Coase, R. “The Nature of the Firm”. Economica (1937) (4): 386-405.
Between firms, resources are allocated via the price mechanism. Within firms, authority and power play a role: bosses tell workers what to do. So, firms are “islands of conscious power in [an] ocean of unconscious co‐operation”. Why does this happen? In a Nobel-prize winning article, Coase argues that sometimes authority is a more efficient way to allocate resources, and the efficient use of authority is what determines the boundaries of firms, i.e. the “buy versus make” decision.
Simon, H. "A Formal Theory of Employment", Econometrica, July 1951.
Simon distinguishes “sales contracts” where a well-defined product is exchanged for a fixed price, from employment contracts where, within limits, an employee agrees to “do whatever the boss needs them to do”. Employment contracts make sense when demand is uncertain—i.e. when the boss doesn’t know in advance exactly what they will need. Once again, relations inside firms are different from relations in the market—authority plays a role inside firms.
Alchian, A. and H. Demsetz, "Production, Information Costs, and Economic Organization", American Economic Review, Dec. 1972.
In contrast to Coase and Simon, Alchian and Demsetz argue that the use of authority within firms is an illusion: “To speak of managing, directing, or assigning workers to various tasks is a deceptive way of noting that the employer continually is involved in renegotiation of contracts on terms that must be acceptable to both parties. Telling an employee to type this letter rather than to file that document is like my telling a grocer to sell me this brand of tuna rather than that brand of bread.” Instead, Alchian and Demsetz argue that team production is what distinguishes within-firm from between-firm interactions: The members of the team implicitly delegate a boss to monitor each agent’s contribution to prevent free riding.
Weitzman, M. L. (1974). “Prices versus Quantities” Review of Economic Studies, 41(4), 477-491.
Prices allocate resources between firms; inside firms it’s much more common to regulate quantities directly: When a firm wants to move workers from division X to Y it doesn’t raises wages in Y and wait for workers to move; it just re-assigns the workers. Weitzman derives the broad theoretical conditions under which setting prices versus setting quantities is the optimal way to allocate resources to different uses.
Williamson, O. et al., "Understanding the Employment Relation" Bell Journal of Economics, Spring 1975.
In the spirit of Coase (1937), Williamson argues that transaction costs explain why firms exist. Transaction costs are likely to be especially severe when jobs are highly idiosyncratic, and when when workers have skills that are very task-specific. In these situations, long-term, vague contracts may outperform competitive markets as an efficient method of exchange and resource allocation.
Jensen, Michael C. and William H. Meckling, (1976)."Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure".Journal of Financial Economics. 3 (4): 305–360.
Connects the principal-agent problem to the issues of asset ownership and firm ownership: both debt and outside equity create new agency problems by separating control of the firm from its ownership. Investigates the nature of these agency costs and demonstrates who bears theses costs and why.
Rooney, Ben. “The FedEx driver who sued and won” CNN Money, November 21, 2014.
FedEx hired 32,500 drivers, managers and affiliated workers as contractors rather than employees.
Nir, Sarah Maslin.“The Price of Nice Nails” New York Times, May 7, 2015.
Workers in New York City nail salons "pay for their jobs" by working for free, sometimes for months. In addition to being a source of profit for the employer who is providing the capital, expertise and opportunity, working for free is a way for workers to pay for the costs of their training in a portable skill.
Gentile, Marie. “How Does Commission Work at a Hair Salon?” Chron.com, 2016.
Describes the most common forms of incentive pay at hair salons, including commission rates, commission structure, commission-earning services and booth-rental salons.
Rogers, Kate. “The franchise industry has gotten more good news” CNBC, March 15, 2016.
By 2016, the U.S. had 795,000 franchises.
WorldatWork, (2016). "Sales Compensation Programs and Practices," research report (October).
Recent details on how sales workers are compensated.
Gabriel, Trip, (2017). “Alone on the Open Road: Truckers Feel Like ‘Throwaway People’,” New York Times, May 22.
Truckers are paid mostly by the mile, not the hour. Federal rules say they can drive 11 hours within a 14-hour window, and then they must stop for a 10-hour break. Many resent the 14-hour rule.
Angrist, Joshua, Sydnee Caldwell, and Jonathan Hall, (2017). “Uber vs. Taxi: A Driver's Eye View,” American Economic Journal: Applied Economics 2021, 13(3): 272–308
Most taxi drivers pay a lump sum to drive each week. Uber drivers don’t. This paper compares these two pay schemes from a driver’s point of view using an experiment that offered random samples of Boston Uber drivers the opportunity to lease a virtual taxi medallion that eliminates the Uber fee. Most drivers preferred to stay with Uber's pay scheme, with a lower commission but no up-front fee.
Edmans, Alex., Xavier Gabaix, and Dirk Jenter, (2017). “Executive Compensation: A Survey of Theory and Evidence,” NBER working paper no. 23596.
Reviews the theoretical and empirical literature on executive compensation.
Sockin, Jason and Michael Sockin. 2020 “Job Characteristics, Employee Demographics, and the Cross-Section of Performance Pay” unpublished paper, University of Pennsylvania.
Who receives performance pay? Using data from Glassdoor, the authors show that whether a person receives performance pay depends more on the type of job that is performed than on personal characteristics like age, education, experience and education. Specifically, performance pay is most common among more senior workers, managers, in non-routine occupations requiring interpersonal skills.
D'Acunto, Francesco, Jin Xie, and Jiaquan Yao. 2020 “Trust and Contracts: Empirical Evidence” CESifo Working Paper No. 8714
While most principal-agent models represent contracts by simple mathematical functions, real-world, written contracts can be extremely complex. This paper shows that the amount of detail in real-world consulting contracts increases when an unexpected shock causes the level of trust between the parties to decline. Contracts also become contingent on a larger number of verifiable states of nature. The authors argue contracts become more ‘complete’ and state-contingent when the parties do not trust each other’s reaction to unplanned events.
Baker, G, and T. Hubbard, (2004). “Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking,” Quarterly Journal of Economics, 119(4): pp. 1443-1479.
Requiring agents to own the assets they work with is one way to incentivize proper care of those assets. However, when agents' behavior can be more easily monitored, employee asset ownership may no longer be necessary. When on-board computers were introduced into long-haul trucking, this is exactly what happened: driver ownership decreased.
Weaver, Jeffrey (2021) Jobs for Sale: Corruption and Misallocation in Hiring American Economic Review, 111(10):3093-3122.
This paper studies the consequences of corrupt hiring in a health bureaucracy in the rural area of a large developing country. Hires pay bribes averaging 17 months of salary, but contrary to conventional wisdom, their observable quality is not necessarily lower than the merit-based hires that would likely have occurred instead: it depends on whether abler applicants have greater or lower ability to pay bribes. In this context, wealthier applicants were usually more productive workers, so bribes led to relatively good performance of hires.
Irwin, Neil, (2017). “To Understand Rising Inequality, Consider the Janitors at Two Top Companies, Then and Now,” New York Times, September 3.
Compares the life patterns of two janitors working at Kodak and Apple, with the shift to a contracting economy.
Goldschmidt, Deborah and Johannes F. Schmieder, (2017). "The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure." Quarterly Journal of Economics 132 (3), pages 1165-1217.
Investigates the effect of outsourcing on wage inequality by following jobs that are moved outside the boundary of lead employers to contracting firms. Using administrative data from the universe of social security records in Germany, it shows that wages in outsourced jobs fall by approximately 10–15% relative to similar jobs that are not outsourced.
Anderson, Stephen J. and David McKenzie. 2022 Improving Business Practices and the Boundary of the Entrepreneur: A Randomized Experiment Comparing Training, Consulting, Insourcing, and Outsourcing Journal of Political Economy Volume 130, Number 1 January 2022
Should small entrepreneurs learn how to do their own finance and marketing, or accomplish these tasks by insourcing workers or outsourcing tasks? Using a randomized experiment in Nigeria, the authors found that insourcing and outsourcing both dominate training the entrepreneur and do at least as well as business consulting at half the cost.