Efficient Adaptation Versus Gains from Specialization: Procuring Labor Services
45 Pages Posted: 12 Mar 2011 Last revised: 23 Sep 2011
Date Written: February 11, 2011
We combine the traditions of Coase and Adam Smith to look for the most efficient mechanisms in situations where buyers need sequences of human asset services, but only know their sequence one step ahead. The environment has two critical features: (a) multilateral matching allows gains from specialization, but sellers incur specific set-up costs for each new buyer they serve. (b) Bilateral relationships economize on set-up costs, but are burdened by two-sided incomplete information and thus bargaining costs. In a suitable region, three mechanisms weakly dominate others. A bilateral mechanism (a market) is best when specific set-up costs are larger (smaller), when sellers’ costs differ less (more), and when the buyer has more ongoing (intermittent) needs. The bilateral mechanism looks like employment (a sequence of bilateral contracts) when each service takes less (more) time.
JEL Classification: D02, D23, L23
Suggested Citation: Suggested Citation