Simple Models of a Human-Capital Based Firm: A Reference Point Approach

Abstract

One important feature of the knowledge economy is the increased importance placed on human-capital, especially when dealing with the firm. We apply the reference point approach to contracts to the modelling of a human-capital based firm. First a model of firm scope is offered which argues that the organisation of a human-capital based firm depends on the "types" of human capital involved. Having a firm based on a homogeneous group of human capital leads to a different organisational form than that of a firm which involves a heterogeneous group of human capital. Second a simple model of a human-capital based firm is discussed. Three organisational forms are considered: an investor-owned firm, a labour-owned firm and a market transaction involving the use of an independent contractor. Results are given that show when each of these forms are optimal. The effects of a firm's size and scope on organisation are considered as is the question of Why are there conversions from worker to investor ownership?

Keywords: knowledge firm, contracts, theory of the firm, reference points, human capital

JEL Classification: D23, D86, L22