The Economics of Contracts: Theories and Applications

By Eric Brousseau; Jean-Michel Glachant | Go to book overview

14
Authority, as flexibility, is at the core
of labor contracts
Olivier Favereau and Bernard Walliser

1 Introduction

From an external point of view, the treatment of labor contracts by modern microeconomic theory reveals an exceptional uneasiness. Either they are entirely unspecific, similar to sales contracts for a commodity (except that the commodity consists now of a service, rather than a good stricto sensu): this is the road followed by general equilibrium theory (see Debreu 1959, § 2.4; for more subtle details, see Arrow and Hahn 1971, pp. 75–6); or they show some specific features, which makes them instances of more general types of contracts: insurance contracts (see Rosen 1985) or principal–agent relationships (see Salanié 1994). Indeed lawyers from any country in the industrial world (see Supiot 1994, part II) could only be surprised by the apparent reluctance of economic theory to deal straightforwardly with the essential property of labor contracts: the compliance of the salaried worker with his employer's authority (i.e. the acknowledged right of giving orders), in exchange for a predetermined wage, independent for the main part of the final proceeds.

Now the surprise is reinforced, not alleviated, by the fact that there is one – exactly one – such model of labor contract, in the economic literature: the one built by Simon (1951). Of course, some economists were aware that an authority relationship should lie at the heart of the contractual link between employer and employee (for an early mention, see Coase 1937). But it was not until 1951 that the first mathematical model of authority relationship was devised by Simon, drawing on the work of Barnard (1938), an expert in management and not an academic. What is even more surprising is that this pathbreaking paper had, to the best of our knowledge, no offspring at all: although quoted from time to time (Arrow 1974; Williamson 1975; Kreps 1990, 1996; Marsden 1999), it never gave rise to a new strand of literature, in spite of its appeal to realism. So there is a kind of a puzzle, also from an internal point of view: economic theory is most of the time silent about the defining feature of labor contracts and when at last a model appears to deal with that feature,

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