Separating contract from governance

This paper contends that there is an important distinction between governance structure and contractual form, and that organizational boundaries, defined by governance structures, need not explain contractual form. The basic idea is that governance refers to the general environments and instruments...

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Bibliographic Details
Published in:Managerial and decision economics 2000-03, Vol.21 (2), p.47-61
Main Author: James Jr, Harvey S.
Format: Article
Language:English
Subjects:
Contract incentives
Contracts
Corporate governance
Cost incentives
Costs
Decision making
Economics
Employee leasing
Employment
Enterprises
Governance
Incentive pay
Incentives
Management
Monitoring costs
Organization
Organization theory
Organizational behaviour
Organizational structure
Quality circles
Studies
Transaction costs
Wages
Wages & salaries
Workers
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Summary:This paper contends that there is an important distinction between governance structure and contractual form, and that organizational boundaries, defined by governance structures, need not explain contractual form. The basic idea is that governance refers to the general environments and instruments that structure and 'govern' specific terms of trade negotiated in 'contracts'. Problems of verifiability and observability of contractual performance are hypothesized to drive the differential effects on governance structure and contractual form. Specifically, transaction cost factors known to result in employment as a general governance structure do not automatically result in contracts characterized by the payment of fixed-wages. Instead, incentive pay and the delegation of decision-making authority to workers may be preferred by firm owners. The paper proposes that the relationship between a firm and a worker involves a two part decision-making framework in which one choice is the type of governance that structures the second choice regarding the specific characteristics of the contract linking the worker to the firm.
ISSN:0143-6570
1099-1468
DOI:10.1002/1099-1468(200003)21:2<47::AID-MDE967>3.0.CO;2-5