Both LECG and CRAI have suffered big losses, which raises some interesting questions about the viability of publicly traded firms whose only asset is human capital. If all your assets can can walk out the door, it would seem that you have to pay them their marginal product, with nothing left over for shareholders. Am I missing something?
Tuesday, March 11, 2008
What's happening to economic consulting firms?
From finance.yahoo.com:Both LECG and CRAI have suffered big losses, which raises some interesting questions about the viability of publicly traded firms whose only asset is human capital. If all your assets can can walk out the door, it would seem that you have to pay them their marginal product, with nothing left over for shareholders. Am I missing something?
Both LECG and CRAI have suffered big losses, which raises some interesting questions about the viability of publicly traded firms whose only asset is human capital. If all your assets can can walk out the door, it would seem that you have to pay them their marginal product, with nothing left over for shareholders. Am I missing something?
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What if the marginal products aren't separable, as in the Alchian and Demsetz (1972) model of team production? Isn't the point of organizing such a group as a firm with salaried employees and residual claimants, rather than a network of independent contractors, to take advantage of the complementarities among the team members' human capital?
ReplyDeleteTwo points. 1) These consulting firms exist only to the point where the complementaries to team production are large enough to overcome the costs of agglomeration. 2) The value of the primary assets, human capital of staff and principals, is highly variable across individuals and over time as abilities are uncovered.
ReplyDeleteThus, a particularly thorny issue for management is to maintain compensation above the value of marginal product of a consultant outside of the firm but below this value plus the team complementaries captured by the firm. Every so often, mistakes will occur, usually with lots of drama. When I see such precipitous drops in value, my knee-jerk reaction is to wonder which principals left the firms?