Paul R. Milgrom

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Discussion Paper

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When changing jobs is costly, efficient employment arrangements are characterized by complex contracts, rather than simply wages. Under these contracts, workers are not generally fully compensated for the effects of post-employment events or decisions. As a consequence, if there is a central office executive with discretionary authority to make decisions, employees will be led to waste valuable time in attempts to influence his decisions. Efficient organization design balances these “influence costs” against the benefits of improved appraisal, coordination, and planning that such an executive can provide. Identifying influence costs requires first identifying the kinds of decisions about which employees will care. We identify several: with efficient employment contracts, employees prefer more on-the-job consumption and better opportunities to learn and display their abilities and to acquire human capital. They also prefer to occupy jobs where continuity of employment is particularly important to the employer, because such jobs carry higher wages. Applications of our perspective, which focuses on influence processes and the trade-off between influence costs and improved decisionmaking appears to have wide and fruitful application to questions or organization theory, industrial organization, contract theory, and related areas.

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