Wednesday, 16 January 2008

Incentives matter: but is it true? file

From Steven N. S. Cheung's "The Contractual Nature of the Firm", Journal of Law and Economics, Vol. 26, No. 1. (Apr., 1983), pp. 1-21.
As examples of the gain from collaboration and the difficulty of delineating contributions, Alchian and Demsetz cite the examples of loading and of fishing. My own favorite example is riverboat pulling in China before the communist regime, when a large group of workers marched along the shore towing a good-sized wooden boat. The unique interest of this example is that the collaborators actually agreed to the hiring of a monitor to whip them. The point here is that even if every puller were perfectly "honest," it would still be too costly to measure the effort each has contributed to the movement of the boat, but to choose a different measurement agreeable to all would be so difficult that the arbitration of an agent is essential. (p.8)
Anyone know if this story is true?

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