Header

UZH-Logo

Maintenance Infos

Use and abuse of authority: A behavioral foundation of the employment relation


Fehr, Ernst; Schmidt, Klaus; Bartling, Björn (2013). Use and abuse of authority: A behavioral foundation of the employment relation. Journal of the European Economic Association, 11(4):711-742.

Abstract

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.

Abstract

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.

Statistics

Citations

5 citations in Web of Science®
6 citations in Scopus®
Google Scholar™

Altmetrics

Downloads

2 downloads since deposited on 18 Apr 2013
0 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:18 Apr 2013 10:50
Last Modified:07 Dec 2017 19:22
Publisher:Wiley-Blackwell
ISSN:1542-4766
Free access at:Related URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.1111/jeea.12017
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2175701 (Organisation)
http://dx.doi.org/10.5167/uzh-67108
Other Identification Number:merlin-id:7953

Download