Contributions published at Theory of Economic Policy and Non-Market Economics (Bruno Frey)

The integration of economics and psychology has created a vibrant and fruitful emerging field of study. The essays in Economics and Psychology take a broad view of the interface between these two disciplines, going beyond the usual focus on "behavioral economics." As documented in this volume, the influence of psychology on economics has been responsible for a view of human behavior that calls into question the assumption of complete rationality (and raises the possibility of altruistic acts), the acceptance of experiments as a valid method of economic research, and the idea that utility or well-being can be measured. The contributors, all leading researchers in the field, offer state-of-the-art discussions of such topics as pro-social behavior and the role of conditional cooperation and trust, happiness research as an empirical tool, the potential of neuroeconomics as a way to deepen understanding of individual decision making, and procedural utility as a concept that captures the well-being people derive directly from the processes and conditions leading to outcomes. Taken together, the essays in Economics and Psychology offer an assessment of where this new interdisciplinary field stands and what directions are most promising for future research, providing a useful guide for economists, psychologists, and social scientists.

The importance of firm-specific knowledge for a company’s sustainable competitive advantage is well established in the knowledge-based theory of the firm. However, the impact of corporate governance design on firm-specific knowledge investments is underexplored. We assess existing co-determination systems in Europe and their impact on firm performance; then we discuss voluntary co-determination as a new corporate governance design that fosters firm-specific knowledge investments, intrinsic work motivation, efficient monitoring, and board diversity while lowering transaction costs. Our analysis indicates that shareholders can increase their company’s value by adopting customized co-determination rules.

To overcome agency problems, public sector reforms started to introduce businesslike incentive structures to motivate public officials. By neglecting internal behavioral incentives, however, these reforms often do not reach their stated goals. Our research analyzes the governance structure of Benedictine monasteries in order to gain new insights into solving agency problems in public institutions. A comparison is useful because members of both organizational forms, public organizations and monasteries, see themselves as responsible participants in their community and claim to serve the public good. We study monastic governance from an economic perspective. Benedictine monasteries in Baden-Württemberg, Bavaria, and German-speaking Switzerland have an average lifetime of almost 500 years, and only a quarter of them broke up because of agency problems. We argue that they were able to survive for centuries due to an appropriate governance structure, relying strongly on the intrinsic motivation of the members and internal control mechanisms. This governance approach differs in several aspects from current public sector reforms. JEL Classification: D73, G3, Z12, H83 Keywords: Public Governance, New Public Management, Public Sector Reform, Psychological Economics, Agency Problems, Monasteries, Benedictine Order

Purpose – The governance structure of monasteries is analyzed to gain new insights and apply them to solve agency problems of modern corporations. In a historic analysis of crises and closures we ask, if Benedictine monasteries were and are capable of solving agency problems. The analysis shows that monasteries established basic governance instruments very early and therefore were able to survive for centuries. Design/methodology/approach – We use a dataset of all Benedictine abbeys that ever existed in Bavaria, Baden-Württemberg and German-speaking Switzerland to determine their lifespan and the reasons for closures. The governance mechanisms are analyzed in detail. Finally we draw conclusions relevant to the modern corporation. The theoretical foundations are based upon principal agency theory, psychological economics, as well as embeddedness theory. Findings – The monasteries that were examined show an average lifetime of almost 500 years and only a quarter of them dissolved as a result of agency problems. We argue that this success is due to an appropriate governance structure that relies strongly on internal control mechanisms. Research limitations/implications – Benedictine monasteries and stock corporations differ fundamentally regarding their goals. Additional limitations of the monastic approach are the tendency to promote groupthink, the danger of dictatorship and the life long commitment. Practical implications – The paper adds new insights into the corporate governance debate designed to solve current agency problems and facilitate better control. Originality/value – By analyzing monasteries, a new approach is offered to understand the efficiency of internal behavioral incentives and their combination with external control mechanisms in corporate governance.

Die Benediktinerklöster weisen im Vergleich zu anderen Institutionen eine ungewöhnlich lange Lebensdauer auf. Unsere empirische Untersuchung aller je existierenden Benediktinerabteien in Bayern, Baden-Württemberg und der Deutschschweiz zeigt, dass ein durchschnittliches Kloster fast 500 Jahren alt wird. Kombiniert mit dem Befund, dass nur rund ein Viertel der Klosterschliessungen auf Führungsversagen zurückzuführen ist, darf auf eine Organisationsform mit ausserordentlicher Langlebigkeit und Stabilität geschlossen werden. Dies ist nicht nur religiösen und kirchlichen Ursachen zuzuschreiben. Die Entwicklung einer ganz eigen geprägten Führungsstruktur, oder Governance, trägt wesentlich zur Erfolgsgeschichte dieser Institutionen bei. Ein ausgefeiltes System von internen und externen Kontrollmechanismen verhindert Missbrauch und Fehlverhalten von Äbten und Mönchen und fördert damit die Überlebensfähigkeit der Abteien. In diesem Beitrag folgt der empirischen Analyse eine detaillierte Betrachtung der benediktinischen Governance und deren Erfolgsfaktoren. Im Schlussabschnitt wird dargelegt, warum monastische Führungsprinzipien auch über das Klosterwesen hinaus Relevanz besitzen.

The financial crisis is a crisis of governance as well. In search of answers and solutions many scholars and practitioners recommend improved output control, i.e. better external incentives or even stricter regulations. Monasteries demonstrate that alternative models may be more suitable to enhance sustainable governance quality and to reduce agency problems. In the long history of monasteries, some abbots and monks were known to line their own pockets and some monasteries were undisciplined. Monasteries developed special systems to combat these excesses thus ensuring their survival over centuries. We study these features from an economic perspective. Derived from an analysis of the Benedictine monastery of Engelberg we offer three improvements of applied governance designed to reduce agency problems. First, monastic governance emphasizes clan control rather than output control. Monasteries demonstrate that organizations can prevent agency problems by complementing external discipline with internal behavioral incentives, such as value systems and voice. Second, organization members making firm-specific investments are motivated by broad participation rights and co determination. Third, the Benedictines are able to apply supportive external control mechanisms not perceived as controlling.

Der Benediktinerorden hat schon früh erstaunlich ausgefeilte Führungs- und Kontrollstrukturen entwickelt und etabliet. Wie sich Unternehmen davon inspirieren lassen können, zeigen die Autoren des folgenden Beitrages.

Culture has attributes of a global public good that needs to be preserved for mankind as a whole. World Culture Certificates are proposed to efficiently preserve World Heritage. The community of nations has to agree on the Global Heritage List and how much each nation is to contribute to that purpose. Each World Heritage site conserved is acknowledged through the issuance of a tradable Certificate. Countries and private firms are induced to seek sites where financial resources can be spent most productively. This leads to an efficient allocation of resources to preserve World Heritage.

Academic economists today are caught in a “Publication Impossibility Theorem System” or PITS. To further their careers, they are required to publish in A-journals, but for the vast majority this is impossible because there are few slots open in such journals. Such academic competition maybe useful to generate hard work, however, there may be serious negative consequences: the wrong output may be produced in an inefficient way, the wrong people may be selected, and losers may react in a harmful way. This paper suggests several ways to remedy this situation.

Which schools of thought are favored by German economists? What makes a good economist and which economists have been most influential? These questions were addressed in a survey, conducted in the summer of 2006 among the members of the ‘Verein für Socialpolitik’, the association of German speaking economists. An econometric analysis is used to identify to what extent ideological preferences or personal factors determine the respondents’ answers. Our results suggest that German economists favor Neoclassics as a school of thought and appreciate the contributions of their Anglo-Saxon colleagues much more than their fellow compatriots’ contributions. Furthermore, a ‘good’ economist should have expertise in a certain field, as well as a broader knowledge of general economics. Some of the results can be compared to Colander (2008). The results indicate that graduate programs noted for their American style greatly influence a student’s opinion as to what attributesna good economist must have.

This paper argues that the “Economics of Crime” concentrates too much on punishment as a policy to fight crime, which is unwise for several reasons. There are important instances in which punishment simply cannot reduce crime. Several feasible alternatives to punishment exist, such as offering positive incentives or handing out awards for law abiding behavior. These alternative approaches tend to create a positive sum environment. When people appreciate living in a society that is to a large extent law abiding, they are more motivated to observe the law.

Culture has attributes of a global public good that needs to be preserved for mankind as a whole. World Culture Certificates are proposed to efficiently preserve World Heritage. The community of nations has to agree on the Global Heritage List and how much each nation is to contribute to that purpose. Each World Heritage site conserved is acknowledged through the issuance of a tradable Certificate. Countries and private firms are induced to seek sites where financial resources can be spent most productively. This leads to an efficient allocation of resources to preserve World Heritage.

Gegenwärtig spielt sich in der Ökonomie eine beinahe revolutionäre Entwicklung ab. Die direkte empirische Erfassung des subjektiven Wohlbefindens fordert die traditionelle Ökonomie heraus, inspiriert sie zu neuen Einsichten und eröffnet neue Wege der wissenschaftlichen Forschung. Ansatz und Möglichkeiten der ökonomischen Analyse des Glücks werden aufgezeigt und anhand von zwei spezifischen Anwendungen illustriert. Der Zusammenhang zwischen Einkommen und Lebenszufriedenheit wird wesentlich durch Anspruchsniveaus, mit denen Lebensumstände beurteilt werden, bestimmt. Die Anspruchsniveaus bilden sich dabei über soziale Vergleiche und Gewöhnungsprozesse heraus. Der Lebenszufriedenheitsansatz wird als neue Methode zur Bewertung öffentlicher Güter präsentiert. Die kurze Diskussion der »Glückspolitik« aus einer konstitutionellen Perspektive legt eine vergleichende institutionelle Analyse des subjektiven Wohlbefindens nahe. Die Glücksrevolution in der Ökonomie steht erst am Anfang. Weitere Einsichten für die Suche nach den Institutionen, die den Menschen am besten erlauben, ihre Vorstellungen vom guten Leben zu verfolgen, sind in der Zukunft zu erwarten.

Academic economists today are caught in a “Publication Impossibility Theorem System” or PITS. To further their careers, they are required to publish in A-journals, but for the vast majority this isnimpossible because there are few slots open in such journals. Such academic competition maybe useful to generate hard work, however, there may be serious negative consequences: the wrong output may be produced in an inefficient way, the wrong people may be selected,nand losers may react in a harmful way. This paper suggests several ways to remedy this situation.

"Four types of “economics” relevant for institutional analysis are distinguished: Standard Neoclassical Economics; Socio-Economics or Social Economics; New Institutional Economics; and Psychological Economics (often misleadingly called Behavioural Economics). The paper argues that an extension of Neoclassical Economics with elements from other social sciences (including political science, sociology, psychology, law and anthropology) is fruitful to explain institutions because it allows us to maintain the strength ofnthat approach. Social Economics can play an important role helping to overcome the limitations of Neoclassics. However, it should become more concrete, integrate what is useful in Neoclassics, and should seriously engage in empirical research."

We discuss Starbuck’s proposal to improve decision processes in scholarly evaluation. While we agree that more variety is needed in evaluation committees, we suggest to enlist scholars from other research fields rather than people from outside academia. We disagree with the proposal that reliable indicators of research effectiveness will improve research. We argue that evaluating research with even better and more reliable indicators would lead to worse results than what is observed today. Attention would be deviated from the content of research, and intrinsic motivation, which is essential for good research, would be crowded out. We propose that evaluations that are based on indicators need to be pushed back. After a careful selection process, researchers need to be given the opportunity to pursue the research they consider to be fruitful.

Die Ausgestaltung von Lohnsystemen und Bonusregeln hat mit der Finanzkrise erst recht an Bedeutung gewonnen. Die Autoren des folgenden Beitrags diskutieren verschiedene Modelle mit variablen Entschädigungen und plädieren für den alternativen Ansatz des Fixlohnes, da dieser der Arbeitsteilung innerhalb von Unternehmen besser Rechnung trage.

Terrorism has large social costs that are difficult to quantify for the well-known problems of eliciting people’s preferences for public goods. We use the LSA to assess these costs in utility and monetary terms. Based on combined cross-section time-series data, we estimate the costs of terrorism for France and the British Isles. We find large negative effects of terrorism on life satisfaction that translate into considerable compensating surpluses for a hypothetical reduction in terrorism, in particular for the serious conflict in Northern Ireland. The effects of terrorism are robust and differ across groups in accordance with prior expectations.