Working Paper: NBER ID: w2407
Authors: Sherwin Rosen
Abstract: The concept of transactions costs used by Coase in "The Nature of the Firm" is applied to the internal labor market of an organization. Under joint production it is shown that the number of transaction-specific prices necessary to decentralize labor allocations rises geometrically with the size of the work force. Complexity of calculation and costs of implementation constrains the possibilities for internal decentralization through a price mechanism and substitutes a more authoritarian system of allocation instead. These same issues of complexity and implementation costs limit the usefulness of agency theory as a conceptual framework for this problem. The analysis suggests that an internal labor market must be viewed in a more comprehensive framework of a personnel management system.
Keywords: Transaction Costs; Internal Labor Markets; Personnel Management
JEL Codes: J31; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| workforce size (J21) | complexity of labor market decentralization (J48) |
| complexity of calculation and costs of implementation (C60) | effectiveness of agency theory (G38) |
| complexity of calculation and costs of implementation (C60) | authoritarian system of allocation (P26) |