Authority in employment contracts: A bilateral bargaining model

Abstract

This paper takes a model of the employment contract which is incomplete in the sense that the required effort level is not exactly specified when employment is agreed and in which each worker negotiates their own contract with their employer. Given the incompleteness of the employment contract, residual rights of control over labour need to be specified. This paper analyses the allocation of these residual rights of control. It is argued that the equilibrium employment contracts will tend to give the employer residual rights of control over labour if workers are potential substitutes and give workers residual rights of control if workers are complements. However, it may not be the case that the equilibrium contracts maximise the available social surplus; in this case there is an argument for government intervention to regulate the form of employment contracts.