Employment, contracts, and the nature of the fir

This dissertation has its foundations in the literature on the nature of the firm. My purpose is to examine the types of the contractual relationships that exist between firm owners and workers. I investigate the conditions that make employment preferable to market-based contracting. The improvement offered by this research is a proposal that the choice of contractual relationship between workers and firms is not characterized primarily either by bilateral bargaining agreements over effort and pay or by arrangements in which workers are paid a wage and agree to subject themselves to managerial authority. Rather, firm owners may agree to grant substantial discretion to workers regarding the actions that they take. The granting of discretion, or agency, and the resulting form of contract, differ substantially from and may be considered substitutes to market contracting and managerial coordination.;I present a detailed example and model of the contracting decisions of an entrepreneur illustrating the difference among market contracts, managerial control within hierarchies, and contractual relations in which the workers are granted discretion over their activities. I also show that the common law distinguishes between employees who are agents and have substantial discretion granted to them and employees who are subject to control by supervisors; employers exploit this distinction through their use of formal employment contracts. In addition, I conduct a transaction cost analysis using data from an electronics producer to determine the extent to which the discretion of workers varies and how the management of workers is related to transaction cost factors known to affect a firm owner's choice between employing workers or using independent contractors. I find that transaction cost factors not only affect the likelihood that a worker will be employed, but also the degree to which workers are subject to managerial oversight. The implication of this analysis is that employment is not equivalent to control.;This research provides a theoretical framework relevant in understanding a number of important issues, including recent trends toward the empowerment of workers and the use of self-directed teams and quality circles, and the growing prevalence of temporary help supply firms and employee leasing services.