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A Legal Basis for Workers as Agents: Employment Contracts, Common Law, and the Theory of the Firm

  • Harvey S. James Jr.

    (University of Missouri)

The purpose of this paper is to show that the common law governing the employment of labor makes the distinction not only between employee and independent contractor but also between managerial control and agency. The idea is that common law precedents govern workers who are employed and managerially controlled without the requirement that formal, written contracts be established, and that these defaults support the authority of management to direct their activities within the firm. However, many firm owners voluntarily restrict their ability to control workers by making them agents. Workers who are agents differ from workers who are managerially controlled in that in the former caseworkers are treated differently in the eyes of the common law and they often sign detailed, formal employment contracts. The typical features of formal employment contracts are examined. The principal conclusion is that formal employment contracts facilitate the granting of discretion to workers by superseding many of the legal defaults that define the relationship between the worker and firm owner.

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Paper provided by EconWPA in its series Law and Economics with number 9705001.

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Length: 30 pages
Date of creation: 01 May 1997
Date of revision: 04 Feb 2002
Handle: RePEc:wpa:wuwple:9705001
Note: Type of Document - Microsoft Word 2000; prepared on IBM PC pentium running WindowsNT; to print on HP; pages: 30; figures: none
Contact details of provider: Web page: http://128.118.178.162

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  1. Charles Brown, 1990. "Firms' choice of method of pay," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-182, February.
  2. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
  3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  4. Todd R. Zenger, 1994. "Explaining Organizational Diseconomies of Scale in R&D: Agency Problems and the Allocation of Engineering Talent, Ideas, and Effort by Firm Size," Management Science, INFORMS, vol. 40(6), pages 708-729, June.
  5. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  6. 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.
  7. 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.
  8. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  9. 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.
  10. White, William D., 1992. "Information and the control of agents," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 111-117, June.
  11. Moore, John, 1992. "The firm as a collection of assets," European Economic Review, Elsevier, vol. 36(2-3), pages 493-507, April.
  12. 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.
  13. Harvey S. James Jr, 2000. "Separating contract from governance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 47-61.
  14. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
  15. 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.
  16. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
  17. Minkler, Alanson P., 1993. "Knowledge and internal organization," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 17-30, May.
  18. Bruce A. Rayton, 1994. "Are CEOs the Only Residual Claimants? Estimation of the Performance Elasticity of Per-Employee Compensation," Industrial Organization 9412001, EconWPA, revised 16 Jun 1995.
  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.
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