MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 31: 497501 (2010)

Published online in Wiley Online Library

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

EDITORIAL

Managerial Economics: A Forward Looking

Assessment
Paul H. Rubina and Antony W. Dnesb,
a

Department of Economics and School of Law, Emory University, Atlanta, GA, USA
b
Leverhulme Fellow, Leverhulme Trust, London, UK

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

experimental, global and organizational inuences. 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 2010
John Wiley & Sons, Ltd.

INTRODUCTION
The purpose of this short piece is to examine
trends in the type of work emerging in managerial
economics and to offer some assessment of future
directions. Managerial economics is currently
developing in a healthy way, particularly in areas
associated with the new managerial economics
that incorporate organizational economics,
including the study of strategic interaction. The
new work does not so much displace the old but is
more in the nature of an augmentation of it.
Frequently, focus is on organizational questions
related to managing human resources. An
emphasis on applied work that is well grounded
in theory is still very much the requirement in the
new work. Certainly, in terms of the work
appearing in this journal, in these days, a key
requirement for publication is for an application
of economic analysis to signicant managerial
questions.

*Correspondence to: Leverhulme Fellow, Leverhulme Trust,

London, UK. E-mail: a.dnes@hull.ac.uk

Copyright r 2010 John Wiley & Sons, Ltd.

TRENDS IN MANAGERIAL AND DECISION

ECONOMICS
The time is ripe for an assessment of the future
direction of managerial economics. It is possible to
discern themes of inquiry in the context of modern
work that are both interesting and generate useful
insights for businesses and future inquiry. In
general, managerial economics is unfolding in a
healthy fashion, drawing in a lot of the new
institutional economics in the widest possible
sense. One concern though is a need to
counterbalance a modern tendency spreading
from mainstream economics and leading toward
excessively theoretical inquiry that reduces
economic analysis to brutal mathematical
formalism. All modern work requires some
degree of rigor for successful completion, but if
an author has continual recourse to lemmas and
complex theorems, especially if with no practical
applications, then he or she is probably not writing
appropriately for a managerial economics journal.
Managerial economics has always generated
empirical work that is carried out using a variety
of, typically but not always, quantitative methods.

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P. H. RUBIN AND A. W. DNES

Bear in mind in interpreting this statement that

modern econometrics has a considerable role for
semi-quantitative work that includes qualities, for
example based on probit and logit analysis.
Traditionally, there is a strong connection
between managerial economics, operations
research and econometrics applications to real
world problems, which can be seen in examining
classic texts such as Baumol (1962) and, more
recently, Salvatore (2006). Typical topics are based
around the theory of the rm and represent a
synthesis of economics, decision sciences, and
business administration. These topics interact
with each other and are treated in a scientic way
involving testable predictions and subsequent
testing. In this context, it is rare to encounter a
purely theoretical article, as can be seen in
reviewing successive editions of Managerial and
Decision Economics and its stable mate the
Strategic Management Review. Recognition of the
constraints facing rms is important in this work.
It is notable that leading MBA programs, such as
the ones at Harvard in the US or at Craneld in the
UK, normally include managerial economics courses
following the model described above. Often there are
variants emphasizing decision sciences or the business
environment. Therefore, teaching practice can be seen
as indicating to us the established ideas in managerial
economics. There have been developments in recent
years that augment the traditional approach:
particularly in areas such as globalization, the
economics of organization, information economics,
strategic behavior, the learning organization, risk
management, business ethics, and behavioral
economics. All of these topics are hot in modern
managerial economics and are slowly feeding through
into MBA and similar courses.
The modern trends are often referred to as the
new managerial economics. Some modern texts
even use the term explicitly (Boyes, 2008) and focus
on questions of organizational architecture
including areas such as incentive structures in
personnel economics. There are increasing
numbers of specialist works emerging in these
areas, which are coming to feature in inuential
handbooks (Lazear, 2009). Personnel economics,
for example, applies economics to human resources
topics,
including
information
interactions,
problems of team coordination, morale, and
seniority systems. The area has come a long way
in a short time, and, as Lazear (a member of the
Editorial Board of Managerial and Decision
Copyright r 2010 John Wiley & Sons, Ltd.

Economics) points out, now it has its own code in

the Journal of Economic Literature. In managerial
terms, this eld is a natural development of the
economics of organization and of labor economics,
and we hope to see much future research coming
through. It is to be expected that published research
will increasingly reect the new trends.
Game theory has made a tremendous impact on
microeconomics generally, and it is unsurprising that
this has spilled over into eld studies such as
managerial economics. Game theory has many
managerial implications, as there is a need to
understand strategic interaction. There is no doubt
that game theory has brought insights, at least in the
understanding of fairly well-contained market
situations, such as dominance and pricing, that
would be hard to obtain otherwise. Care must be
taken because there are dangers in certain
approaches to using game theory. The approach
has really been a part of managerial economics from
the start, but it can become arid and disconnected
from real world issues quite easily. Without drawing
attention to individual pieces of work, it is possible
to note that a tendency to create ever more detailed
models that assume high levels of information for
managers may well generate distinct papers, but may
not add much to our knowledge of management.
Consider this to be a plea for keeping ones feet on
the ground in managerial economics.
Case studies are still useful and show how
decisions are made in the real world. Classic areas
such as transfer pricing are still of great interest to
rms, not just in theoretical terms but also in terms
of practices used, not least because transfer pricing
practices are often the target of antitrust
investigations. Other areas where case studies can
be relevant include benchmarking, antitrust cases
more generally dened, the characteristics of
entrepreneurship, and the development of
particular organizational forms. Coase (1988)
famously argued for much more casestudy work
on the grounds that a great deal of information
can be inferred from such observation, asking us
to ask the businessmen about business practice.
We might say, ask carefully. There are pitfalls in
asking questions so that response biases spoil the
information ow. Avoiding the problems is often a
matter of using common sense and thinking
whether there might be adverse incentive
structures surrounding the answering of questions.
A good example of case-study work is Reid and
Jacobsens (1988) monograph on the small
Manage. Decis. Econ. 31: 497501 (2010)
DOI: 10.1002/mde

MANAGERIAL ECONOMICS

entrepreneurial rm. The papers in Masten (1996)

and Ricketts (2008) also give a good avor of this
type of work. Case studies, when carried out
carefully in relation to well-identied theoretical
questions, are an appropriate way to investigate
organizational questions, and may be the only
means available to do so in some cases. Our recent
special edition on pricing practices (Levy and
Smets, 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 incorporating
ethics into managerial economics training, or, at
least, to juxtapose conventional managerial foci
with an ethics focus. Often this will take the form
of incorporating concerns about corporate social
responsibility, sometimes in terms of social
performance and questions of corporate
governance, which have generated a series of
research questions that show up in the journals.
It would be good to see more of this type of work.
An argument that managerial economics excludes
considerations of ethics has been around for some
time (Green and Lopus, 2008) but is a little
inaccurate. One text with an explicit focus on
ethics and corporate social responsibility is
Brickley et al. (2009), which also links these
topics to organizational questions.
In recent years, there has been a growth in
research work linking business economics with
ethics issues. Economics is currently being
challenged on this front and it is good to see
some response in the literature. It would be nice to
see more hard thinking about business ethics
coming through in practical applications to
business questions. Notable recent contributions
include work by Heal (2005), an environmental
economist now working at Columbia in the eld of
corporate social performance and public policy,
examining the purpose of corporate philanthropy,
focusing on externality and distributional
questions.
An interesting recent direction of research
(Fisman et al., 2009) gives a rigorous demonstration showing how philanthropic gestures may
be used to signal quality for a rm. The signaling
Copyright r 2010 John Wiley & Sons, Ltd.

499

model reveals that it is less costly for quality

rms to invest in corporate social responsibility,
leading to a separating equilibrium in which lowquality rms do not invest in such efforts. The
signaling model explains the frequent empirical
observation that corporate social performance
improves protability performance for many
rms (Wood, 2010).
In many respects, the recent incorporation of
corporate social performance into discussions in
managerial economics blends observation with
well-developed strategic modeling. The direction
of the research suggests that philanthropy is rarely
aimed at anything other than improving the
fortunes of the rm, and that this is based on
sound reasoning. In Managerial and Decision
Economics, recent papers focusing on aspects of
social performance include Arrunada et al. (2009)
who examine the interaction between franchised
rms and institutional constraints.

INTERNATIONAL GROWTH OF
MANAGERIAL ECONOMICS
One gratifying recent trend is the growth in
managerial economics around the world. Outside
the United States and Canada, the growth has not
simply occurred in Europe, Australia, and
New Zealand. Management schools with claims
to international prestige have also emerged in India
and Southeast Asia. Managerial economics is in
increasingly good shape internationally largely
because globalizing economic development has
led to sustained growth in management schools.
Also, movement of scholars around the world has
supported knowledge transfer. Recent papers
reecting this growing internationalism include
Lin et al. (2009), who examine the efciency of
publically traded rms in China.
Papers in Managerial and Decision Economics
reect this growing internationalism, as a review of
recent editions tends to show. Articles originate
from authors based in diverse locations including
North America, England, France, Germany,
Greece, Hong Kong, India, Israel, Italy, the
Netherlands, Norway, Singapore, and Spain. Yet
the topics overlap frequently, showing that the
same concerns are shared worldwide and that
there is also a shared managerial economics
culture. The practice in Managerial and Decision
Manage. Decis. Econ. 31: 497501 (2010)
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P. H. RUBIN AND A. W. DNES

Economics, which has anyway always enjoyed a

transatlantic publishing background, of dividing
the responsibilities of editors regionally reects an
understanding of this internationalism.

BEHAVIORAL AND MANAGERIAL

ECONOMICS
There is an increasing recognition that the
behavioral foundations of economics lack
realism, and that increases in realism can in fact
improve theoretical insights and, ultimately,
predictions in managerial and other settings. In
practice, the recognition has grown from the
results of experimental economics and a certain
interaction between economics and psychology.
There need be no total rejection of traditional
neoclassical economics as a result of these
observations, because behavioral economics
really just seeks to improve the behavioral
foundations of economics. Indeed, there is
evidence that from a normative perspective, when
individuals (and businesses) are faced with
practical problem solving, they do resort to
approaches drawn from neoclassical economics
that are based on maximization and efcient use of
information in a constrained-choice setting (Ariely
et al., 2003).
Many of the insights of behavioral economics
have arisen in considering problems of rational
decision making under uncertainty. Researchers
have found, among other things, that the framing
of decision making alters decisions, notions of
fairness inuence behavior, individuals experience
loss aversion giving asymmetrically high valuation
of losses compared with gains relative to a concave
utility function, individuals experience endowment
effects over the value of items traded, and that
heuristics are frequently involved in making
decisions (Thaler and Sunstein, 2008). Many of
these observations are consistent with approaches
to decision making that invoke bounded
rationality (Williamson, 1985); hence, there has
always been receptiveness to them among
economists working on organizational questions.
There are practical implications: for example, loss
aversion can be cited to explain patterns of change
in price elasticities.
The use of heuristics in business needs much
more study, not least because heuristics have both
Copyright r 2010 John Wiley & Sons, Ltd.

good and bad properties. Decision costs are saved,

but this can be at the cost of relying on irrational
decision making that can go astray. Experimental
results emphasizing peoples innate sense of
fairness leading to loss-making punishment
strategies also require more study in business
settings. Lazear (2009) has suggested that, in the
area of personnel economics, deviations from strict
reward-based incentive schemes often reect
fairness considerations and are targeted at
workplace morale. In Managerial and Decision
Economics, recent papers taking an experimental/
behavioral approach toward managerial decision
making include Rosenboim et al., (2008) who nd
evidence of regret effects and of status-quo bias.
We hope to see more of these managerial
applications.

CONCLUDING COMMENTS
Managerial economics has enjoyed a gradual
evolution over the decades, reecting changes
within the economics mainstream and some
inuences from managerial studies more widely
dened. In particular, there are contemporary
efforts occurring to address the impact of
corporate social performance on the rm, and to
analyze very detailed issues concerning business
administration, so-called architecture, in relation
to the work of teams and the impact of incentive
structures. It is to be expected that topics of
inquiry in managerial economics should mirror
wider concerns in the business community. This is
healthy and should make us realize that the
emphasis remains very much on applications. We
look forward to reviewing many submissions
reecting this applied ethos.

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