Complexity, Contract and the Employment Relationship
USC Working Paper No. 97-22
Posted: 25 Feb 1998
Date Written: November 1997
This paper introduces a formal model of contract incompleteness based on the observation that individuals cannot anticipate and plan for all possible future contingencies. Using a version of the multi-tasking model of Holmstrom-Milgrom (1991), it is shown that the trade-off between the use of an employment relationship versus an explicit state contingent contract depends on number of tasks or complexity of the services provided by the individual. Furthermore, when specific investments are sufficiently large, an employment relationship can achieve efficient governance, even though the employment contract itself is incomplete.
JEL Classification: J41
Suggested Citation: Suggested Citation