Complexity, Contract and the Employment Relationship

USC Working Paper No. 97-22

Posted: 25 Feb 1998

See all articles by W. Bentley MacLeod

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: November 1997

Abstract

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

MacLeod, William Bentley, Complexity, Contract and the Employment Relationship (November 1997). USC Working Paper No. 97-22. Available at SSRN: https://ssrn.com/abstract=62128

William Bentley MacLeod (Contact Author)

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