There is nothing I like more when reading scholarly work than the thoughtful interrogation of long-standing myths about a particular phenomenon. Take, for example, the article by economists Nicola Persico, Andrew Postlewaite, and Dan Silverman, “The Effect of Adolescent Experience on Labor Market Outcomes: The Case of Height” (http://ssrn.com/abstract=293122). For years economists (and frankly any casual observer) noted that taller people make more money and seem to command greater power. This was widely explained as a bias in favor of height (or as discrimination against short people). These three economists took that hypothesis and explored whether there was a stronger determinant of success as reflected in labor market returns. Surprise! It turns out if you look at height of white males over time against labor market success you discover that boys who were tall in high school have stronger labor market returns. Adult height is only relevant to the extent that it correlates with youth height.
Bank and Cheffins’ paper is of the same ilk. They take a look at a long standing puzzle: why does the United States lack the corporate pyramid structures common in other countries of the world? In some countries it is common for a successful individual or wealthy family to have a small stake in the overall operations of cascading companies, but to have a sufficient stake in the chain that they control billions of dollars worth of corporate activities with only a limited personal or family investment. These arrangements have given rise to a variety of well documented concerns, including that a small number of investors exercise enormous control at the expense of minority shareholders, that tiny elites are given disproportionate access to corporate power, and that these investors have huge sway with government. The often told example of this kind of arrangement, retold by Bank and Cheffins, is of the unmarried brothers, Oris Paxton Van Sweringen and Mantis James Van Sweringen who were able to invest less than 20 million dollars but control eight class I railroads with combined assets of over two billion dollars. Continue reading "The Corporate Pyramid Fable"