Incomplete Contingent Labor Contract, Asymmetric Residual Rights and Authority, the Theory of the Firm

Abstract

In the paper the trade-offs among endogenous transaction costs caused by two-sided moral hazard, exogenous monitoring cost, and economies of specialization are specified in a Grossman, Hart, and Moore (GHM) model to absorb Maskin and Tirole's recent critique and Holmstrom and Milgrom's criticism of the model of incomplete contract. The extended GHM model allowing incomplete contingent labor contract as well as complete contingent trade contract of goods is used to explore the implications of structure of ownership and residual rights for the equilibrium network size of division of labor and productivity.

JEL Classification: D23, L11, L22, L23