Rational Chef Theory?

I have a new paper out at Economics of Governance on the organization of high-end restaurants. The basic question behind the paper was: why are so many Haute-Cuisine chefs also the owners of the restaurants where they work? In trying to figure out an answer, I developed a framework to study the relationship between creativity, ownership of, and the division of labor within, the firm/restaurant. Here’s how I summarize the paper’s key idea in the concluding section:

My approach relies on the conjecture that, in organizing their businesses, entrepreneurs face a tradeoff between the benefits of specialization and the losses from opportunism. If one knows the specific sources of opportunism a firm must overcome in its line of business, one should be able to predict the organizational responses the firm will adopt in the real world. I focus on two aspects of organizational choice: an establishment’s ownership structure and the allocation of tasks within it. I predict that the industry’s characteristics favor the assignment of residual claimancy to the chef and that the chef-owner will also maintain for herself such tasks as the design of the restaurant’s menu and the selection of ingredients. Other tasks, including the preparation of the meal and the management of the establishment’s finances, will fall in the hands of someone else.

Here’s the abstract of the paper:

This paper develops a theory of the organization of high-end restaurants. I identify the high degree of output complexity produced by these establishments as the industry’s fundamental characteristic. This high degree of output complexity leads to reputational investments by restaurants, which in turn affects their organizational structure. In particular, my theory addresses the prevalence of chef-owned establishments in the fine dining industry and the assignment of productive tasks within its kitchens.

Transaction Costs and Secondary Calculation

Transaction costs are a “famously nebulous” concept in economics, and the relationship between the transaction cost approach and the Austrian tradition invites further development. Here’s my small step in that direction.

Defining and establishing property rights is a process that consumes valuable resources. Seemingly obvious, but mostly overlooked: sometimes, the value which can be seized by establishing property rights falls short of the resources necessary to establish them.

For one, under private ownership, economic calculation governs the decision of how, when, and where to construct a road in the first place. But after that initial decision, a form of calculation—what Piano and Rouanet term “secondary calculation”—continues to govern the very decision about whether to use prices for allocating space to the roads. Additionally, even if prices are used (as opposed to, say, a non-profit model), secondary calculation governs how swiftly and thoroughly to adjust those prices. Such secondary calculation assesses the profitability of first enhancing one’s private property right to the road and then subsequently implementing and adjusting prices. Once again, if transaction costs are prohibitive, pure market-clearing prices won’t be used, and some other mechanism will be, but importantly, this decision is itself also guided by (secondary) calculation.

Published at at EconLib. For the original discussion of “secondary calculation,” see Piano and Rouanet.