.Slide25
Agency costsThree types of production factor: capital (K), managerial knowledge (M), and labour
(E), where E stands for work effort. K is supplied by owners (o), M is supplied by managers (m) and E is supplied by workers (w). Standard production function: Q(K,M,E). Under PH, m is both exposed to the power of o and unable to exercise authority over w and requires some additional compensation x to make specific investments in managerial knowledge. Under PL
the immunity of m may scare shareholders, who may find it difficult to get rid of opportunistic managers. To invest, they may thus ask for the inclusion of some additional safeguards, which we assume to take an extra-return
y on their investments. A similar argument applies to workers which we assume to require the same extra-return y on their human capital investment.Under PH, the agency costs y are saved while under PL the agency costs x are saved. The immunity and powers (involved by the different varieties of capitalism) themselves work as safeguards. Slide26
Politics Business Structures and TechnologiesWe denote with r, b
and s the prices of respectively K, M and E. b and r are the agency costs to be paid for m and for o and w On this basis, we write the firm’s profit under PH as follows:πH,H (K,M,E) = Q(K,M,E) – [r K
+ (b +
x) M + s E] (A) P TSimilarly, we write the firm’s profit under P
L
as follows:
π
L,L
(
K,M,E
) =
Q
(
K,M,E
)
– [(
r
+
y
)
K + b
M
+ (
s
+
y
)
E
]
(B)
P
H
can prevail if, given the factors currently employed,
π
H,H
≥
π
L,L
, or:
(
K
+
E
)y
≥
M
x
or (
K
+
E
)/
M
≥
x
/
y
(C)
T
P
P
L
can prevail if, given the factors currently employed,
π
H,H
≥
π
L,L
, or:
(
K
+
E
)y
≤
M
x
or (
K
+
E
)/
M
≤
x
/
y
(
D)
Slide27
Varieties of Capitalism as Organizational EquilibriaLet: (KH , M
H , EH) = argmax πH,H (K,M,E) (8) (K L , M L, E L) = argmax π L,L (K,M,E) (9) Definition 3. The variety (PH , tH) constitutes a concentrated OE for the set of values for which the degree of interest concentration PH maximizes profit under the prevailing technology t
H and, in turn, the factors intensity tH maximizes profit given degree of interest concentration P
H. This occurs when the following holds: tH = (KH+EH)/MH ≥ x/y (10)
Definition 4.
The variety
(
P
L
,
t
L
)
constitutes
a dispersed OE
for the set of values for which the degree of interest concentration P
L
maximizes profit under the prevailing technology
tL and, in turn, the factors intensity tL maximizes profit given degree of interest concentration PL. This occurs when the following holds: t
L = (KL+E
L
)/
M
L
≤
x
/
y
(11)
Slide28
Proposition 2.
(a) Multiple OEs exist when the following condition is satisfied:tH = (KH+EH)/MH ≥ x/y ≥ (KL+EL)/ML = tL (12)i.e., when both condition (10) and (11) are satisfied.(b) A unique concentrated OE exists if:
tH = (K
H+EH)/MH ≥ (KL+EL)/ML = tL ≥ x/y (13)i.e., when condition (10) is satisfied but not condition (11)
(
c
)
A unique dispersed OE exists
if:
x
/
y
≥
t
H
= (
K
H+EH)/MH ≥ (KL+
EL)/ML =
t
L
(14)
i.e., when condition (11) is satisfied but not condition (10).
Multiple equilibria exist as long as the ratio between the two additional costs
x
and
y
falls within the close interval defined by
t
H
and
t
L
. This condition is more likely to be satisfied, the greater the elasticity of substitution among production factors. Slide29
Proposition 3Suppose that both concentrated (PH ,
tH) and dispersed (PL , tL) OE exist. Then: a) If ,wherethen (PH , tH) and (PL , tL) are not mutually Pareto comparable; b)
If , then (P
L , tL) is Pareto superior; c) The greater m’s decisional authority ε, the smaller the set of parameters for which (PL , tL) is Pareto superior;
d
)
For any
t
, the two disequilibria characterized by asymmetric concentration of class interests are never Pareto superior
.Slide30
Intuition behind proposition 3 Managers are always better off under equilibrium (PL
, tL) as opposed to (PH , tH), where the combination of both upstream immunity and downstream power enables them to extract large organizational rents. This in turn implies that equilibrium (PH , tH) can never be Pareto superior. For workers, the superiority of one of the two equilibria depends instead on two components, namely m’s decisional authority ε and the cost of collective action cw. Whenever m’s authority is sufficiently low and the cost of collective action is sufficiently high, workers are better off under equilibrium (PL , tL). In these cases the cost of being subject to m’s power is more than off-set by the possibility to avoid the collective action problem associated with interest concentration. For the set of parameters in which both (PH , t
H) and (PL , t
L) are equilibria this condition is always satisfied, so that workers always prefer equilibrium (PL , tL). It follows that the Pareto superiority of the dispersed equilibrium rests on the utility gained by owners, and in particular on the value of the firm’s profit Slide31
31Slide32
32The evolution of the American variety of capitalism I
At the time of the second industrial revolution, thanks to two major revolutionary conflicts (independence war and secession war), the US had already fought successfully against the old European aristocracy and the slave-owning American farmers of the South. The development of large firms happened in the framework of a strong democracy. Large block holdings, present in more than one firm, were seen with suspicion by early antitrust authorities, (Sherman and Clayton acts). Pyramids were dismantled by F.D. Roosevelt by the means of appropriate fiscal policies.This “exceptional” early dispersion of capitalist interests made it less important to concentrate workers’ interests in strong unions and in social democratic parties. A dispersed equilibrium emerged.Slide33
33The evolution of the American variety of capitalism II
The American dispersed equilibrium has encouraged investment in human skills of professional managers, the diversification of ownership, and the concentration of large amounts of capital in corporations. By contrast, it has provided only very mild incentives for the human capital of owners and workers. The absence of family control (Berle and Means) and the extension of managerial hierarchies have allowed the growth of large firms.In turn the characteristics of the technical and productive assets have reinforced the institutional stability of the American model. Slide34
34 Evolutionary roots of the European varieties I
The European countries (with possible exception of Switzerland) followed a different path: at the time of the second industrial revolution, their societies were hierarchical and still permeated by aristocratic privileges.No democratic authority could limit the concentration of the power of the capitalist dynasties occurring with the second industrial revolution.A social-democratic reaction concentrated also workers’ interest and a concentrated equilibrium emerged in all these countries.Slide35
35 Evolutionary roots of the European varieties II
This distribution of rights entailed a stronger incentive for owners (and their heirs) to invest in the human capital necessary to run firms while, at the same time, employment protection creates conditions favourable to firm-specific investments also for some workers. By contrast, investments in the human capital of professional managers is discouraged. Family control and limited managerial hierarchies have also limited the size of the firms. As in the American case, the technology, favoured by the European forms of corporate governance, reinforces in turn the distribution of rights characterizing these systems: ‘concentrated’ owners and workers have a vested interest in finding the political safeguards that protect their investments in physical and human capital associated with this technology. Slide36
36The British Metamorphosis
(I): from concentrated equilibrium to disequilibrium.At the time of the second industrial revolution, aristocratic influence, early unionization and a deep sense of class division made Britain a typical case of concentrated equilibrium. However, transmission and division of inheritance
, coupled with the international role of the city produced a dispersion of property.
In seventies the UK was characterized by a situation of "institutional disequilibrium" where the traditionally well-organized British unions were not matched by a countervailing centralization of firms' ownership. Slide37
37The British Metamorphosis
(II): from disequilibrium to dispersed equilibrium.This institutional disequilibrium coincided with a crisis of the British economy . For some time, "continental solutions" (such as pyramids and cross-share holding on one side and some "responsible" centralization of union's activity on the other) seemed to have a chance to prevail (Franks, Mayer, Rossi 2005).These "continental solutions" were, however, opposed by the city. Eventually the Thatcher government made a sharp move towards a
dispersed
type of institutional equilibrium, characterised by strong limitations of unions' activities and by a (much advertised) shareholder popular capitalism. These arrangements have not been substantially reversed by the subsequent Labour Party governments.Slide38
38Switzerland:
an Alpine America?There are remarkable similarities between U. S. and Switzerland. Both countries came to an early tolerance of religious and ethnic diversity. The "cement of society" relied more on shared values and ways of life than on ethnic or religious homogeneity. Also Switzerland achieved an
early definitive exit from aristocratic privileges (in 1847). Swiss feudal ties were traditionally weak. The peasants were difficult to dominate because they were often far away on the Alpine pastures and because they were well trained in military activities (serving, often, as the most valuable mercenaries all around Europe).
Like the U. S., at the time of the second industrial revolution, Switzerland had a robust democracy and satisfied the conditions to realize a “dispersed equilibrium”. Slide39
Conclusion I: policy implicationsIn both biology and economics, complementarities involve the evolution of complex systems where intra-species conflicts and relations with the environment generate “
second order complementarities”.In economic intentional policy action plays a role that it does not play in biology. Complementarities can be changed but both their resilience and their nature must be understood by policy makers.As Pistor, Acemoglou, Aoki and others have emphasized, the same policies may have different implications in different contexts.Shareholder protection can be counterproductive in concentrated varieties of capitalism and the labor policies that may be successful in dispersed varieties can have very different effects in other contexts.Slide40
Conclusion II: limitations of the analysis The analysis is obviously far
too aggregate and clusters together different countries in two two main species of capitalism.The focus has been the West. Do countries like China, India Japan and Korea fit this framework or do they require a different approach? In spite of these limitations, the paper may stimulate further research on the interactions between conflictual and synergic complementarities. We should try to understandthe rich hierarchy of complementarities which characterizes complex evolving systems. Thank you so much for your attention!!!!!