The Theory of the Firm, Independent Contractors, and Some Law and Economics of Employment
48 Pages Posted: 2 Aug 1999
Date Written: June 1999
This paper considers use of employment contracts versus commercial contracts for the exchange of labor services. Those workers selling their services via the former contract are employees and those using the latter are independent contractors. Following the legal distinction between the two types of contracts, this is equivalent to modeling the right to control the work routine. The work routine is allowed to affect effort incentives as in Holmstrom and Milgrom (1994) and investment incentives as in Grossman and Hart (1986). Predictions of the effects of monitoring costs and the importance of investment on control of the work routine and use of independent contractors are derived. These predictions are tested and supported with data from the Current Population Survey augmented with occupational characteristics from the Dictionary of Occupational Titles.
JEL Classification: J41
Suggested Citation: Suggested Citation