Econometrica: Jul 1951, Volume 19, Issue 3

A Formal Theory of the Employment Relationship

https://doi.org/0012-9682(195107)19:3<293:AFTOTE>2.0.CO;2-2
p. 293-305

Herbert A. Simon

A distinction is drawn between a sales contract and an employment contract, and a formal model is constructed exhibiting this distinction. By introducing a definition of rational behavior, a method is obtained for determining under what conditions an employment contract will rationally be preferred to a sales contract, and what limits will rationally be placed on the authority of an employer in an employment contract. The relationship of this model to certain other theories of planning under uncertainty is discussed.

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