When Should a Firm Employ its Workers? A Relational Contracting Approach

Schöttner, Anja and Harvey Upton

No 19688, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A principal hiring an agent chooses between employment and self-employment. Under employment, the principal can control the manner in which the agent performs the assignment (the ‘work design’), whereas this is legally forbidden under self-employment. Due to incomplete contracts, the relationship is governed by relational agreements, which are influenced by the allocation of control. We show that employment typically results in an over-demanding work design, compared to an under-demanding work design under self-employment, and that employment relationships are more rigid and better suited to favorable production environments. We further examine the impact of taxation, minimum wages, and formal performance pay.

JEL-codes: D86 L23 L24 M55 (search for similar items in EconPapers)
Date: 2024-11
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