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The Employment Relationship versus Independent Contracting: On the Organizational Choice and Incentives

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  • Ayse Mumcu-Serdar

    (Bogazici University)

Abstract

This paper studies a firm's choice between employing a worker and using an independent contractor to carry out a task. If the firm hires a worker, all residual rights reside with the firm. In contrast, when the firm deals with an independent contractor, it cannot interfere with the way the task is undertaken. The firm's future actions may impose non-pecuniary costs to the worker, and as a result the worker requires an ex-ante compensation. The firm can economize on the up-front cost by hiring an independent contractor. Independent contracting is a commitment device which ensures that the principal will not intervene in the future. However, when the firm has superior private information that is relevant to the execution of the task, the firm faces a trade-off between paying lower costs by hiring an independent contractor and keeping the option of value-enhancing intervention in employment relationship.

Suggested Citation

  • Ayse Mumcu-Serdar, 2000. "The Employment Relationship versus Independent Contracting: On the Organizational Choice and Incentives," Econometric Society World Congress 2000 Contributed Papers 1333, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1333
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    References listed on IDEAS

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    Cited by:

    1. George J. Mailath & Volker Nocke & Andrew Postlewaite, 2004. "Business Strategy, Human Capital, and Managerial Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 617-633, December.

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