Efficient Adaptation Versus Gains from Specialization: Procuring Labor Services

45 Pages Posted: 12 Mar 2011 Last revised: 23 Sep 2011

See all articles by Birger Wernerfelt

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: February 11, 2011

Abstract

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.

Keywords: Organizations

JEL Classification: D02, D23, L23

Suggested Citation

Wernerfelt, Birger, Efficient Adaptation Versus Gains from Specialization: Procuring Labor Services (February 11, 2011). Available at SSRN: https://ssrn.com/abstract=1783722 or http://dx.doi.org/10.2139/ssrn.1783722

Birger Wernerfelt (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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