Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange

Key Points

• To analyze why formal employment relationships and internal labor markets emerge over spot-market contracting when work involves specialized, firm-specific skills.
• Theoretical modeling applying transaction cost economics to employment governance.
• Evaluation of contracting hazards arising from bounded rationality, opportunism, and specialized human capital.
• Comparative analysis of alternative contractual modes, including individual sequential contracting and collective internal labor markets.
• Idiosyncratic job tasks create site-specific skills and informational advantages that make individual spot contracting prone to opportunism and costly renegotiation.
• Internal labor markets with administrative wage rules, promotion ladders, and grievance procedures significantly economize on bounded rationality and mitigate transactional friction.