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Contingent Labor Contracting Under Demand and Supply Uncertainty

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  • Joseph M. Milner

    (John M. Olin School of Business, Washington University, St. Louis, Missouri 63130)

  • Edieal J. Pinker

    (William E. Simon School of Business, University of Rochester, Rochester, New York 14627)

Abstract

Firms increasingly use contingent labor to flexibly respond to demand in many environments. Labor supply agencies are growing to fill this need. As a result, firms and agencies are engaging in long-term contracts for labor supply. We develop mathematical models of the interaction between firms and labor supply agencies when demand and supply are uncertain. We consider two models of labor supply uncertainty, termed productivity and availability uncertainty, and study how each affects the nature of the contracts formed. These models reflect two major roles played by the labor supply agency. In the case of productivity uncertainty we find that it is possible to construct a contract that coordinates the firm and agency hiring in an optimal way. In contrast, we show that in environments characterized by availability uncertainty, optimal contracts are not possible. However, there is a large range of contract parameters for which both parties would benefit from a contract. We analyze these and discuss the trade-offs that should be considered in contract negotiation.

Suggested Citation

  • Joseph M. Milner & Edieal J. Pinker, 2001. "Contingent Labor Contracting Under Demand and Supply Uncertainty," Management Science, INFORMS, vol. 47(8), pages 1046-1062, August.
    • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:8:p:1046-1062
    DOI: 10.1287/mnsc.47.8.1046.10233
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    References listed on IDEAS

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    Cited by:

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    2. Andersson Joona, Pernilla & Wadensjö, Eskil, 2004. "Other Forms of Employment: Temporary Employment Agencies and Self-Employment," IZA Discussion Papers 1166, Institute of Labor Economics (IZA).
    3. Smirnykh, Larisa & Wörgötter, Andreas, 2013. "Why Do Russian Firms Use Fixed-Term and Agency Work Contracts?," IZA Policy Papers 54, Institute of Labor Economics (IZA).
    4. Saravanan Kesavan & Bradley R. Staats & Wendell Gilland, 2014. "Volume Flexibility in Services: The Costs and Benefits of Flexible Labor Resources," Management Science, INFORMS, vol. 60(8), pages 1884-1906, August.
    5. Eryn Juan He & Joel Goh, 2022. "Profit or Growth? Dynamic Order Allocation in a Hybrid Workforce," Management Science, INFORMS, vol. 68(8), pages 5891-5906, August.
    6. Techawiboonwong, Atthawit & Yenradee, Pisal & Das, Sanchoy K., 2006. "A master scheduling model with skilled and unskilled temporary workers," International Journal of Production Economics, Elsevier, vol. 103(2), pages 798-809, October.
    7. Susan Feng Lu & Lauren Xiaoyuan Lu, 2017. "Do Mandatory Overtime Laws Improve Quality? Staffing Decisions and Operational Flexibility of Nursing Homes," Management Science, INFORMS, vol. 63(11), pages 3566-3585, November.
    8. Evan Barlow & Gad Allon & Achal Bassamboo, 2020. "Worker poaching in a supply chain: Enemy from within?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(5), pages 695-709, July.
    9. Alma M. dela Cruz, 2007. "Contractual Arrangements in Agriculture (Northern and Central Luzon Component)," Development Economics Working Papers 22626, East Asian Bureau of Economic Research.
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    11. Dellaert, Nico & de Kok, Ton, 2004. "Integrating resource and production decisions in a simple multi-stage assembly system," International Journal of Production Economics, Elsevier, vol. 90(3), pages 281-294, August.
    12. Nasuh Buyukkaramikli & J. Bertrand & Henny Ooijen, 2013. "Flexible hiring in a make to order system with parallel processing units," Annals of Operations Research, Springer, vol. 209(1), pages 159-178, October.
    13. Pinker, Edieal J. & Larson, Richard C., 2003. "Optimizing the use of contingent labor when demand is uncertain," European Journal of Operational Research, Elsevier, vol. 144(1), pages 39-55, January.
    14. Dela Cruz, Alma M., 2007. "Contractual Arrangements in Agriculture (Northern and Central Luzon Component)," Discussion Papers DP 2007-21, Philippine Institute for Development Studies.
    15. Mustafa Akan & Bar{i}c{s} Ata & Martin A. Lariviere, 2011. "Asymmetric Information and Economies of Scale in Service Contracting," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 58-72, September.

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