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The Employment Relationship versus Independent Contracting: On the Organizational Choice and Incentives


  • Ayse Mumcu-Serdar

    (Bogazici University)


This paper studies a firm's choice between employing a worker and using an independent contractor to carry out a task. If the firm hires a worker, all residual rights reside with the firm. In contrast, when the firm deals with an independent contractor, it cannot interfere with the way the task is undertaken. The firm's future actions may impose non-pecuniary costs to the worker, and as a result the worker requires an ex-ante compensation. The firm can economize on the up-front cost by hiring an independent contractor. Independent contracting is a commitment device which ensures that the principal will not intervene in the future. However, when the firm has superior private information that is relevant to the execution of the task, the firm faces a trade-off between paying lower costs by hiring an independent contractor and keeping the option of value-enhancing intervention in employment relationship.

Suggested Citation

  • Ayse Mumcu-Serdar, 2000. "The Employment Relationship versus Independent Contracting: On the Organizational Choice and Incentives," Econometric Society World Congress 2000 Contributed Papers 1333, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1333

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    References listed on IDEAS

    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Khalil Fahad & Lawarree Jacques, 1995. "Input versus Output Monitoring: Who Is the Residual Claimant?," Journal of Economic Theory, Elsevier, vol. 66(1), pages 139-157, June.
    6. 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.
    7. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
    8. Mathias Dewatripont & Jean Tirole, 1994. "A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1027-1054.
    9. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 181-198, Spring.
    10. 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 403-417, October.
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