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Incentives, Solidarity, and the Division of Labor

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  • Michael T. Rauh

    (Department of Finance, Indiana University Kelley School of Business)

Abstract

In this paper, we consider a version of the Holmstr¨om-Milgrom linear model with two tasks, production and administration, where performance is harder to measure in the latter. Both the principal and agent can devote effort to these tasks. We assume there are gains from specialization and that players have a preference for solidarity in work. As the gains from specialization increase, the principal eventually prefers to hire the agent solely for production purposes over autarky. As these gains increase still further, the principal increasingly specializes in administration and in the limit there is a complete division of labor. At the same time, the nature of the employment contract is transformed from one based on solidarity to one based on incentives. We therefore formalize aspects of the thought of Smith and Marx, who held that a division of labor leads to exchange and a deterioration in social relations.

Suggested Citation

  • Michael T. Rauh, 2007. "Incentives, Solidarity, and the Division of Labor," Working Papers 2007-15, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2007-15
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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2007-15-rauh.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    alienation; cooperation; division of labor; incentives; Marxism; reciprocity; solidarity;

    JEL classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • B14 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Socialist; Marxist
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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