Optimal Contracting and the Organization of Knowledge
Luis Garicano () and
Review of Economic Studies, 2015, vol. 82, issue 2, 632-658
We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient because lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs.
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
Working Paper: Optimal Contracting and the Organization of Knowledge (2014)
Working Paper: Optimal contracting and the organization of knowledge (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:82:y:2015:i:2:p:632-658
Access Statistics for this article
Review of Economic Studies is currently edited by Thomas Chaney, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Kurt Mitman, Francesca Molinari, Katrine Loken and Elias Papaioannou
More articles in Review of Economic Studies from Oxford University Press
Bibliographic data for series maintained by Oxford University Press ().