By Paul Joskow*
I have been a student of Oliver Williamson’s for over 50 years. I was first introduced to Olly’s work in 1968 by Richard Nelson, who taught the first semester of the graduate course in industrial organization (IO) at Yale at that time. The course focused heavily on topics related to for-profit and not-for-profit organizations, organizational objectives and behavior, industry dynamics from an evolutionary perspective, research, development and the diffusion of innovations. We focused on papers and books by Simon, March, Cyert, Alchian, Chandler, Becker, Weber, Winter, Leibenstein, Mansfield, Marris, Baumol, Demsetz, Schelling, and Marschak. Coase’s famous paper on the nature of the firm was on the reading list but, as I recall, was not given too much attention.
One of our assignments in Nelson’s course was to read Cyert and March’s book A Behavior Theory of the Firm which had been published in 1963 and featured recent work in the “Carnegie School” tradition. Chapter 9 of the book is entitled “A Model of Rational Managerial Behavior” and was written by Olly when he was a PhD student at Carnegie.** Olly’s paper in the Cyert and March volume develops and explores a model of a firm whose managers have preferences over attributes like the size of the staff, managerial emoluments, and managerial slack. Rather than seeking to maximize the firm’s profits, the managers seek to maximize a managerial utility function that includes the attributes that affect their own welfare, subject to a minimum “acceptable” profit constraint, presumably defined by the threat of the management being ousted. The paper works out the comparative statics of the model and discusses its testable implications. A potential application to analyzing regulated monopoly firms is then outlined in the paper. Closely related work, also published in 1963, includes an econometric analysis of executive compensation based on “testable implications” of the theoretical model.***
I was already interested in studying the behavior of regulatory agencies and the effects of regulation on firm behavior and performance when I came to graduate school and I was very much taken by Olly’s suggestion that regulated monopoly firms might be a fruitful focus of further work in this area. Indeed, I wrote a term paper, now lost to history, extending Olly’s model to include a specification of technology and alternative regulatory constraints. So, what must have been one of Olly’s first published papers got me into doing my first “research” on regulated firms. While Olly probably didn’t look back at his 1963 paper as one of his more important academic contributions, it did have a big impact on me at the time.
The second semester IO course at Yale was taught by the late John McGowan. The focus of this course was antitrust policy and just as that course began Olly’s influential paper “Economies as an Antitrust Defense: The Welfare Tradeoffs”^ was published. It was received with great excitement by my fellow graduate students who had come to view much of antitrust policy and the economics that supported it as a subject in need of serious renovation. In that course, we also read Olly’s paper on peak load pricing an issue of regulatory policy concern at that time.^^ Olly thus became in my mind an idol who traveled both with the Carnegie crowd and also did more traditional welfare economics of policy relevance.
*Paul Joskow is Elizabeth and James Killian Professor of Economics at MIT and a Former President of the Sloan Foundation. He served as President of SIOE (then called ISNIE) 2002-3.
**This work is incorporated in Olly’s first book. Oliver E. Williamson, The Economics of Discretionary Behavior: Managerial Objectives in the Theory of the Firm, Markham Publishing, Chicago 1967.
*** Oliver E. Williamson, “Managerial Discretion and Business Behavior,” American Economic Review, 53(5), December 1963, 1032-1057.
^ Oliver E. Williamson, “Economies as an Antitrust Defense: The Welfare Tradeoffs,” American Economic Review, December 1968, 58(1), 18-36.
^^ Oliver E. Williamson, “Peak Load Pricing and Optimal Capacity Under Indivisibility Constraints,” American Economic Review, September 1966, 56(4), 810-827.