Organizational forms and incentives

Ayse Mumcu, University of Pennsylvania


In the first chapter, we extend the results of the Coase theorem to the relationships where, due to contractual incompleteness, agents are unable to bargain over all aspects of the transaction. We show that the initial allocation of ownership rights is irrelevant if a sufficiently large surplus is created by cooperation. Our result contrasts with Grossman and Hart (1986), who, using a similar model, obtain that the ownership rights should be allocated to minimize ex-ante inefficiencies in production. The critical element behind these two different results is that while Grossman and Hart model uses the Nash bargaining solution treating status quo payoffs as disagreement points, here they are treated as outside options. In the second chapter, we study a firm's choice between employing a worker and using an independent contractor to carry out a task. If the firm hires a worker, all residual rights reside with the firm. In contrast, when the firm deals with an independent contractor, it cannot interfere with the way the task is undertaken. The firm's future actions may impose non-pecuniary costs to the worker, and as a result the worker requires an ex-ante compensation. The firm can economize on the up-front cost by hiring all independent contractor. Independent contracting is a commitment device which ensures that the principal will not intervene in the future. However, when the firm has superior private information that is relevant to the execution of the task, the firm faces a trade-off between paying lower costs by hiring an independent contractor and keeping the option of value-enhancing intervention in employment relationship. In the third chapter, we study the bargaining relationship between a firm and its incumbent worker who possesses firm-specific human capital. We show that, in the contract renewal stage, the worker's ability to strategically disclose his skills increases his bargaining power vis-a-vis the firm. The firm can threaten to fire the worker and hire a new inexperienced worker, but this threat is not always credible. Even though the bargaining takes place in an environment with perfect information, the game has inefficient equilibria where delays occur in real time.

Subject Area

Economics|Labor economics|Labor relations

Recommended Citation

Mumcu, Ayse, "Organizational forms and incentives" (1997). Dissertations available from ProQuest. AAI9800902.