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A Tale of Two Wages: Separating Contract from Governance

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  • Harvey S. James Jr.

    (University of Hartford)

Abstract

This paper distinguishes between governance structure and contractual form. The basic premise is that researchers often confuse these two concepts when they develop or empirically test models within the transaction cost framework. In the paper I utilize a simple principal- agent model to show that transaction cost factors affect both contractual form and governance structure, but not identically. Transaction cost factors that are known to result in employment as a governance structure do not automatically result in contracts characterized by the payment of fixed-wages, as suggested by economic theory. Instead, incentive pay and the delegation of decision-making authority to workers may be preferred by firm owners. The implication is that the relationship between a firm and a worker involves a two stage decision-making process by the firm owner. The first is the choice of governance structure, the second is the nature of the contract linking the worker to the firm.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9705001.

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Length: 25 pages
Date of creation: 01 May 1997
Date of revision:
Handle: RePEc:wpa:wuwpmi:9705001

Note: Type of Document - Microsoft Word 6.0/7.0; prepared on IBM PC pentium running Windows95; to print on HP; pages: 25; figures: none. The paper contains equations produced by Microsoft Word 7.0 equation editor.
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Web page: http://128.118.178.162

Related research

Keywords: Transaction cost economics; governance; agency; control; incentive contracts;

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References

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  1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  2. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Valsecchi, Irene, 1996. "Policing Team Production through Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(2), pages 361-75, October.
  4. 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.
  5. Erin Anderson & David C. Schmittlein, 1984. "Integration of the Sales Force: An Empirical Examination," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 385-395, Autumn.
  6. White, William D., 1992. "Information and the control of agents," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 111-117, June.
  7. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  9. Oliver D. Hart, 1987. "Incomplete Contracts and the Theory of the Firm," Working papers 448, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Minkler, Alanson P., 1993. "Knowledge and internal organization," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 17-30, May.
  11. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 181-98, Spring.
  12. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
  13. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
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