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Why Are There Explicit Contracts of Employment?

  • Harvey James

    (University of Missouri)

  • Derek Johnson

    (University of Connecticut)

In this paper we explain the prevalence of explicit contracts of employment, particularly those that embody high- rather than low-powered incentives and clauses that supersede the common law defaults. Our analysis is based on an understanding of two fundamental problems that arise when agency relationships are established between a worker and firm. The first is that agency relationships often require the creation of specific property rights in order for firm owners to realize productive efficiencies of scale or scope from agency. The second is that the economic characteristics of the agency relationship, which generally entail the transfer of specific "process rights" to agents, are often quite different from the nature of agency characterized in and supported by the common law. The implication is that implicit employment contracts supported by the common law are incapable of effectively governing employment relationship characterized by these two problems. Thus, explicit contractual provisions are required in the employment relationship.

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Paper provided by EconWPA in its series Law and Economics with number 0202001.

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Length: 25 pages
Date of creation: 04 Feb 2002
Date of revision:
Handle: RePEc:wpa:wuwple:0202001
Note: Type of Document - Microsoft Word; prepared on IBM PC; to print on HP; pages: 25; figures: none
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February.
  3. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  4. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
  5. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  6. 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.
  7. Harvey S. James Jr, 2000. "Separating contract from governance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 47-61.
  8. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 181-98, Spring.
  9. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
  10. 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.
  11. 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.
  12. Williamson, Oliver E, 1988. "The Logic of Economic Organization," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 65-93, Spring.
  13. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
  14. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  15. Valsecchi, Irene, 1996. "Policing Team Production through Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(2), pages 361-75, October.
  16. White, William D., 1992. "Information and the control of agents," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 111-117, June.
  17. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
  18. Stiglitz, J.E., 1988. "Principal And Agent," Papers 12, Princeton, Woodrow Wilson School - Discussion Paper.
  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. Minkler, Alanson P., 1993. "Knowledge and internal organization," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 17-30, May.
  21. Moore, John, 1992. "The firm as a collection of assets," European Economic Review, Elsevier, vol. 36(2-3), pages 493-507, April.
  22. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  23. Cheung, Steven N S, 1983. "The Contractual Nature of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(1), pages 1-21, April.
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