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Externalities
Kinds of Externalities Selected AbstractsPROFIT MAXIMIZATION AND SOCIAL OPTIMUM WITH NETWORK EXTERNALITY,THE MANCHESTER SCHOOL, Issue 2 2006URIEL SPIEGEL The paper analyzes the options open to monopoly firms that sell Internet services. We consider two groups of customers that are different in their reservation prices. The monopoly uses price discrimination between customers by producing two versions of the product at positive price for high-quality product and a free version at zero price for lower-quality product. The monopoly can sell advertising space to increase its revenue but risks losing customers who are annoyed by advertising. Network externalities increase the incentive to increase output; thus we find cases where the profit maximization is consistent with maximum social welfare. [source] Externalities, Learning and Governance: New Perspectives on Local Economic DevelopmentDEVELOPMENT AND CHANGE, Issue 2 2001Bert Helmsing In spite of growing mobility of production and production factors, economic development is increasingly localized in economic agglomerations. This article reviews three partially overlapping perspectives on local economic development, which derive from three factors intensifying the localized nature of economic development: externalities, learning and governance. Externalities play a central role in the new geographical economics of Krugman and in new economic geography of clusters and industrial districts. The dynamics of local economic development are increasingly associated with evolutionary economic thinking in general and with collective learning in particular. Inter-firm and extra-firm organization has experienced considerable innovation in the last few decades. New institutional devices are based on the notions of commodity chain, cluster and milieu. These innovations introduce new issues of economic governance both at the level of industry and of territory. [source] Robust Predictions for Bilateral Contracting with ExternalitiesECONOMETRICA, Issue 3 2003Ilya Segal The paper studies bilateral contracting between one principal and N agents when each agent's utility depends on the principal's unobservable contracts with other agents. We show that allowing deviations to menu contracts from which the principal chooses bounds equilibrium outcomes in a wide class of bilateral contracting games without imposing ad hoc restrictions on the agents' beliefs. This bound yields, for example, competitive convergence as N ,, in environments in which an appropriately-defined notion of competitive equilibrium exists. We also examine the additional restrictions arising in two common bilateral contracting games: the "offer game" in which the principal makes simultaneous offers to the agents, and the "bidding game" in which the agents make simultaneous offers to the principal. [source] Unemployment and Search Externalities in a Model with Heterogeneous Jobs and WorkersECONOMICA, Issue 273 2002Pieter A. Gautier This paper presents a matching model with low, and high,skilled workers and simple and complex jobs. I show that the degree to which low,skilled workers are harmed by high,skilled workers who are willing to temporarily accept simple jobs depends on the relative productivity of high, and low,skilled workers on simple jobs and on the quit rate of high,skilled workers. Under certain conditions, low,skilled workers can benefit from job competition with high,skilled workers. Within this framework, some explanations for the high and persistent unemployment rates of lower educated workers in the 1990s are evaluated. [source] Increasing Returns, Labour Utilization and Externalities: Procyclical Productivity in the United States and JapanECONOMICA, Issue 266 2000Michela Vecchi This paper investigates procyclical productivity and attempts to discriminate among several competing explanations. The study focuses on the United States and Japan, since the different industrial relations in these two economies serve to cast a sharper light on the procyclical productivity debate. Labour hoarding, evaluated through the introduction of a labour utilization proxy, proves to be an important influence. The interpretation of the role of external economies remains an open issue. [source] Consumption Externalities, Coordination, and Advertising*INTERNATIONAL ECONOMIC REVIEW, Issue 3 2002Ivan Pastine The aim of this article is to demonstrate that advertising can have an important function in markets with consumption externalities apart from its persuasive and informative roles. We show that advertising may function as a device to coordinate consumer expectations of the purchasing decisions of other consumers in markets with consumption externalities. The implications of advertising as a coordinating device are examined in the pricing and advertising decisions of firms interacting strategically. Although, at times, the one-period advertising expense can exceed the one-period monopoly profit, in equilibrium, consumers will pay a premium for the more heavily advertised brand. [source] Irrigation Externalities and Agricultural Sustainability in South-eastern NigeriaJOURNAL OF AGRICULTURAL ECONOMICS, Issue 3 2004Kevin C. Urama Agricultural intensification by irrigation is increasingly regarded as the key to solving food supply problems in Sub-Saharan Africa. Conversely, mounting empirical evidence suggests that irrigation externalities might preclude long-term sustainability of arable agriculture. Choosing between intensive irrigation schemes and less intensive farming systems is therefore, problematic. The paper examines the implications of irrigation intensification in south-eastern Nigeria using adjacent rain-fed farms as the counterfactual. The analyses found mixed results. When first introduced, the irrigation scheme increased marginal factor productivity and gross margins but this has subsequently declined to the extent that the marginal factor product of land has become negative. The annual yields of the irrigated farms were also less stable than those of the less intensive rain-fed farms. These results indicate the dilemma that irrigation externalities present to sustainable agricultural policy and suggest a need to look again at the potential for developments in rain-fed systems. [source] Emerging Threats to Internet Security: Incentives, Externalities and Policy ImplicationsJOURNAL OF CONTINGENCIES AND CRISIS MANAGEMENT, Issue 4 2009Michel Van Eeten Somewhere around 10% of all machines connected to the Internet are thought to be infected with malicious software. This has allowed the emergence of so-called ,botnets', networks of sometimes millions of infected machines that are remotely controlled by malicious actors. Botnets are mostly used for criminal purposes, but they also enable large-scale failures that might even reach disastrous proportions. We explain the rise of botnets as the outcome of the incentive structures of market players and present new empirical evidence on these incentives. The resulting externalities require some form of voluntary or government-led collective action. Our findings have implications for the controversial debate on the appropriate policy measures, where two perspectives on cybersecurity fight for dominance: national security and law enforcement. [source] Intergenerational Allocation of Government Expenditures: Externalities and Optimal TaxationJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 1 2008KAZI IQBAL This paper studies optimal capital and labor income taxes when the benefits of public goods are age-dependent. Provided the government can impose a consumption tax, it can attain the first-best resource allocation. This involves the uniform taxation of the cohorts' labor income and a zero capital income tax. With no consumption tax and optimally chosen government spending, labor income should be taxed nonuniformly across cohorts and the capital income tax should be nonzero. Deviations of the public goods from their respective optima create distortions. These affect the labor supply decisions of both cohorts and capital accumulation, providing a further reason to tax (or subsidize) capital income. [source] Endogenous City Formation with Production Externalities: Existence of EquilibriumJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 6 2007COURTNEY LAFOUNTAIN I show that equilibria exist in closed city-system models with production externalities if firms' production possibilities vary continuously with the source of the externality, are constant returns to scale in own inputs, include inaction, and satisfy free disposal; if firms have to employ their own inputs to produce output; if there is a finite number of firm types; and if some standard conditions on preferences and endowments are satisfied. This is the first model to include production externalities in the fully general equilibrium framework required for endogenous city formation. Thus, this result provides formal support for the conjecture that production externalities lead to urban agglomeration. [source] Inefficient Local Regulation of Local ExternalitiesJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 3 2005GREGORY BESHAROV The consequences of commitment failure have been missing from debates about the decentralized regulation of automobile emissions and other sources of local consumption externalities. Even when the direct external effects of such products are limited to a single jurisdiction, the presence of increasing returns-to-scale production causes one jurisdiction's choice of regulatory standard to affect the prices and availability of goods elsewhere. Decentralized regulatory equilibria may be inefficient as a result. Because of a commitment failure, production may be split between standards,and consumers denied the full range of products,when it is efficient to have standards that allow products to be consumed everywhere. Coordination failures may cause similar inefficiencies. The results question the usefulness of the principle of subsidiarity as commonly employed. [source] Regulation and Coordination of International Environmental Externalities with Incomplete Information and Costly Public FundsJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 3 2000Faysal Mansouri In this article, we study cross-border externalities in a game played by two principal-agent pairs with adverse selection. Each firm/agent is located in one country and generates pollution by producing complementary or substitute goods, sold on a common market. A fraction of pollution is transferred from one country to another. Each regulator/principal is imperfectly informed about the marginal cost of his domestic firm and accordingly uses secret incentive contracts with costly public funds. We show the necessity of cooperation between competing regulators to effectively internalize all the damages caused to the environment, while reaching the first best. If the level of uncertainty is sufficiently low, we obtain an infinity of noncooperative Bayesian differentiable equilibria, which may necessitate competing regulators to coordinate on an equilibrium. Such coordination constitutes an incentive for competing regulators to cooperate. Our major result states that under some circumstances asymmetric information relaxes the transborder externality problem. Indeed, we show that, when there is a major transfer of pollution and firms' marginal costs are sufficiently high, competing regulators are better off under uncertainty. Therefore, asymmetry of information can have the very consequence of generating regulation that is too strict from the domestic viewpoint but that improves social efficiency when the benefits to both countries are taken into account. [source] EXTERNALITIES AND PARTIAL TAX REFORM: DOES IT MAKE SENSE TO TAX ROAD FREIGHT (BUT NOT PASSENGER) TRANSPORT?,JOURNAL OF REGIONAL SCIENCE, Issue 4 2007Edward Calthrop ABSTRACT Externalities such as pollution and road congestion are jointly produced by the use of intermediate inputs by firms and the consumption of final goods by households. To cope with such externalities, policy proposals often suggest partial tax reforms. This paper uses a simple general equilibrium model to explore the effects of a reform of taxes on freight transport in a second-best setting. The theoretical model shows that the welfare effect of higher freight taxes is positive, unless passenger transport is severely under-taxed and the tax reform attracts substantially more passenger transport. Moreover, the optimal freight tax may be below or above marginal external cost. Budgetary neutral tax reform exercises with a numerical simulation model for the U.K. suggest that, under a wide variety of parameter values, higher freight transport taxes are indeed welfare increasing. The welfare gain of freight tax reform rises with the level of the passenger tax, but the optimal freight tax declines at higher taxes on passenger transport. Substantial net benefits of tax reform are obtained only under labor tax recycling of the revenues. [source] Endogenous Growth, Increasing Returns and Externalities: An Alternative Interpretation of the EvidenceMETROECONOMICA, Issue 4 2001Jesus Felipe A number of recent papers have used aggregate production functions in an attempt to measure the degree of returns to scale and possible external effects in US manufacturing industries. In this paper I argue that the methods used and the results obtained are deceptive. The reason is that underlying every aggregate production function is the income accounting identity that relates output in value terms to the sum of wages and profits. This identity can be transformed, depending on the empirical paths of the wage and profit rates and of the factor shares, into different mathematical forms which resemble neoclassical production functions. Estimation of these forms, as is done in the literature discussed in the paper, poses serious problems for the interpretation of the results. [source] Consumption Externalities, Production Externalities and IndeterminacyMETROECONOMICA, Issue 4 2000Mark Weder In this paper we show that consumption externalities reduce the degree of increasing returns needed to generate indeterminacy in a two-sector optimal growth model. In equilibrium, consumption externalities operate as if the utility function is (close to) linear. If these externalities are strong, the minimum necessary increasing returns approach zero. Therefore, this paper,in a stylized fashion,provides an example of how microbehavior, i.e. interactions at the household level, can generate aggregate instability. Consumption externalities also help to eliminate the counterfactual cyclical behavior of consumption in the two-sector model. [source] Parking Externalities in Commercial Real EstateREAL ESTATE ECONOMICS, Issue 2 2010Bowman Cutter IV Local governments have employed a variety of strategies to reduce street congestion through an increase in parking supply. These policies have been criticized as an implicit subsidy that shifts costs from drivers to the public at large. Others have noted that parking lots and structures can lead to increased water and air pollution. However, there has not been an examination of whether parking, presumably by reducing congestion, generates external benefits. We measure whether nearby parking availability influences commercial property prices after controlling for property characteristics, including on-site parking. We find that publicly accessible parking, such as commercial parking garages, generates significant aggregate externalities. We also find evidence of a significant complementary relationship between building and parking area in property values. This suggests that parking regulation could have a significant impact on property development through its effect on the value of the marginal square foot of building area. [source] The Empirics of International Currencies: Network Externalities, History and Persistence,THE ECONOMIC JOURNAL, Issue 537 2009Marc Flandreau Using a new database for the late nineteenth century, when the pound sterling was the world's leading international currency, this article provides evidence on the empirical determinants of international currency status. We report evidence in favour of the search-theoretic models to international currencies. Using a microeconomic model of currency choice, we provide empirical support to strategic externalities. We find strong confirmation of the existence of persistence, but reject the view that the international monetary system was subject to pure path dependency and lock-in effects, suggesting that, even in the absence of WWI, the USD was bound to overtake sterling. [source] Altruism and Determinacy of Equilibria in Overlapping Generations Models with ExternalitiesTHE JAPANESE ECONOMIC REVIEW, Issue 2 2003Alain Venditti This paper deals with an OLG model with production and a single commodity, in which agents are assumed altruistic and the aggregate production function contains external effects. I prove that, if the technology satisfies a minor assumption, which encompasses positive and negative externalities, some curvature conditions on the utility function ensure local determinacy of stationary and period 2 equilibria. I prove that non-separable, strictly concave preferences are a fundamental ingredient for the occurrence of indeterminate equilibria. Finally, considering the case of unbounded growth, I establish that for any utility and production functions a unique balanced growth path is globally determinate. JEL Classification Numbers: C62, E32 [source] Brain dopamine is associated with eating behaviors in humansINTERNATIONAL JOURNAL OF EATING DISORDERS, Issue 2 2003Nora D. Volkow Abstract Objective Eating behavior in humans is influenced by variables other than just hunger-satiety including cognitive restraint, emotional distress, and sensitivity to food stimuli. We investigate the role of dopamine (DA), a neurotransmitter involved with food motivation, in these variables. Methods We used the Dutch Eating Behavior Questionnaire (DEBQ) to measure Restraint, Emotionality, and Externality in 10 subjects. We correlated DEBQ scores with brain DA levels. Positron emission tomography and {11C}raclopride uptake were used to measure baseline D2 receptors (neutral stimulation) and to assess changes in extracellular DA to food stimulation (display of food). Results Restraint was correlated with DA changes with food stimulation (higher restraint, greater responsivity), emotionality was negatively correlated with baseline D2 receptors (higher emotionality, lower D2 receptors), whereas externality was not. These correlations were significant in the dorsal but not in the ventral striatum. Discussion These results provide evidence that DA in the dorsal striatum is involved with the restraint and emotionality components regulating eating behavior and that these two dimensions reflect different neurobiologic processes. © 2003 by Wiley Periodicals, Inc.Int J Eat Disord 33: 136,142, 2003. [source] Resale Externality and the Used Housing MarketREAL ESTATE ECONOMICS, Issue 3 2007Shinichiro Iwata The selling prices of used houses may not fully reflect the maintenance spending of current owners when prospective buyers are unable to conduct a thorough inspection before purchase. This article investigates how this resale externality problem affects the maintenance expenditures of homeowners. After considering both observable and unobservable repair expenses, the analysis shows that the resale externality reduces not only maintenance expenditures, but also household mobility. A treatment effects model is used to estimate the simultaneous relationship between mobility and maintenance in the Japanese resale housing market. The results indicate that the resale externality has a significant negative impact on maintenance expenditures. [source] Externalities, Learning and Governance: New Perspectives on Local Economic DevelopmentDEVELOPMENT AND CHANGE, Issue 2 2001Bert Helmsing In spite of growing mobility of production and production factors, economic development is increasingly localized in economic agglomerations. This article reviews three partially overlapping perspectives on local economic development, which derive from three factors intensifying the localized nature of economic development: externalities, learning and governance. Externalities play a central role in the new geographical economics of Krugman and in new economic geography of clusters and industrial districts. The dynamics of local economic development are increasingly associated with evolutionary economic thinking in general and with collective learning in particular. Inter-firm and extra-firm organization has experienced considerable innovation in the last few decades. New institutional devices are based on the notions of commodity chain, cluster and milieu. These innovations introduce new issues of economic governance both at the level of industry and of territory. [source] Food Industrialisation and Food Power: Implications for Food GovernanceDEVELOPMENT POLICY REVIEW, Issue 5-6 2003Tim Lang Food supply chains of developed countries industrialised in the second half of the twentieth century, with significant implications for developing countries over policy priorities, the ensuing external costs and the accompanying concentration of market power. Very powerful corporations dominate many sectors. Primary producers are locked into tight specifications and contracts. Consumers may benefit from cheaper food but there are quality implications and health externalities. As consumer confidence has been shaken, new quality agencies have been created. Tensions have emerged about the state's role as facilitator of industrial efficiencies. Food policy is thus torn between the pursuit of productivity and reduced prices and the demand for higher quality, with implications for both producers and consumers in the developing world. [source] Producing and Consuming Chemicals: The Moral Economy of the American LawnECONOMIC GEOGRAPHY, Issue 4 2003Paul Robbins Abstract: The burgeoning application of fertilizers and pesticides to residential lawns, which has begun to offset the gains made in reducing the use of chemicals in agriculture, represents a serious environmental hazard in the United States and elsewhere. Increased use and purchase occur specifically among a sector of consumers who explicitly and disproportionately acknowledge the risks associated with chemical deposition, moreover, and who express concern about the quality of water and human health. What drives the production of monocultural lawns in a period when environmental consciousness has encouraged "green" household action (e.g., recycling)? And why does the production of chemical externalities occur among individuals who claim to be concerned about community, family, and environment? In this article, we explore the interactions that condition and characterize the growth of intensive residential yard management in the United States. We argue that the peculiar growth and expansion of the moral economy of the lawn is the product of a threefold process in which (1) the lawn-chemical industry has implemented new and innovative styles of marketing that (2) help to produce an association of community, family, and environmental health with intensive turf-grass aesthetics and (3) reflect an increasing local demand by consumers for authentic experiences of community, family, and connection to the nonhuman biological world through meaningful work. [source] External economies of scale in the Lancashire cotton industry, 1900,1950ECONOMIC HISTORY REVIEW, Issue 1 2002Stephen Broadberry This article provides three types of evidence for external economies of scale in the Lancashire cotton industry. Anglo-American productivity differences are used to demon-strate external economies at the industry level. Econometric evidence of dynamic (Marshall-Arrow-Romer) external economies of localization in spinning and weaving is provided using individual earnings data. A case study of a merchant firm demonstrates the build-up of dynamic (Jacobs) externalities of urbanization. It is argued that the persistence of a large merchant community generating external economies of scale helped to delay Britain's loss of comparative advantage to low wage producers. [source] The Proposed Privatisation of Queensland MotorwaysECONOMIC PAPERS: A JOURNAL OF APPLIED ECONOMICS AND POLICY, Issue 1 2010Ross Guest L51; R42; R48 This article evaluates the proposed sale of the tolling rights on Queensland Motorways from an economic welfare perspective. Weighing against the sale are arguments about optimal risk allocation and network externalities. In contrast, there is a productive efficiency case in favour of the sale. Privatisation also raises questions about private monopoly power and the delivery of community service obligations, although these could be handled through contract specifications. The sale price is essentially a distributional issue. The back-of-the-envelope financial analysis here suggests that the mooted sale price of $3 billion would undervalue the asset and therefore transfer net worth from Queensland taxpayers to private investors. [source] Why are Europeans so tough on migrants?ECONOMIC POLICY, Issue 44 2005Tito Boeri SUMMARY European migration International migration can significantly increase income per capita in Europe. We estimate that at the given wage and productivity gap between Western and Eastern Europe, migration of 3% of the Eastern population to the West could increase total EU GDP by up to 0.5%. Yet on 1 May 2004, 14 EU countries out of 15 adopted transitional arrangements vis-à-vis the new member states and national migration restrictions vis-à-vis third country nationals are getting stricter and stricter. In this paper we offer two explanations for this paradox and document their empirical relevance in the case of the EU enlargement. The first explanation is that immigration to rigid labour markets involves a number of negative externalities on the native population. The second explanation is that there are important cross-country spillovers in the effects of migration policies, inducing a race-to-the top in border restrictions with high costs in terms of foregone European output. In light of our results, we discuss, in the final section, the key features of a desirable migration policy to be coordinated at the EU level. ,Tito Boeri and Herbert Brücker [source] Social Contacts and Occupational ChoiceECONOMICA, Issue 305 2010SAMUEL BENTOLILA Social contacts help to find jobs, but not necessarily in the occupations where workers are most productive. Hence social contacts can generate mismatch between workers' occupational choices and their productive advantage. Accordingly, social networks can lead to low labour force quality, low returns to firms' investment and depressed aggregate productivity. We analyse surveys from both the US and Europe including information on job finding through contacts. Consistent with our predictions, contacts reduce unemployment duration by 1,3 months on average, but they are associated with wage discounts of at least 2.5%. We also find some evidence of negative externalities on aggregate productivity. [source] Entrepreneurial Policy: The Case of Regional Specialization vs.ENTREPRENEURSHIP THEORY AND PRACTICE, Issue 5 2008Spontaneous Industrial Diversity Regional economic development policy is recognized as a key tool governments use to foster economic prosperity. Whether specialization (or diversity) of economic activities should be a regional development policy goal is often debated. We address this question in a local-diversity context, by reviewing traditional arguments in its favor, supplemented with evidence for more entrepreneurial concepts like industrial symbiosis and Jacobs externalities. We show that the context of entrepreneurship matters more to policy than the type and form of resulting industries. Policies enabling entrepreneurs to exploit opportunities in a context of spontaneously evolved industrial diversity are better facilitators of regional development. [source] Transport and environment: policy directions for europeENVIRONMENTAL POLICY AND GOVERNANCE, Issue 3 2001Robert Tinch Transport externalities are among the most important environmental problems affecting quality of life in Europe. Forecasts suggest that past environmental improvements may now be rolled back by traffic growth, and current traffic trends are not sustainable. The theory of environmental policy proposes pricing external costs at their marginal social costs as one solution. Although full marginal social cost pricing is impracticable, advances in tolling technology and environmental valuation mean that it is now a viable option to approximate such charging. There are signs that the European Commission and other bodies are starting to favour pricing over regulatory instruments. However, often overlooked is the potential for non-convexities in the transport sector or between transport and the rest of the economy. For example it may be that small increases in resources for public transport would not result in welfare gains, whereas large increases would. Non-convexities would mean that market forces under marginal social cost pricing might lead away from the optimal transport system. This is one reason why pricing instruments cannot in themselves be a panacea for transport externalities or bring about a sustainable transport system. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment [source] Value Maximisation, Stakeholder Theory, and the Corporate Objective FunctionEUROPEAN FINANCIAL MANAGEMENT, Issue 3 2001Michael Jensen This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. I argue that since it is logically impossible to maximise in more than one dimension, purposeful behaviour requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is maximised when each firm in an economy maximises its total market value. Total value is not just the value of the equity but also includes the market values of all other financial claims including debt, preferred stock, and warrants. In sharp contrast stakeholder theory, argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm (including not only financial claimants, but also employees, customers, communities, governmental officials and under some interpretations the environment, terrorists and blackmailers). Because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs among these competing interests they leave managers with a theory that makes it impossible for them to make purposeful decisions. With no way to keep score, stakeholder theory makes managers unaccountable for their actions. It seems clear that such a theory can be attractive to the self interest of managers and directors. Creating value takes more than acceptance of value maximisation as the organisational objective. As a statement of corporate purpose or vision, value maximisation is not likely to tap into the energy and enthusiasm of employees and managers to create value. Seen in this light, change in long-term market value becomes the scorecard that managers, directors, and others use to assess success or failure of the organisation. The choice of value maximisation as the corporate scorecard must be complemented by a corporate vision, strategy and tactics that unite participants in the organisation in its struggle for dominance in its competitive arena. A firm cannot maximise value if it ignores the interest of its stakeholders. I offer a proposal to clarify what I believe is the proper relation between value maximisation and stakeholder theory. I call it enlightened value maximisation, and it is identical to what I call enlightened stakeholder theory. Enlightened value maximisation utilises much of the structure of stakeholder theory but accepts maximisation of the long run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders. Managers, directors, strategists, and management scientists can benefit from enlightened stakeholder theory. Enlightened stakeholder theory specifies long-term value maximisation or value seeking as the firm's objective and therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. I also discuss the Balanced Scorecard, the managerial equivalent of stakeholder theory. The same conclusions hold. Balanced Scorecard theory is flawed because it presents managers with a scorecard which gives no score,that is, no single-valued measure of how they have performed. Thus managers evaluated with such a system (which can easily have two dozen measures and provides no information on the tradeoffs between them) have no way to make principled or purposeful decisions. The solution is to define a true (single dimensional) score for measuring performance for the organisation or division (and it must be consistent with the organisation's strategy). Given this we then encourage managers to use measures of the drivers of performance to understand better how to maximise their score. And as long as their score is defined properly, (and for lower levels in the organisation it will generally not be value) this will enhance their contribution to the firm. [source] | ||||||||||||||||||||||||||||||||||