IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2407.html
   My bibliography  Save this paper

Transactions Costs and Internal Labor Markets

Author

Listed:
  • Sherwin Rosen

Abstract

The concept of transactions costs used by Coase in "The Nature of the Firm" is applied to the internal labor market of an organization. Under joint production it is shown that the number of transaction-specific prices necessary to decentralize labor allocations rises geometrically with the size of the work force. Complexity of calculation and costs of implementation constrains the possibilities for internal decentralization through a price mechanism and substitutes a more authoritarian system of allocation instead. These same issues of complexity and implementation costs limit the usefulness of agency theory as a conceptual framework for this problem. The analysis suggests that an internal labor market must be viewed in a more comprehensive framework of a personnel management system.

Suggested Citation

  • Sherwin Rosen, 1987. "Transactions Costs and Internal Labor Markets," NBER Working Papers 2407, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2407
    Note: LS
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2407.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    2. Martin Gaynor & Mark Pauly, 1987. "Alternative Compensation Arrangements and Productive Efficiency in Partnerships: Evidence from Medical Group Practice," NBER Working Papers 2170, National Bureau of Economic Research, Inc.
    3. D. Gale Johnson, 1950. "Resource Allocation under Share Contracts," Journal of Political Economy, University of Chicago Press, vol. 58(2), pages 111-111.
    4. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
    5. Breton, Albert & Wintrobe, Ronald, 1986. "The Bureaucracy of Murder Revisited," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 905-926, October.
    6. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-364, June.
    7. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    8. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-185, March.
    9. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59(3), pages 185-185.
    10. Hall, Robert E, 1982. "The Importance of Lifetime Jobs in the U.S. Economy," American Economic Review, American Economic Association, vol. 72(4), pages 716-724, September.
    11. Tjalling C. Koopmans & Martin J. Beckmann, 1955. "Assignment Problems and the Location of Economic Activities," Cowles Foundation Discussion Papers 4, Cowles Foundation for Research in Economics, Yale University.
    12. Joesph E. Stiglitz, 1975. "Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 552-579, Autumn.
    13. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    14. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
    15. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    16. Radner, Roy, 1981. "Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship," Econometrica, Econometric Society, vol. 49(5), pages 1127-1148, September.
    17. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58(3), pages 211-211.
    18. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
    19. 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.
    20. Kennan, John, 1979. "Bonding and the enforcement of labor contracts," Economics Letters, Elsevier, vol. 3(1), pages 61-66.
    21. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew Seltzer & André Sammartino, 2009. "Internal Labour Markets: Evidence From Two Large Australian Employers," Australian Economic History Review, Economic History Society of Australia and New Zealand, vol. 49(2), pages 107-137, July.
    2. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-176, February.
    3. Arnaldo Camuffo, 2002. "The Changing Nature of Internal Labor Markets," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 6(4), pages 281-294, December.
    4. Skidmore, Marin & Baylis, Kathy & Arends-Kuenning, Mary P. & Michelson, Hope C., 2017. "The Effect of Intermediary Market Power on Grain Quality in India," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259174, Agricultural and Applied Economics Association.
    5. Kirsten Foss, 1998. "Technological Interdependencies,Specialization and Coordination A Property Rights Perspective on The Nature of the Firm," DRUID Working Papers 98-10, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    6. repec:dau:papers:123456789/4126 is not listed on IDEAS
    7. James Jr., Harvey S., 1998. "Are employment and managerial control equivalent? Evidence from an electronics producer," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 447-471, September.
    8. Erik Brynjolffson, 1991. "An Incomplete Contracts Theory of Information, Technology and Organization," Working Paper Series 126, MIT Center for Coordination Science.
    9. Richardson, Alan J. & Kilfoyle, Eksa, 2009. "Accounting in markets, hierarchies and networks: The role of accounting in the transnational governance of postal transactions," Accounting, Organizations and Society, Elsevier, vol. 34(8), pages 939-956, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    2. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    3. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133, Elsevier.
    4. Edward P. Lazear & Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 91-114, Fall.
    5. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
    6. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    7. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    8. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    9. Lőrinczi, Gyula, 2013. "A cégek eredete [The origin of the firm]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 25-46.
    10. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, vol. 91(3), pages 525-541, June.
    11. Bartsch, Elga, 1996. "Enforcement of environmental liability in the case of uncertain causality and asymmetric information," Kiel Working Papers 755, Kiel Institute for the World Economy (IfW Kiel).
    12. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    13. Jean-Jacques Laffont, 1987. "Le risque moral dans la relation de mandat," Revue Économique, Programme National Persée, vol. 38(1), pages 5-24.
    14. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    15. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
    16. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, April.
    17. Scott Shane, 2001. "Organizational Incentives and Organizational Mortality," Organization Science, INFORMS, vol. 12(2), pages 136-160, April.
    18. Bernd Irlenbusch, 2006. "Experimental perspectives on incentives in organisations," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 14(1), pages 1-24, February.
    19. Frank Mathewson & Ignatius J. Horstmann, 2004. "Coordination, Specialization and Incentives: An Equilibrium Model of Firm Boundaries," Econometric Society 2004 North American Winter Meetings 266, Econometric Society.
    20. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    21. Luis H. B. Braido, 2003. "Insurance and Incentives in Sharecropping," CESifo Working Paper Series 1098, CESifo.
    22. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2407. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.