Continental Law defines the employment contract by the notion of « subordination » of the employee to the employer. Since Simon (1951), economics defines authority as the opportunity for the employer to postpone the selection of the tasks the employee should perform. This paper shows that these definitions do not fit. It proposes to use the framework of option pricing in order to interpret Simon’s model and to analyze the economic conceptions of authority, flexibility and renegotiation. When states are not verifiable, the economic concept of employment contract is a specific case of the broader set of sale contracts. It can be formalized as a spot contract paired with a call option on the worker tasks. Therefore, the economic formalization of the employment contract does not implement what lawyers define as an employment relationship. The economic formalization of the subordination notion used by Law is still to be done.
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number
2007-28.
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Find related papers by JEL classification: D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law G12 - Financial Economics - - General Financial Markets - - - Asset Pricing J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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