The payments perspective: micro‐foundations of resource analysis

• Author: Steven A. Lippman,Richard P. Rumelt
• Date: 01 October 2003
• Published date: 01 October 2003
• DOI: http://doi.org/10.1002/smj.346

Strategic Management Journal

Strat. Mgmt. J.,24: 903– 927 (2003)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.346

THE PAYMENTS PERSPECTIVE:

MICRO-FOUNDATIONS OF RESOURCE ANALYSIS

STEVEN A. LIPPMAN and RICHARD P. RUMELT*

The Anderson School at UCLA, Los Angeles, California, U.S.A.

Problems in the micro-foundations of neoclassical theory, especially in partial equilibrium

analysis, are being imported into the resource-based view. This paper critiques neoclassical

theory and proffers new concepts more suited to strategy scholars. In particular,we develop the

concepts of simple rents, rent sensitivity analysis, and the payments perspective. Copyright 

2003 John Wiley & Sons, Ltd.

The micro-foundations of a subject are the defini-

tions of its basic elements and the allowable oper-

ations that can be performed using these elements.

Our purpose in this paper is to critique neoclas-

sical micro-foundations that have been imported

into strategy research and to proffer new concepts

that, we argue, should be the micro-foundations of

strategy’s resource-based view.

A central element of the resource-based program

is the presumptive connection between economic

rent and sustainable advantage. We hold that the

identification of competitive advantage with neo-

classical economic rent, or with economic profit,

and the associated concept of opportunity cost,

imports a micro-foundations shortcoming into the

strategy field. The resource-based program offers

an important new way to look at the firm, but it

cannot be pushed through to completion without

making a clear break with the neoclassical inter-

pretations of economic profit, economic rent, and

opportunity cost.

The problem with these neoclassical economic

concepts is fundamental. The problem is not

Key words: resource-based view; economic profit; pay-

ments perspective; rent

*Correspondence to: Richard P. Rumelt, The Anderson School

at UCLA, 110 Westwood Plaza, Ste. D514, Los Angeles, CA

90095-1481, U.S.A.

whether or not markets are perfect, or whether or

not there is uncertainty or asymmetric information.

The problem is at the heart of price theory itself.

It is the indeterminacy in the concept of ‘cost’

induced by the existence of economic rents.

The purpose of this paper is to provide a cri-

tique of relevant neoclassical theory, and to sketch

out a substitute framework for use in strategy

research. The view we espouse is called the ‘pay-

ments perspective.’ Consistent with the spirit of

the resource-based program, it identifies a firm’s

revenue as payments for the services of its inputs

and resources: Payments ≡Revenue,bydefini-

tion. This point of view is called ‘full imputation’

and follows the ideas of Winter (1987), Fried-

man (1976), Buchanan (1969), and Coase (1938).

For example, the revenues of a consulting firm

consist of payments for commodity inputs (e.g.,

paper, administrative support) plus payments for

the services of its specialized know-how. Cru-

cially, there is no residual part of revenue that

is not attributable to a resource. The payments

to resources are what we later define as simple

rents — they are neither Ricardian, transfer, differ-

ential, quasi, Paretian, compound quasi, nor eco-

nomic rents. The payments perspective requires

a way of identifying resource scarcity other than

the concept of economic rent. To that end, we

Copyright 2003 John Wiley & Sons, Ltd.

904 S. A. Lippman and R. P. Rumelt

introduce rent sensitivity analysis, which permits

the identification of scarce economic resources by

a marginal test rather than direct reference to a

wedge between value in use and value in next-best

use. In a companion paper (Lippman and Rumelt,

2003) we utilize this foundation to explore the

application of cooperative game theory to the ques-

tions of resource advantage and gains to trade in

resources.

The paper begins with the concept of rent. The

first section provides a brief history of rent con-

cepts, and the second section uses the example

of farming and land to develop and illustrate the

key ideas and phenomena that economic scarcity

induces. Our views on the significance of these

analyses for strategy are included throughout the

presentation. We end our investigation of rents

with a critique of the concept of the ‘supply curve’

and partial equilibrium analysis. We show that

there is many a slip between the ‘cup’ of cost and

the ‘lip’ of price.

The paper then turns to a critique of economic

cost concepts. We show that the concept of eco-

nomic cost has no agreed upon definition within

economics. Even Nobel Laureates disagree about

these micro-foundations. We analyze and illustrate

the different masters the cost concept tries to serve.

In the end, we recommend a change in perspective.

The language of cost obscures the simple fact that

value is lodged in scarce factors, not ‘economic

profit.’ The payments perspective helps avoid a

variety of logical fallacies in reasoning about per-

formance and value.

It is fitting in a paper about payments for value

received to remark what we would owe to others,

were their insights not freely given. Our thinking

about the resource-based view has been shaped by

the contributions of almost every scholar working

in this still-small field. Winter’s (1987) arguments

on the history and importance of full imputation

have been an important guide. Teece’s (1986) work

shaped our thinking about appropriation. Werner-

felt’s (1984, 1995) contributions to the resource-

based view, in addition to being seminal, have been

consistent sources of insight and models of clarity.

Barney’s (1986, 2001) contributions have pushed

the frontier and uncovered important new concep-

tual challenges. Dierickx and Cool’s (1989) paper

made key contributions to ideas about the accu-

mulation of unpriced resources. Peteraf’s (1993)

work on ex ante competition was an important

stimulus. Mahoney’s (2001) investigation of sus-

tainable rents provided a number of valuable ideas.

RENT CONCEPTS

The resource-based view has been the primary

avenue for the transference of the concept of rent

from economics to the study of competitive strat-

egy. Bowman (1974: 47) noted that strategy was a

‘search for rent’ and Rumelt (1984, 1987) argued

that sustained performance was due to rents, and,

moreover, that the key source of rents was the

coupling of uncertainty (or entrepreneurship) with

isolating mechanisms. Montgomery and Werner-

felt (1988), Peteraf (1993), Mahoney and Pandian

(1992), Winter (1995), and others have contributed

to the identification of rents as the surplus earned

by scarce, proprietary, and valuable resources.

Rent is a payment for the services of a factor of

production (one pays rent for an apartment or car).

An economic rent, on the other hand, is defined1as

a payment for a factor in excess of that minimally

necessary to call forth its services. Economic rent

is due to scarcity: when a limited quantity of a

factor is available, an increased payment (price)

does not call forth an increased supply. Many

authors do not bother to make the distinction

between rent and economic rent, instead depending

on the context to make the difference clear. For

example, in the context of hiring workers, Milgrom

and Roberts (1992) say, ‘A rent is the portion of

earnings in excess of the minimum amount needed

to attract a worker to accept a particular job or a

firm to enter a particular industry.’

A businessperson pays rent for land or space.

This payment is a cost of doing business. But what

makes such payments interesting is that they arise

only because the land or space is scarce. Whereas

a person or a cow or an orchard must consume

resources just to exist, space exists without being

fed. The payment for space is for its scarcity value.

The payment rises to the level necessary to exclude

others, and hence is the value of the space to

others.2

1See ‘Economic rent’ in The New Palgrave (1987), e ntry by A.

Alchian.

2The ‘exclusion’ argument loses strength if there are exter-

nalities associated with resource use or when resources have

the characteristics of public goods (e.g., broadcasting, software

standards). When property rights are poorly defined or absent,

firms depend upon a variety of isolating mechanisms to capture

surplus. See Rumelt (1984).

Copyright 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J.,24: 903– 927 (2003)