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Separating contract from governance

Author

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  • Harvey S. James Jr

    (Department of Economics, University of Hartford, West Hartford, CT, USA)

Abstract

This paper contends that there is an important distinction between governance structure and contractual form, and that organizational boundaries, defined by governance structures, need not explain contractual form. The basic idea is that governance refers to the general environments and instruments that structure and 'govern' specific terms of trade negotiated in 'contracts'. Problems of verifiability and observability of contractual performance are hypothesized to drive the differential effects on governance structure and contractual form. Specifically, transaction cost factors known to result in employment as a general governance structure do not automatically result in contracts characterized by the payment of fixed-wages. Instead, incentive pay and the delegation of decision-making authority to workers may be preferred by firm owners. The paper proposes that the relationship between a firm and a worker involves a two part decision-making framework in which one choice is the type of governance that structures the second choice regarding the specific characteristics of the contract linking the worker to the firm. Copyright © 2000 John Wiley & Sons, Ltd.

Suggested Citation

  • Harvey S. James Jr, 2000. "Separating contract from governance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 47-61.
  • Handle: RePEc:wly:mgtdec:v:21:y:2000:i:2:p:47-61
    DOI: 10.1002/1099-1468(200003)21:2<47::AID-MDE967>3.0.CO;2-5
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    References listed on IDEAS

    as
    1. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    2. Hart, Oliver D, 1988. "Incomplete Contracts and the Theory of the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 119-139, Spring.
    3. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
    4. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    5. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 141-161, Spring.
    6. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    7. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    9. White, William D., 1992. "Information and the control of agents," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 111-117, June.
    10. 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.
    11. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
    12. Rebitzer, James B., 1995. "Is there a trade-off between supervision and wages? An empirical test of efficiency wage theory," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 107-129, September.
    13. 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.
    14. 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.
    15. Levinthal, Daniel, 1988. "A survey of agency models of organizations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(2), pages 153-185, March.
    16. Minkler, Alanson P., 1993. "Knowledge and internal organization," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 17-30, May.
    17. Laing, Derek, 1994. "Firm Specific Human Capital as an Employer Discipline Device," Economic Inquiry, Western Economic Association International, vol. 32(1), pages 128-137, January.
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    Citations

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    Cited by:

    1. Ariño, Africa & Reuer, Jeffrey J., 2004. "Alliance contractual design," IESE Research Papers D/572, IESE Business School.
    2. Josef Windsperger & Maria Jell, 2005. "Structuring residual income and decision rights under internal governance: results from the Hungarian trucking industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(5), pages 295-305.
    3. Harvey James & Derek Johnson, 2002. "Why Are There Explicit Contracts of Employment?," Law and Economics 0202001, EconWPA.
    4. James Jr., Harvey S., 2002. "The trust paradox: a survey of economic inquiries into the nature of trust and trustworthiness," Journal of Economic Behavior & Organization, Elsevier, vol. 47(3), pages 291-307, March.
    5. Harvey S. James Jr., 1997. "A Legal Basis for Workers as Agents: Employment Contracts, Common Law, and the Theory of the Firm," Law and Economics 9705001, EconWPA, revised 04 Feb 2002.
    6. Josef Windsperger, 2013. "The governance of franchising networks," Chapters,in: Handbook of Economic Organization, chapter 27 Edward Elgar Publishing.
    7. Reuer, Jeffrey J. & Ariño, Africa, 2002. "Contractual heterogeneity in strategic alliances," IESE Research Papers D/482, IESE Business School.
    8. repec:spr:agrhuv:v:35:y:2018:i:2:d:10.1007_s10460-017-9834-4 is not listed on IDEAS
    9. Emmanuel Raynaud, 2010. "The Structure of Franchise Contracts," Chapters,in: The Elgar Companion to Transaction Cost Economics, chapter 20 Edward Elgar Publishing.
    10. Reuer, Jeffrey J. & Arino, Africa & Mellewigt, Thomas, 2006. "Entrepreneurial alliances as contractual forms," Journal of Business Venturing, Elsevier, vol. 21(3), pages 306-325, May.
    11. Harvey James, 2002. "On the Reliability of Trusting," Microeconomics 0202002, EconWPA.
    12. Harvey James, 2002. "The Trust Paradox: A Survey of Economic Inquiries Into the Nature of Trust and Trustworthiness," Microeconomics 0202001, EconWPA.
    13. Reuer, Jeffrey J. & Ariño, Africa & Mellewight, Thomas, 2003. "Entrepreneurial alliances as contractual forms," IESE Research Papers D/527, IESE Business School.

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