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Transactions Costs and Internal Labor Markets

  • Sherwin Rosen

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2407.

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Date of creation: Oct 1987
Date of revision:
Publication status: published as Rosen, Sherwin. "Transactions Costs and Internal Labor Markets." Journal of Law, Economics, and Organization, Vol. 4, No. 1, (Spring 1988), pp. 49-64.
Handle: RePEc:nbr:nberwo:2407
Note: LS
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