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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. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  2. Tjalling C. Koopmans & Martin J. Beckmann, 1955. "Assignment Problems and the Location of Economic Activities," Cowles Foundation Discussion Papers 4, Cowles Foundation for Research in Economics, Yale University.
  3. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  4. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
  5. Green, Jerry & Stokey, Nancy, 1983. "A Comparison of Tournaments and Contracts," Scholarly Articles 3203644, Harvard University Department of Economics.
  6. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March.
  7. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Breton, Albert & Wintrobe, Ronald, 1986. "The Bureaucracy of Murder Revisited," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 905-26, October.
  9. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  10. 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, vol. 21(2), pages 297-326, October.
  11. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185.
  12. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  13. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  14. Radner, Roy, 1981. "Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship," Econometrica, Econometric Society, vol. 49(5), pages 1127-48, September.
  15. D. Gale Johnson, 1950. "Resource Allocation under Share Contracts," Journal of Political Economy, University of Chicago Press, vol. 58, pages 111.
  16. 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.
  17. Kennan, John, 1979. "Bonding and the enforcement of labor contracts," Economics Letters, Elsevier, vol. 3(1), pages 61-66.
  18. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  19. Hall, Robert E, 1982. "The Importance of Lifetime Jobs in the U.S. Economy," American Economic Review, American Economic Association, vol. 72(4), pages 716-24, September.
  20. Joesph E. Stiglitz, 1975. "Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 552-579, Autumn.
  21. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
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Cited by:
  1. Brynjolfsson, Erik., 1991. "An incomplete contracts theory of information, technology and organization," Working papers #126. Working paper (Sloa, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Kirsten Foss, 1998. "Technological Interdependencies,Specialization and Coordination A Property Rights Perspective on The Nature of the Firm," DRUID Working Papers 98-10, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  3. James Jr., Harvey S., 1998. "Are employment and managerial control equivalent? Evidence from an electronics producer," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 447-471, September.
  4. Antoine Renucci & Frédéric Loss, 2004. "When Promotions Induce Good Managers to Be Lazy," Econometric Society 2004 North American Winter Meetings 263, Econometric Society.
  5. Arnaldo Camuffo, 2002. "The Changing Nature of Internal Labor Markets," Journal of Management and Governance, Springer, vol. 6(4), pages 281-294, December.
  6. 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.
  7. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-76, February.

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