| Recognizing the growing awareness of limitation of Neoclassical economics in explaining economic organization in the world where transaction cost is positive, this study is an attempt toward extending the theory of labor relation to explain the evolution of labor institution in agricultural development by incorporating the concept of excess burden.; From field observations and empirical results which highlight on explicit measurement of transaction costs, patterns of labor contract evolution are inductively generated and are subsequently explained. Using simultaneous equation model with selectivity bias, determinants of choice of labor contract are identified. The saving in transaction costs i.e. supervision costs and recruitment cost is confirmed to be the determinant in the choice of labor contract.; Stylized facts from different countries show that labor contracts evolved from time-rate to piece-rate and finally to piece rate with team. In the path of development, the potential loss of profit due to failure to specialize reduces, however, the potential loss due to labor shirking increases as heterogeneity of the work force increases. Here, the concept of excess burden is introduced to refine the theory. Excess burden is defined here as the sum of profit loss due to failure to specialize and profit loss due to shirking. The profit-maximizing contract in a given economic environment is the one associated with the least excess burden. The study shows that a successful institutional innovation to lower excess burden is the very key to a successful technological transfer that bring about productivity gain in economic growth and development. |
