On the Nature and Scope of the Firm : An Adjustment-Cost Theory

I compare alternative game forms for situations where a buyer needs a sequence of human asset services. The hierarchy is defined as a game form in which the parties engage in once- and-for-all wage negotiation, the boss describes desired services sequentially, and either party may terminate the relationship at will. If many diverse and frequent adjustments are needed, this involves lower adjustment costs than any alternative game form. The price list game form is better when the list of possible adjustments is small, and the negotiation-as-needed game form is better when adjustments are needed infrequently. An empirical test supports the theory