The Comparative Advantages of Firms, Markets and Contracts: a Unified Theory

Abstract

The most efficient labour market mechanism depends on the advantages of specialization, workers’ costs of switching between entrepreneurs, and the frequency with which needs change. Multilateral mechanisms are more efficient when specialization is more advantageous, when it is cheap for workers to switch between entrepreneurs, and when individual entrepreneurs cannot occupy a worker on a full-time basis. Given a bilateral mechanism, employment (a firm) is more efficient than contracts when in-process adjustments arise more frequently. There exist three regions in which firms, markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class.