Use and Abuse of Authority: A Behavioral Foundation of the Employment Relation
Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Matthew Rabin., 1992.
"Incorporating Fairness into Game Theory and Economics,"
Economics Working Papers
92-199, University of California at Berkeley.
- Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
- M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
- Stefan Grosse & Louis Putterman & Bettina Rockenbach, 2011. "Monitoring In Teams: Using Laboratory Experiments To Study A Theory Of The Firm," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 785-816, 08.
- Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2008.
"Contracts as Reference Points: Experimental Evidence,"
IZA Discussion Papers
3889, Institute for the Study of Labor (IZA).
- Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
- Ernst Fehr & Oliver D. Hart & Christian Zehnder, 2008. "Contracts as Reference Points - Experimental Evidence," NBER Working Papers 14501, National Bureau of Economic Research, Inc.
- Bartling, Björn & Schmidt, Klaus M., 2012.
"Reference Points in Renegotiations: The Role of Contracts and Competition,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
385, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Björn Bartling & Klaus M. Schmidt, 2012. "Reference points in renegotiations: The role of contracts and competition," ECON - Working Papers 089, Department of Economics - University of Zurich.
- Oliver D. Hart, 2011.
"Noncontractible Investments and Reference Points,"
NBER Working Papers
16929, National Bureau of Economic Research, Inc.
- Casey Ichniowski & Kathryn Shaw, 2003. "Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 155-180, Winter.
- Stephen A. Marglin & Stephen A. Marglin, 1975. "What Do Bosses Do? Part II," Review of Radical Political Economics, Union for Radical Political Economics, vol. 7(1), pages 20-37, April.
- Brown, Martin & Falk, Armin & Fehr, Ernst, 2008.
"Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device,"
IZA Discussion Papers
3345, Institute for the Study of Labor (IZA).
- Martin Brown & Armin Falk & Ernst Fehr, 2012. "Competition And Relational Contracts: The Role Of Unemployment As A Disciplinary Device," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 887-907, 08.
- Brown, Martin & Falk, Armin & Fehr, Ernst, 2011. "Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 359, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Martin Brown & Armin Falk & Ernst Fehr, 2008. "Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device," Working Papers 2008-07, Swiss National Bank.
- Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring.
- Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
- Bartling, Björn & Schmidt, Klaus M., 2012. "Reference Points in Renegotiations: The Role of Contracts and Competition," Discussion Papers in Economics 14192, University of Munich, Department of Economics.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Robert Gibbons, 2010. "Transaction-Cost Economics: Past, Present, and Future?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 263-288, 06.
- Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points ï¿½ experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
- Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-17, October.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9231. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.