MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 31: 497–501 (2010)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/mde.1509

EDITORIAL

Managerial Economics: A Forward LookingAssessment

Paul H. Rubina and Antony W. Dnesb,�

aDepartment of Economics and School of Law, Emory University, Atlanta, GA, USAbLeverhulme Fellow, Leverhulme Trust, London, UK

We examine recent trends in managerial economics, particularly in relation to behavioral,

experimental, global and organizational influences. Managerial economics shows healthy

development over the recent decade and is still grounded in practical applications. Examples

are given using recent articles from Managerial and Decision Economics. Copyright r 2010John Wiley & Sons, Ltd.

INTRODUCTION

The purpose of this short piece is to examinetrends in the type of work emerging in managerialeconomics and to offer some assessment of futuredirections. Managerial economics is currentlydeveloping in a healthy way, particularly in areasassociated with ‘the new managerial economics’that incorporate organizational economics,including the study of strategic interaction. Thenew work does not so much displace the old but ismore in the nature of an augmentation of it.Frequently, focus is on organizational questionsrelated to managing human resources. Anemphasis on applied work that is well groundedin theory is still very much the requirement in thenew work. Certainly, in terms of the workappearing in this journal, in these days, a keyrequirement for publication is for an applicationof economic analysis to significant managerialquestions.

TRENDS IN MANAGERIAL AND DECISION

ECONOMICS

The time is ripe for an assessment of the futuredirection of managerial economics. It is possible todiscern themes of inquiry in the context of modernwork that are both interesting and generate usefulinsights for businesses and future inquiry. Ingeneral, managerial economics is unfolding in ahealthy fashion, drawing in a lot of the newinstitutional economics in the widest possiblesense. One concern though is a need tocounterbalance a modern tendency spreadingfrom mainstream economics and leading towardexcessively theoretical inquiry that reduceseconomic analysis to brutal mathematicalformalism. All modern work requires somedegree of rigor for successful completion, but ifan author has continual recourse to lemmas andcomplex theorems, especially if with no practicalapplications, then he or she is probably not writingappropriately for a managerial economics journal.

Managerial economics has always generatedempirical work that is carried out using a varietyof, typically but not always, quantitative methods.

*Correspondence to: Leverhulme Fellow, Leverhulme Trust,London, UK. E-mail: a.dnes@hull.ac.uk

Copyright r 2010 John Wiley & Sons, Ltd.

Bear in mind in interpreting this statement thatmodern econometrics has a considerable role forsemi-quantitative work that includes qualities, forexample based on probit and logit analysis.Traditionally, there is a strong connectionbetween managerial economics, operationsresearch and econometrics applications to realworld problems, which can be seen in examiningclassic texts such as Baumol (1962) and, morerecently, Salvatore (2006). Typical topics are basedaround the theory of the firm and represent asynthesis of economics, decision sciences, andbusiness administration. These topics interactwith each other and are treated in a scientific wayinvolving testable predictions and subsequenttesting. In this context, it is rare to encounter apurely theoretical article, as can be seen inreviewing successive editions of Managerial andDecision Economics and its stable mate theStrategic Management Review. Recognition of theconstraints facing firms is important in this work.

It is notable that leading MBA programs, such asthe ones at Harvard in the US or at Cranfield in theUK, normally include managerial economics coursesfollowing the model described above. Often there arevariants emphasizing decision sciences or the businessenvironment. Therefore, teaching practice can be seenas indicating to us the established ideas in managerialeconomics. There have been developments in recentyears that augment the traditional approach:particularly in areas such as globalization, theeconomics of organization, information economics,strategic behavior, the learning organization, riskmanagement, business ethics, and behavioraleconomics. All of these topics are hot in modernmanagerial economics and are slowly feeding throughinto MBA and similar courses.

The modern trends are often referred to as ‘thenew managerial economics’. Some modern textseven use the term explicitly (Boyes, 2008) and focuson questions of ‘organizational architecture’including areas such as incentive structures inpersonnel economics. There are increasingnumbers of specialist works emerging in theseareas, which are coming to feature in influentialhandbooks (Lazear, 2009). Personnel economics,for example, applies economics to human resourcestopics, including information interactions,problems of team coordination, morale, andseniority systems. The area has come a long wayin a short time, and, as Lazear (a member of theEditorial Board of Managerial and Decision

Economics) points out, now it has its own code inthe Journal of Economic Literature. In managerialterms, this field is a natural development of theeconomics of organization and of labor economics,and we hope to see much future research comingthrough. It is to be expected that published researchwill increasingly reflect the new trends.

Game theory has made a tremendous impact onmicroeconomics generally, and it is unsurprising thatthis has spilled over into field studies such asmanagerial economics. Game theory has manymanagerial implications, as there is a need tounderstand strategic interaction. There is no doubtthat game theory has brought insights, at least in theunderstanding of fairly well-contained marketsituations, such as dominance and pricing, thatwould be hard to obtain otherwise. Care must betaken because there are dangers in certainapproaches to using game theory. The approachhas really been a part of managerial economics fromthe start, but it can become arid and disconnectedfrom real world issues quite easily. Without drawingattention to individual pieces of work, it is possibleto note that a tendency to create ever more detailedmodels that assume high levels of information formanagers may well generate distinct papers, but maynot add much to our knowledge of management.Consider this to be a plea for keeping one’s feet onthe ground in managerial economics.

Case studies are still useful and show howdecisions are made in the real world. Classic areassuch as transfer pricing are still of great interest tofirms, not just in theoretical terms but also in termsof practices used, not least because transfer pricingpractices are often the target of antitrustinvestigations. Other areas where case studies canbe relevant include benchmarking, antitrust casesmore generally defined, the characteristics ofentrepreneurship, and the development ofparticular organizational forms. Coase (1988)famously argued for much more case–study workon the grounds that a great deal of informationcan be inferred from such observation, asking usto ask the businessmen about business practice.We might say, ask carefully. There are pitfalls inasking questions so that response biases spoil theinformation flow. Avoiding the problems is often amatter of using common sense and thinkingwhether there might be adverse incentivestructures surrounding the answering of questions.

A good example of case-study work is Reid andJacobsen’s (1988) monograph on the small

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Copyright r 2010 John Wiley & Sons, Ltd. Manage. Decis. Econ. 31: 497–501 (2010)DOI: 10.1002/mde

entrepreneurial firm. The papers in Masten (1996)and Ricketts (2008) also give a good flavor of thistype of work. Case studies, when carried outcarefully in relation to well-identified theoreticalquestions, are an appropriate way to investigateorganizational questions, and may be the onlymeans available to do so in some cases. Our recentspecial edition on pricing practices (Levy andSmets, 2010) includes several papers (for example,Kwapil et al., 2010) based on case-study methods,often augmented with statistical analysis.

BUSINESS ETHICS AND MANAGERIAL

ECONOMICS

A further modern trend is toward incorporatingethics into managerial economics training, or, atleast, to juxtapose conventional managerial fociwith an ethics focus. Often this will take the formof incorporating concerns about corporate socialresponsibility, sometimes in terms of socialperformance and questions of corporategovernance, which have generated a series ofresearch questions that show up in the journals.It would be good to see more of this type of work.An argument that managerial economics excludesconsiderations of ethics has been around for sometime (Green and Lopus, 2008) but is a littleinaccurate. One text with an explicit focus onethics and corporate social responsibility isBrickley et al. (2009), which also links thesetopics to organizational questions.

In recent years, there has been a growth inresearch work linking business economics withethics issues. Economics is currently beingchallenged on this front and it is good to seesome response in the literature. It would be nice tosee more hard thinking about business ethicscoming through in practical applications tobusiness questions. Notable recent contributionsinclude work by Heal (2005), an environmentaleconomist now working at Columbia in the field ofcorporate social performance and public policy,examining the purpose of corporate philanthropy,focusing on externality and distributionalquestions.

An interesting recent direction of research(Fisman et al., 2009) gives a rigorous demons-tration showing how philanthropic gestures maybe used to signal quality for a firm. The signaling

model reveals that it is less costly for qualityfirms to invest in corporate social responsibility,leading to a separating equilibrium in which low-quality firms do not invest in such efforts. Thesignaling model explains the frequent empiricalobservation that corporate social performanceimproves profitability performance for manyfirms (Wood, 2010).

In many respects, the recent incorporation ofcorporate social performance into discussions inmanagerial economics blends observation withwell-developed strategic modeling. The directionof the research suggests that philanthropy is rarelyaimed at anything other than improving thefortunes of the firm, and that this is based onsound reasoning. In Managerial and DecisionEconomics, recent papers focusing on aspects ofsocial performance include Arrunada et al. (2009)who examine the interaction between franchisedfirms and institutional constraints.

INTERNATIONAL GROWTH OF

MANAGERIAL ECONOMICS

One gratifying recent trend is the growth inmanagerial economics around the world. Outsidethe United States and Canada, the growth has notsimply occurred in Europe, Australia, andNew Zealand. Management schools with claimsto international prestige have also emerged in Indiaand Southeast Asia. Managerial economics is inincreasingly good shape internationally largelybecause globalizing economic development hasled to sustained growth in management schools.Also, movement of scholars around the world hassupported knowledge transfer. Recent papersreflecting this growing internationalism includeLin et al. (2009), who examine the efficiency ofpublically traded firms in China.

Papers in Managerial and Decision Economicsreflect this growing internationalism, as a review ofrecent editions tends to show. Articles originatefrom authors based in diverse locations includingNorth America, England, France, Germany,Greece, Hong Kong, India, Israel, Italy, theNetherlands, Norway, Singapore, and Spain. Yetthe topics overlap frequently, showing that thesame concerns are shared worldwide and thatthere is also a shared managerial economicsculture. The practice in Managerial and Decision

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Copyright r 2010 John Wiley & Sons, Ltd. Manage. Decis. Econ. 31: 497–501 (2010)DOI: 10.1002/mde

Economics, which has anyway always enjoyed atransatlantic publishing background, of dividingthe responsibilities of editors regionally reflects anunderstanding of this internationalism.

BEHAVIORAL AND MANAGERIAL

ECONOMICS

There is an increasing recognition that thebehavioral foundations of economics lackrealism, and that increases in realism can in factimprove theoretical insights and, ultimately,predictions in managerial and other settings. Inpractice, the recognition has grown from theresults of experimental economics and a certaininteraction between economics and psychology.There need be no total rejection of traditionalneoclassical economics as a result of theseobservations, because behavioral economicsreally just seeks to improve the behavioralfoundations of economics. Indeed, there isevidence that from a normative perspective, whenindividuals (and businesses) are faced withpractical problem solving, they do resort toapproaches drawn from neoclassical economicsthat are based on maximization and efficient use ofinformation in a constrained-choice setting (Arielyet al., 2003).

Many of the insights of behavioral economicshave arisen in considering problems of rationaldecision making under uncertainty. Researchershave found, among other things, that the framingof decision making alters decisions, notions offairness influence behavior, individuals experienceloss aversion giving asymmetrically high valuationof losses compared with gains relative to a concaveutility function, individuals experience endowmenteffects over the value of items traded, and thatheuristics are frequently involved in makingdecisions (Thaler and Sunstein, 2008). Many ofthese observations are consistent with approachesto decision making that invoke boundedrationality (Williamson, 1985); hence, there hasalways been receptiveness to them amongeconomists working on organizational questions.There are practical implications: for example, lossaversion can be cited to explain patterns of changein price elasticities.

The use of heuristics in business needs muchmore study, not least because heuristics have both

good and bad properties. Decision costs are saved,but this can be at the cost of relying on irrationaldecision making that can go astray. Experimentalresults emphasizing people’s innate sense offairness leading to loss-making punishmentstrategies also require more study in businesssettings. Lazear (2009) has suggested that, in thearea of personnel economics, deviations from strictreward-based incentive schemes often reflectfairness considerations and are targeted atworkplace morale. In Managerial and DecisionEconomics, recent papers taking an experimental/behavioral approach toward managerial decisionmaking include Rosenboim et al., (2008) who findevidence of regret effects and of status-quo bias.We hope to see more of these managerialapplications.

CONCLUDING COMMENTS

Managerial economics has enjoyed a gradualevolution over the decades, reflecting changeswithin the economics mainstream and someinfluences from managerial studies more widelydefined. In particular, there are contemporaryefforts occurring to address the impact ofcorporate social performance on the firm, and toanalyze very detailed issues concerning businessadministration, so-called ‘architecture’, in relationto the work of teams and the impact of incentivestructures. It is to be expected that topics ofinquiry in managerial economics should mirrorwider concerns in the business community. This ishealthy and should make us realize that theemphasis remains very much on applications. Welook forward to reviewing many submissionsreflecting this applied ethos.

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Boyes W. 2008. The New Managerial Economics.Cengage: Mason, OH.

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