Tuesday, 17 February 2015

A firm with no employees is not a firm

or so says Jim Rose at the Utopia - You are standing in it! blog.

As a practical notion the statement is ok but as a theoretical statement it is not.

The most obvious counter to it is the Grossman-Hart-Moore approach (or property rights approach, also sometimes called the incomplete contracts approach) to the firm under which a firm is defined to be a collection of jointly-owned (non-human) assets. Ownership of an asset is the possession of the residual control rights over that asset. So a firm could involve having no employees, it would just have owners and assets. Some worker cooperatives would be like this.

This means, for example, that the distinction between an independent contractor and an employee, if there is one,  turns on who owns the non-human assets with which the agent works. An independent contractor owns his own `tools' while an employee does not.

Note also that ownership does not involve having residual income rights. One problem with using income rights as a definition of ownership is that they are too easy to contract away. Consider, for example, a manager who is on an incentive contract which involves him getting a percentage of the profits of the firm. This makes him a residual claimant to the firm's profits but does not make him an owner.

1 comment:

Jim Rose said...

thanks, I did mention partners as an alternative to employees, albeit in passing, but I did mention it.