The O-Ring Theory of the Firm

We develop an O‐ring production function characterized by specialization and division of labor and where shirking or negative shocks can have major adverse consequences. We show that when the principal can monitor individual output, the firm tends be large (potentially larger than first best), with a high degree of specialization and division of labor, weak incentives, and low pay as in traditional nonunion manufacturing. Moral hazard can only limit the size of the firm relative to the first best when the principal can only monitor team output, in which case the firm has the opposite characteristics.


Publication Date:
Feb 01 2018
Date Submitted:
Jun 21 2019
Pagination:
82-101
Citation:
Journal of Economics and Management Strategy
27
1

Note: The file is under embargo until: 2020-12-31



 Record created 2019-06-21, last modified 2019-08-05

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