Philip K. Porter

Measuring Managerial Efficiency: The Case of Baseball

In economic analysis the role of the entrepreneur is paramount to the production process. The entrepreneur is engaged in a Darwinian game of efficiently transforming scarce resource inputs into outputs. In the modern business organization this role is delegated to managers. Despite the conceptual importance of the role of management in the production function, very little is known about the actual effect on output of variations in managerial skill. In part this is due to the lack of proprietory data. In part it is due to difficulties in measuring the outputs and inputs of complex production processes in a meaningful way. A number of investigators have employed the concept of the frontier production function, as developed by Forsund and Hjalmarsson [1] and Timmer [6] and more recently by Schmidt and Lovell [3], to measure the effect on technical and price efficiency of various property rights structures or institutional constraints. To our knowledge estimates of managerial efficiency have not been obtained with firm specific data, except for some regulated industries. In this study we estimate managerial efficiency by manager and by firm, managerial marginal revenue product, the rate of change in managerial efficiency over years of experience and relative factor price efficiency. We use major league baseball teams over the period 1961-1980 as our data source. What is particularly appealing about the choice of major league baseball teams as the industry for analysis is that outputs (win percent) and inputs (player skills) are unambiguously measured, and the production function is simply specified, as shown by Scully, [5]. Our results indicate that managerial skill in baseball contributes very substantially to the production process. The paper will evolve as follows. First, the concept of the frontier production function is briefly outlined. Then, estimates of managerial efficiency by manager and by team are provided and discussed, a managerial efficiency learning curve is estimated, an estimate of managerial marginal revenue product provided, and the managerial efficiency

Institutional technology and economic growth

An endogenous model of constitutional changes and economic growth links the temporal decline in private market returns when technology is constant with the returns to rule changes realized in a political market. There is a steady state constitutional setting in which all rule changes have been incorporated that is analytically equivalent to the neoclassical steady state. As in the neoclassical model, private-sector technological progress postpones the steady state. To the extent the original constitutional setting promotes innovation, the evolutionary process toward the steady state is delayed. The model yields a theory of revolution based on forces leading to the adoption of inefficient changes in the constitutional setting.

Agency costs, property rights, and the evolution of labor unions

Collective bargaining requires that an agent represent workers. This paper examines the implications for the trade union movement of the resulting agency costs. Without transferable rights in the union, union members lack the means and incentive to bring forth the innovative agent controls common to the modern corporation. Considerations of the bargaining strengths of employers and employees, each represented by an agent, provide an explanation of the simultaneous decline of private sector union membership (corporate share holders have been more successful at lowering agency costs) and growth of public sector union representation (where the union official, a “double agent,” serves the interest of both employee and bureaucratic employer).

Majority voting and Pareto optimality

6. SummaryThis investigation of the majority voting decision under various tax structures makes the following points. First, that majority voting cannot be relied upon to choose the Pareto optimal level of output of the public good if the structure of taxes is predetermined. What is chosen is an output level of the public good that is Pareto optimal with respect to the particular tax structure. Another tax structure might exist that provides a better solution.Secondly, the choice of a tax structure should not be made independent of the choice of the output of the public good if Pareto efficiency is the objective. Pareto efficiency is guaranteed because the change in the contribution to the candidate of a marginal change in any after-tax endowment, λiUiY, is equal for all individuals. Consequently, individuals capable of offering high marginal contributions, λi, will be rewarded with low tax rates. attaining Pareto efficiency via this pairing, however, may require a significant altering of the after tax distribution of income. If, for example, all individuals have identical utility functions and equal marginal contributions, equation (12b) requires equal after tax incomes (equal marginal sacrifice).This system of voting and taxation is the antithesis of that developed independently by Clarke (1971) and Groves and Loeb (1975). Clarke, and Groves and Loeb determine the output level of the public good by maximizing the sum of stated valuation functions for the public good for given tax rates associated with the public good. Because penalties may be imposed if people misrepresent their valuations, true and complete representations are forthcoming (this results in βi = 1 for all i in equations (9) and (10)). Here the approach is to reward voting intensity with reductions in the tax on private endowments until and individuals have equal voting intensity (i.e., βi = β for all i). Both systems overlook equity considerations.Finally, individual tax burdens associated with a public project should be made known to the individual. Uncertainty about the individual cost of a joint project will lead to suboptimal output, even though the aforementioned conditions for Pareto optimality are met.An extrapolation of these results might suggest that, to the extent that persons are more homogeneous within regions than across regions, a wider range of tax structures might be needed to assure Pareto efficiency at the aggregate level than at the local level. This provides a rationale for the fact that state and regional income tax rates are often uniform while federal income tax rates are graduated according to income. Conversely, if all taxing bodies are subject to the same tax structure constraints, one would expect the provision of local public goods to more closely approximate the Pareto ideal than the provision of pure public goods at the national level.

Is the criminal justice system just

Abstract A frequent criticism of the United States’ system of criminal justice is that it is biased toward the rich who can afford better legal representation. This study accepts the premise that additional defense spending is productive but finds no reason to expect that this is unfair. When the quality of legal defense is heterogeneous any system that promotes equality of treatment is either prohibitively expensive or must restrict the rights of an individual to defend herself. Recent advances in the concept of “fairness” expand the set of distributions that can be claimed to be fair. Within this set is a distribution of defense expenditures and quality of representation that protects individual freedoms, is not overly costly and is fair. By recognizing that defense expenditures are a cost for the accused a system of prosecutorial responses to increased defense spending that removes unfairness from the system are developed. The appropriate response is found to be a less than equal proportional increase. There is some archival and much anecdotal evidence to be presented to support the premise that this is how our present system works. The system of public defenders serves as a baseline for “fair” treatment, it defines the kind of defense you can get for nothing. The system of plea bargaining, with certain convictions and bargained sentences, provides more equality than the system of trials since there is less opportunity for the defendant to use wealth.

Potential earnings, post-schooling investment and returns to human capital

Abstract Economists contend that the shape of the earnings profile during years of work tenure is generated by job training investments. Increases in observed earnings result from on-the-job training investments defined as the difference between potential earnings and observed earnings. Calculations of the return to post-schooling investment and the time to recover investments have not been possible because potential earnings are not directly observable. In this paper a methodology is developed which permits estimates of potential earnings to be inferred from observations of earnings. Returns to post-school investment and the profile of observed earnings are then estimated.