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

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  • Xiaokai Yang

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 complete contingent contract of goods trade is used to explore the implications of structure of ownership and residual rights for the equilibrium network size of division of labor and productivity.

Suggested Citation

  • Xiaokai Yang, 2000. "Incomplete Contingent Labor Contract, Asymmetric Residual Rights and Authority, and the Theory of the Firm," CID Working Papers 45, Center for International Development at Harvard University.
    • Handle: RePEc:wop:cidhav:45
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    File URL: http://www.cid.harvard.edu/cidwp/pdf/045.pdf
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    References listed on IDEAS

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    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 39-56.
    3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    4. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 115-138.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Jeff Borland & Xiaokai Yang, 2006. "Specialization, Product Development, Evolution Of The Institution Of The Firm, And Economic Growth," World Scientific Book Chapters, in: Christis Tombazos & Xiaokai Yang (ed.), Inframarginal Contributions To Development Economics, chapter 12, pages 291-325, World Scientific Publishing Co. Pte. Ltd..
    7. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
    8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    9. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    10. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    11. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 83-114.
    12. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    13. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    14. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    15. Cheung, Steven N S, 1983. "The Contractual Nature of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(1), pages 1-21, April.
    16. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
    17. Xiaokai Yang & Yew-Kwang Ng, 2006. "Theory Of The Firm And Structure Of Residual Rights," World Scientific Book Chapters, in: Christis Tombazos & Xiaokai Yang (ed.), Inframarginal Contributions To Development Economics, chapter 10, pages 231-258, World Scientific Publishing Co. Pte. Ltd..
    18. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    19. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    20. Kenneth J. Arrow & Yew-Kwang Ng & Xiaokai Yang (ed.), 1998. "Increasing Returns and Economic Analysis," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-26255-7, December.
    21. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
    22. Xiaokai Yang, 1994. "Endogenous vs. exogenous comparative advantage and economies of specialization vs. economies of scale," Journal of Economics, Springer, vol. 60(1), pages 29-54, February.
    23. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 139-149.
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    26. John J. Wallis & Douglass North, 1986. "Measuring the Transaction Sector in the American Economy, 1870-1970," NBER Chapters, in: Long-Term Factors in American Economic Growth, pages 95-162, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Cheng, Wenli & Yang, Xiaokai, 2004. "Inframarginal analysis of division of labor: A survey," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 137-174, October.

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    More about this item

    Keywords

    theory of the firm; incomplete labor contract; asymmetric authority; two-sided moral hazard; transaction cost; asymmetric residual rights; division of labor; specialization;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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