The Equilibrium Organization of Labor

37 Pages Posted: 20 Dec 2012

See all articles by Birger Wernerfelt

Birger Wernerfelt

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

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Date Written: December 20, 2012


We look for the equilibrium organization of labor. The environment has two critical features: (a) Multilateral matching allows gains from specialization, but players incur specific set-up costs each time they are matched with a new trading partner. (b) Bilateral relationships economize on set-up costs, but are burdened by bargaining costs. Under weak conditions, four mechanisms weakly dominate all others: markets, employment with negotiated wages, employment with market wages, and bilateral sequential contracting. For each mechanism, we characterize the tasks traded in it and the players participating. The predictions depend on several factors that do not play a role in other contemporary theories of organization.

Keywords: organization, labor, trade

JEL Classification: D02, D23, L23

Suggested Citation

Wernerfelt, Birger, The Equilibrium Organization of Labor (December 20, 2012). Available at SSRN: or

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

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