The Equilibrium Organization of Labor

We look for the equilibrium organization of labor. The environment has two critical features: (a) Multilateral matching allows gains from specialization, but players incur specific set-up costs each time they are matched with a new trading partner. (b) Bilateral relationships economize on set-up costs, but are burdened by bargaining costs. Under weak conditions, four mechanisms weakly dominate all others: markets, employment with negotiated wages, employment with market wages, and bilateral sequential contracting. For each mechanism, we characterize the tasks traded in it and the players participating. The predictions depend on several factors that do not play a role in other contemporary theories of organization.