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Transactions Costs and Internal Labor Markets

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  • Sherwin Rosen

Abstract

The concept of transactions costs used by Coase in "The Nature of the Firm" is applied to the internal labor market of an organization. Under joint production it is shown that the number of transaction-specific prices necessary to decentralize labor allocations rises geometrically with the size of the work force. Complexity of calculation and costs of implementation constrains the possibilities for internal decentralization through a price mechanism and substitutes a more authoritarian system of allocation instead. These same issues of complexity and implementation costs limit the usefulness of agency theory as a conceptual framework for this problem. The analysis suggests that an internal labor market must be viewed in a more comprehensive framework of a personnel management system.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2407.

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Date of creation: Oct 1987
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Publication status: published as Rosen, Sherwin. "Transactions Costs and Internal Labor Markets." Journal of Law, Economics, and Organization, Vol. 4, No. 1, (Spring 1988), pp. 49-64.
Handle: RePEc:nbr:nberwo:2407

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  1. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
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  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 7-45, January.
  6. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
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  15. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
  16. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 58, pages 211.
  17. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 168-85, March.
  18. Martin Gaynor & Mark Pauly, 1987. "Alternative Compensation Arrangements and Productive Efficiency in Partnerships: Evidence from Medical Group Practice," NBER Working Papers 2170, National Bureau of Economic Research, Inc.
  19. Kennan, John, 1979. "Bonding and the enforcement of labor contracts," Economics Letters, Elsevier, Elsevier, vol. 3(1), pages 61-66.
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Cited by:
  1. Kirsten Foss, 1998. "Technological Interdependencies,Specialization and Coordination A Property Rights Perspective on The Nature of the Firm," DRUID Working Papers, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies 98-10, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  2. Erik Brynjolffson, 1991. "An Incomplete Contracts Theory of Information, Technology and Organization," Working Paper Series, MIT Center for Coordination Science 126, MIT Center for Coordination Science.
  3. Renucci, Antoine & Loss, Frédéric, 2004. "When Promotions Induce Good Managers to Be Lazy," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4126, Paris Dauphine University.
  4. James Jr., Harvey S., 1998. "Are employment and managerial control equivalent? Evidence from an electronics producer," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 36(4), pages 447-471, September.
  5. Arnaldo Camuffo, 2002. "The Changing Nature of Internal Labor Markets," Journal of Management and Governance, Springer, Springer, vol. 6(4), pages 281-294, December.
  6. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  7. Richardson, Alan J. & Kilfoyle, Eksa, 2009. "Accounting in markets, hierarchies and networks: The role of accounting in the transnational governance of postal transactions," Accounting, Organizations and Society, Elsevier, vol. 34(8), pages 939-956, November.

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