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Firms, Markets, and the Work Ethic

Author

Listed:
  • Abhijit Ramalingam

    (Department of Economics, Indiana University)

  • Michael Rauh

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

In this paper, we develop a new theory of the firm where the market is primarily an incentive system whereas the firm is an intrinsic motivation device. The firm is more efficient than the market when asset specificity and subjective risk are sufficiently high because it provides balanced incentives, fosters intrinsic motivation, and economizes on risk. An efficient firm is unambiguously the more ethical institution in the sense that the component of production effort due to intrinsic motivation and the agent's rents in exchange for commitment are higher. The exception is when the market approximates the first best.

Suggested Citation

  • Abhijit Ramalingam & Michael Rauh, 2008. "Firms, Markets, and the Work Ethic," Working Papers 2008-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2008-04
    as

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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2008-04-ramalingam-rauh.pdf
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    References listed on IDEAS

    as
    1. Ernst Fehr & Simon G├Ąchter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
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    3. Ernst Fehr & Alexander Klein & Klaus M Schmidt, 2007. "Fairness and Contract Design," Econometrica, Econometric Society, pages 121-154.
    4. 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.
    5. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    6. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
    7. Martin Dufwenberg & Paul Heidhues & Georg Kirchsteiger & Frank Riedel & Joel Sobel, 2011. "Other-Regarding Preferences in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 613-639.
    8. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    9. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
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    11. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    12. Ernst Fehr & Urs Fischbacher, 2002. "Why Social Preferences Matter -- The Impact of Non-Selfish Motives on Competition, Cooperation and Incentives," Economic Journal, Royal Economic Society, vol. 112(478), pages 1-33, March.
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    More about this item

    Keywords

    authority; conscientiousness; incentives; markets; multi-tasking; ownership; theory of the firm; work ethic;

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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