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Abstract:
It is well known that contract incompleteness can arise from the impossibility of planning for all future contingencies in a relationship (e.g. Williamson (1975)). In this paper it is shown that whether or not such imcompleteness constrains the efficiency of the contract is very sensitive to assumptions concerning the timing of the resolution of uncertainty. It is shown that when agents must respond to an unforeseen contingency before being able to renegotiate the contract, then contract complexity is a binding constraint, a case that is called ex post hold-up. Secondly, it is suggested that the amount of multi-tasking can provide a measure of contract complexity. When complexity is low, contingent contracting is efficient, while subjective performance evaluation is more efficient when complexity is high. In this case the optimal contract for ex post hold-up is based upon the ability of humans to make subject judgements that are in some cases more informative than explicit performance measures. Moreover, the efficiency of the contract is not sensitive to human error per se, but is an increasing function of the correlation in judgements between the contracting parties.

Abstract:
Economics students need to be taught that opportunity costs are important for optimal decisionmaking but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about sunk costs can help agents achieve efficient investments in a simple team production environment. Further, the solution we propose is uniquely efficient if the environment is sufficiently complex. Hence, in addition to explaining contract form and ownership (Williamson (1975) and Hart (1995)), studies of the holdup problem may also provide insights into observed behavior in day to day bilateral bargaining problems.

Abstract:
Economics students need to be taught that opportunity costs are important for optimal decisionmaking but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about sunk costs can help agents achieve efficient investments in a simple team production environment. Further, the solution we propose is uniquely efficient if the environment is sufficiently complex. Hence, in addition to explaining contract form and ownership (Williamson (1975) and Hart (1995)), studies of the holdup problem may also provide insights into observed behavior in day to day bilateral bargaining problems.

Abstract:
In this paper we introduce a way to systematically organize the choice between different forms of compensation based upon observable job characteristics. Secondly, we explore the determinants of compensation based upon questionnaire responses concerning job characteristics and methods of pay contained in the Quality of Employment Survey (QES), the National Longitudinal Survey of Youth (NLSY), the Panel Study of Income Dynamics (PSID), and the Current Population Survey. The main conclusion is that there is no single model of the employment relationship that can explain the variation in compensation form. We draw upon both agency and incomplete contract models to study the interplay between job characteristics and compensation. Specific results include a) the number of tasks seems to be associated with the use of incomplete contracts; b) jobs with high power incentives (piece or commission rates) tend to be associated with more worker autonomy and fewer tasks performed than hourly paid or salary jobs; c) tight labor market conditions tend to be associated with increased use of bonuses and promotions.

Abstract:
This paper explores the use of heuristic search algorithms for modeling human decision making. It is shown that this algorithm is consistent with many observed behavioral regularities, and may help explain deviations from rational choice. The main insight is that the heuristic function can be viewed as formal implementation of one aspect of emotion as discussed in {Descarte's Error} by Antonio Damasio. Consistent with Damasio's observations, it is shown that the quality of decision making is very sensitive to the nature of the heuristic ("emotion"), and hence this may help us better understand the role of emotion in rational choice theory.

Abstract:
This paper explores the use of heuristic search algorithms for modeling human decision making. It is shown that this algorithm is consistent with many observed behavioral regularities, and may help explain deviations from rational choice. The main insight is that the heuristic function can be viewed as formal implementation of one aspect of emotion as discussed in {Descarte's Error} by Antonio Damasio. Consistent with Damasio's observations, it is shown that the quality of decision making is very sensitive to the nature of the heuristic ("emotion"), and hence this may help us better understand the role of emotion in rational choice theory.

Abstract:
This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.

contract, law and economics, reputation, repeated games, incomplete

Abstract:
The standard model of utility maximization assumes that individuals make complete contingent plans before making a decision. This paper shows that when the environment is sufficiently complex the optimal rule entails learning by doing rather than contingent planning. An implication of this result is that spill-overs from learning by doing are less than perfect, a hypothesis central to many models of learning by doing, such as Rosen (1972). It is shown that one can derive learning curves that can be fitted to data. The model is also consistent with the observations of behavioral economics, such as Kahneman and Tversky (1979), that in the short run individuals may make biased decisions, though long run behavior is consistent with utility maximization. Finally, the model is applied to Becker (1968)'s deterrence model to show that the optimal amount of monitoring is bounded away from zero.

Decision Theory, Learning by Doing, Incentives

Abstract:
Most contracts that individuals enter into are not written from scratch but depend upon forms and terms that have been successful in the past. In this paper we study the structure of the form construction contracts published by the American Institute of Architects (AIA). We show that these contracts are an efficient solution to the problem of procuring large, complex projects when unforeseen contingencies are inevitable. This is achieved by carefully structuring the ex post bargaining game between the Principal and the Agent. The optimal mechanism corresponding to the AIA construction form is consistent with decisions of the courts in several prominent, but controversial, cases, and hence provides an economic foundation for a number of the common-law excuses from performance. Finally, the case of form contracts for construction is an example of how markets, as opposed to private negotiation, can be used to determine efficient contract terms.

Abstract:
The goal of this paper is to examine optimal individual and entity-level liability for negligence when expected accident costs depend both on the agent's level of expertise and the principal's level of authority. We consider these issues in the context of physician and managed care organization (MCO) liability for medical malpractice. It is shown that the standard rules for the determination of negligence and damages do not result in an efficient outcome when only physicians are held liable for their torts, but is restored if MCOs are held solely liable for the torts committed by their physicians. There is a damage rule that induces the efficient outcome when physicians are held liable for their torts, however these damages are a complex function of the details of the MCO contract.

Abstract:
This paper extends the standard principal-agent model to allow for subjective evaluation. It is shown that the optimal contract entails the use of more compressed evaluations relative to the case with objective performance measures. The degree of compression increases as the correlation between the principal's and agent's beliefs decreases. It is possible for the agent to implement a contract with high power incentives, however this necessarily entails a high level of "conflict" in the relationship, with the optimal amount of compression resulting from trading off between performance incentives and the socially wasteful "conflict" that they create. The model is also used to show how a bias or discrimination against an individual can lead to lower wages and performance.

Abstract:
This paper extends the standard principal-agent model to allow for subjective evaluation. It is shown that the optimal contract entails the use of more compressed evaluations relative to the case with objective performance measures. The degree of compression increases as the correlation between the principal's and agent's beliefs decreases. It is possible for the agent to implement a contract with high power incentives, however this necessarily entails a high level of "conflict" in the relationship, with the optimal amount of compression resulting from trading off between performance incentives and the socially wasteful "conflict" that they create. The model is also used to show how a bias or discrimination against an individual can lead to lower wages and performance.

Abstract:
In order to regulate risk taking efficiently, tort liability rules governing organizations' liability for torts by their agents should ensure that organizations both want their agents to take optimal precautions and benefit from using cost-effective mechanisms to regulate agents. This chapter shows that vicarious liability, the current rule governing organizations' liability for their agents' torts, does not satisfy these objectives. By holding organizations liable for torts committed by employees, but not by independent contractors, vicarious liability discourages organizations from asserting direct control over agents, even when control is an efficient way to regulate care. Organizations governed by vicarious liability also may not attempt to induce efficient care-taking by independent contractors because organizations often do not maximize profits by inducing efficient care. Indeed, vicarious liability encourages organizations to undermine the effect of individual tort liability by hiring judgment-proof independent contractors.

Abstract:
Economists use the standard rational model to predict behaviour under a new policy regime and to evaluate the policy according to its impact on the welfare of the people affected. Experimental observation of behaviour casts some doubt on the predictive accuracy of the standard model, but the more realistic behavioral alternatives often provide a poor basis for normative evaluations. This paper suggests that in some cases we can do both. A behavioral trait can be modeled as a cognitive strategy that has evolved to augment a deeper notion of personal welfare. This makes it possible to predict behaviour with greater accuracy and to make normative evaluations of the outcomes of policy.

Bargaining, Fairness, Property Rights, Endowment Effect, Framing

Abstract:
Most contracts that individuals enter into are not written from scratch; rather, they depend upon forms and terms that have been successful in the past. In this paper, we study the structure of form construction contracts published by the American Institute of Architects (AIA). We show that these contracts are an efficient solution to the problem of procuring large, complex projects when unforeseen contingencies are inevitable. This is achieved by carefully structuring the ex post bargaining game between the Principal and the Agent. The optimal mechanism corresponding to the AIA construction form is consistent with decisions of the courts in several prominent but controversial cases, and hence it provides an economic foundation for a number of the common-law excuses from performance. Finally, the case of form contracts for construction is an example of how markets, as opposed to private negotiations, can be used to determine efficient contract terms.

law and economics, incomplete contracts, construction, agency theory

Abstract:
As Posner (1997) has observed, when individuals in a relationship can commit to imposing costs upon each other then efficient behavior in the absence of law is possible. The question is whether efficient norms of behavior evolve endogenously in a population. We show that in a standard hold up model in which both parties make relationship specific investments the long run outcome of a stochastic adaptation process similar to Young's (1993) 'adaptive play' does not in general correspond to the efficient equilibria. As Grossman and Hart (1986) observe, institutions, such as firms, may be needed to improve the allocation of resources.

Hold up problem, bargaining, evolution

Abstract:
As Posner (1997) has observed, when individuals in a relationship can commit to imposing costs upon each other then efficient behavior in the absence of law is possible. The question is whether efficient norms of behavior evolve endogenously in a population. We show that in a standard hold up model in which both parties make relationship specific investments the long run outcome of a stochastic adaptation process similar to Young's (1993) 'adaptive play' does not in general correspond to the efficient equilibria. As Grossman and Hart (1986) observe, institutions, such as firms, may be needed to improve the allocation of resources.

Hold up problem, bargaining, evolution

Abstract:
This Article provides an economic analysis of optimal negligence liability for physicians and Managed Care Organizations explicitly modeling the role of physician expertise and MCO authority. We find that even when patients anticipate the risks imposed on them, physicians and MCOs do not take optimal care absent sanctions. Markets and contracts do not provide optimal incentives because market prices are determined at the moment of contracting, but physician expertise and MCO authority depend on non-contractable actions taken post-contract. Negligence liability can induce optimal care if damage rules are optimal. Optimality requires that MCOs be held liable for both their own negligent treatment coverage decisions and for negligence by affiliated physicians. Moreover, we find that MCOs should be liable even when they do not exert direct control over physicians. Finally, we show that it may be optimal to preclude physicians or MCOs from obtaining liability waivers from patients, even when patients are fully-informed and waive only when it is in their interests to do so at that moment.

Abstract:
This note derives the optimal compensation contract with subjective evaluation when the principal and agent may not agree regarding performance. The optimal contract takes the form of a bonus payment whenever the principal believes performance is acceptable, but with the payment of a penalty by the principal whenever the agent disagrees with a negative evaluation by the principal. The efficiency of the relationship is increasing with the degree of correlation,a result that is consistent with the importance of trust for an efficient employment relationship.

Abstract:
One of the most vexing public policy issues is the extent to which governments should intervene into private contractual relationships. The purpose of this paper is to explore both theoretically and empirically the extent to which such interventions may enhance efficiency. In the case of employment law, economists have traditionally taken the view that intervention, such as protection against wrongful discharge, simply undoes the original intent of the parties to the agreement. We find that both the good faith and the implied contract exceptions to employment at will may enhance employment in occupations characterized by high levels of investment. These results suggest that under the appropriate conditions courts may enhance the operation of a competitive market by setting appropriate default remedies for breach of contract.

employment law, wrongful discharge, private contracts, default rules

Abstract:
We document that an increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates. We find that compensation in performance-pay jobs is more closely tied to both observed (by the econometrician) and unobserved productive characteristics of workers. Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of male wages between the late 1970s and the early 1990s, and accounts for nearly all of the top-end growth in wage dispersion (above the 80th percentile).

performance pay, compensation, bonus pay, incentive pay, wage inequality

Abstract:
The problem of decision making in the face of uncertainty is a ubiquitous problem in day to day economic decision making. Psychologists have found that a number of factors can influence the quality of such decision making, including ability, temperament and of course sheer luck. We report the results obtained from an experimental framework that begins an evaluation of the relative importance of these factors in a simple search problem where the complexity of search is the major treatment variable. We find that variations in complexity and "luck" explain most of the variation in performance. However, individual heterogeneity also explains a significant portion. Individual differences matter most when the problem is of moderate complexity. A small portion of the heterogeneity is attributable to ability, but a more significant portion is attributable to variations in what we might label temperament. Finally, we find that framing the incentive as a bonus, rather than a penalty, encourages search but does not significantly affect performance.

Abstract:
The authors examine changes in the wages, employment, and effort of nurses in California hospitals following takeovers by large chains using 1990s data. The market for nurses has been described as a classic monopsony, so that one might expect increases in firm market power to be associated with declines in wages. However, a basic contracting model predicts effects on effort rather than on wages, which is what this analysis finds: nurses experienced few declines in wages following takeovers, but did see increases in the number of patients per nurse, the measure of effort used here. The authors show that their results are also consistent with an extended version of the monopsony model that considers effort and allows for revenue shifts following a takeover. Finally, they find that these changes were similar in the largest for-profit and non-profit chains, suggesting that market forces are more important than institutional form.

nurses, California hospitals, monopolies, for-profits and nonprofits

Abstract:
This paper uses data from the 1990s to examine changes in the wages, employment, and effort of nurses in California hospitals following takeovers by large chains. The market for nurses has been described as a classic monopsony, so that one might expect increases in firm market power to be associated with declines in wages. However, we show that if one extends the monopsony model to consider effort, or if we apply a basic contracting model to the data, then we would expect to see effects on effort rather than on wages. This prediction is bourne out by the data - nurses see few declines in wages following takeovers, but see increases in the number of patients per nurse, our measure of effort. We also find that these changes are similar in the largest for-profit and non-profit chains, suggesting that market forces are more more important than institutional form.

Abstract:
This paper uses data from the 1990s to examine changes in the wages, employment, and effort of nurses in California hospitals following takeovers by large chains. The market for nurses has been described as a classic monopsony, so that one might expect increases inform market power to be associated with declines in wages. However, we show that if one extends the monopsony model to consider effort, or if we apply a basic contracting model to the data, then we would expect to see effects on effort rather than on wages. This prediction is bourne out by the data - nurses see few declines in wages following takeovers, but see increases in the number of patients per nurse, our measure of effort. We also find that these changes are similar in the largest for-profit and non-profit chains, suggesting that market forces are more important than institutional form.

Abstract:
This paper illustrates how the explicit introduction of planning costs into a model of decision making under uncertainty can result is a theory of learning by doing that is empirically implementable. Even when not optimal, it is shown that learning by doing results in convergence to optimal choice under very general conditions. Hence, it may explain why learning by doing (or adaptive learning) is a good first order model of behavior for a wide variety of environments.

Decision Theory, Learning by Doing, Contingent Plans, Status Quo Effects, Incomplete Contracts, Behavioral Economics

Abstract:
We provide evidence on how two important types of institutions - dismissal barriers, and bonus pay - affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.

employment protection, efficiency wages, bonus pay, incomplete contracts, firing costs, experiment

Abstract:
We provide evidence on how two important types of institutions - dismissal barriers, and bonus pay - affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.

institutions, contracts, contract enforcement, market experiment

Abstract:
We provide evidence on how two important types of institutions - dismissal barriers, and bonus pay - affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.

Abstract:
This paper explores the set of stochastically stable equilibria in a model in which individuals first decide to make a high or low investment, and then are matched to play a Nash demand game. If an agreement is not reached, then they are re-matched in the next period, and obtain a payoff discounted by d. We identify a condition under which stochastically stable bargaining conventions exist and find, that the stochastically stable division rule is independent of the long run investment strategy. In these conventions the potential to trade in subsequent periods always has an effect on the bargain, and the market acts more like a threat point, than an outside option. If investments are substitutes stochastically stable bargaining conventions imply larger investment incentives than the Nash bargaining solution whereas the opposite is true if investments are complements. Finally, if it is not efficient for trade to occur as a result of the outside option, and investments are complements, then no bargaining convention can develop, and investment levels are typically inefficient.

Abstract:
Regulation of the employment contract is both wide spread and diverse. The diversity of regulation is surprising because it suggests that there is little consensus regarding optimal intervention into the labor market. This paper discusses several economic reasons why it may be efficient for employers and employees to enter into long term contracts that make employee dismissal expensive. This analysis suggests that employment contracts can be expected to be complex in practice, and hence can be viewed as part of the technology of exchange. Given that knowledge of a technology requires skill and know-how, one cannot expect all employee-employer matches to discover and use the most efficient contract terms possible. It is suggested that the regulation of the employment relationship might be improved with the creation of a market for contracts, similar to the one that currently exists in the United States for construction projects.

Abstract:
We document that an increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates. We find that compensation in performance-pay jobs is more closely tied to both observed (by the econometrician) and unobserved productive characteristics of workers. Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of male wages between the late 1970s and the early 1990s, and accounts for nearly all of the top-end growth in wage dispersion(above the 80th percentile).

Abstract:
We examine the impact of tort reforms using U.S. birth records for 1989-2001. We make four contributions: First, we develop a model that analyzes the incentives created by specific tort reforms. Second, we assemble new data on tort reform. Third, we examine a range of outcomes. Finally, we allow for differential effects by demographic/risk group. We find that reforms of the "deep pockets rule" reduce complications of labor and C-sections, while caps on noneconomic damages increase them. Our results demonstrate there are important interactions between incentives created by tort law and other incentives facing physicians.

Abstract:
Economics students need to be taught that opportunity costs are important for optimal decision making but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about sunk costs can help agents achieve efficient investments in a simple team production environment. Furthermore, the solution we propose is uniquely efficient if the environment is sufficiently complex. Hence, in addition to explaining contract form and ownership (Williamson, 1975; Hart, 1995), studies of the holdup problem may also provide insights into observed behavior in day-today bilateral bargaining problems.

Abstract:
No abstract available.

Abstract:
This paper presents results from a 1971 natural experiment carried out by the Canadian government on the unemployment insurance system. At that time, they dramatically increased the generosity of the system. We find that the propensity to collect UI increases with a first time exposure to the system. Hence as more individuals experience unemployment their lifetime use of the system increases. This supply side hysterisis effect may explain why unemployment has steadily increased over the 1972 - 1992 period, even though the generosity of unemployment insurance did not.

Abstract:
The extent of government in private contractual relationships is a vexing public policy issue. This article explores, both theoretically and empirically, the degree to which such intervention may enhance employment. Economists traditionally have held that interventions such as wrongful discharge protections simply undo the original intent of the parties to an employment contract. We find that both good faith as well as implied contract exceptions to employment-at-will may enhance employment, particularly in occupations characterised by high levels of investment and skill. This suggests that under the appropriate conditions, labour law may enhance the operation of a competitive market.

Abstract:
Economic models of contract typically assume that courts enforce obligations based on verifiable events (corresponding to the legal rule of specific performance). As a matter of law, this is not the case. This leaves open the question of optimal contract design given the available remedies used by the courts. This paper shows that American standard form construction contracts can be viewed as an efficient mechanism for implementing building projects given existing legal rules. It is shown that a central feature of these contracts is the inclusion of governance covenants that shape the scope of authority, and regulate the ex post bargaining power of parties. Our model also implies that the legal remedies of mistake, impossibility and the doctrine limiting damages for unforeseen events developed in the case of Hadley vs. Baxendale are efficient solutions to the problem of implementing complex exchange.

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Abstract:
This note discusses and contrasts the different perspectives that the law, empirical labor economics and contract theory bring to the study of the employment relationship. Understanding the reasons for these different perspectives should give rise to a better understanding of the employment relationship and more effective labor market policy.

Abstract:
Regulation of the employment contract is both wide spread and diverse. The diversity of regulation is surprising because it suggests that there is little consensus regarding optimal intervention into the labor market. This paper discusses several economic reasons why it may be efficient for employers and employees to enter into long term contracts that make employee dismissal expensive. This analysis suggests that employment contracts can be expected to be complex in practice, and hence can be viewed as part of the technology of exchange. Given that knowledge of a technology requires skill and know-how, one cannot expect all employee-employer matches to discover and use the most efficient contract terms possible. It is suggested that the regulation of the employment relationship might be improved with the creation of a market for contracts, similar to the one that currently exists in the United States for construction projects.

Abstract:
This paper presents results from a 1971 natural experiment carried out by the Canadian government on the unemployment insurance system. At that time, the generosity of the UI system was increased dramatically. We find some evidence that the propensity to collect UI increases with a first-time exposure to the new UI system. Hence, as more individuals experience unemployment, their lifetime use of the system increases. This supply side hysteresis effect may explain why unemployment has steadily increased over the 1972-1992 period, even though the generosity of unemployment insurance did not.

Unemployment insurance, Learning, Incentives, Unemployment, Hysteresis

Abstract:
Many workers receive pay based on subjectively assessed performance, yet the shirking model of efficiency wages excludes it. This paper incorporates such pay, with the following results. Performance pay is more efficient than efficiency wages when the costs of having a job vacant are low and qualified workers in short supply. More capital-intensive industries pay more than less capital-intensive industries, as observed in studies of interindustry wages differentials. Sustaining an efficient outcome requires a social convention similar to the notion of a fair wage. The model also makes predictions about the relationship between turnover, wages, growth and unemployment.

Abstract:
We examine an evolutionary model of bargaining behavior in a society where resources are finite. Agents who develop better strategies for bargaining and trading come to dominate the population. We show that successful agents exhibit loss aversion and an "endowment effect." When information is symmetric, a norm of equity is evolutionarily stable and efficient. In this case, disagreement arises when there is uncertainty concerning the gains to trade. The social institution of private property may emerge spontaneously when information concerning individual endowments is private. As in the symmetric information case, disagreement (or inefficiencies) arise when there is uncertainty over the gains from trade.

Abstract:
This paper introduces a formal model of contract incompleteness based on the observation that individuals cannot anticipate and plan for all possible future contingencies. Using a version of the multi-tasking model of Holmstrom-Milgrom (1991), it is shown that the trade-off between the use of an employment relationship versus an explicit state contingent contract depends on number of tasks or complexity of the services provided by the individual. Furthermore, when specific investments are sufficiently large, an employment relationship can achieve efficient governance, even though the employment contract itself is incomplete.