Microfoundations of the Conflict Theory of the Firm (Principal-Agent, Marxian, Labor).

Abstract

The symbiotic relationship between the mainstream economic theory of information and uncertainty and some aspects of neo-Marxian economic theory is explored. First, results from the principal-agent literature are used to criticize the conflict theory of the firm as developed in the neo-Marxian literature. The central contention is that a coherent theoretical account of the phenomena addressed in this literature depends on the assumption that workers possess superior information concerning the production process. Second, the capitalist firm is modelled as a finitely-repeated principal-agent game in which the agent: (1) acquires private information about the production process; (2) cannot be compelled to work under conditions which preclude attainment of the reservation utility level, and cannot be made to post a bond; (3) is costly to replace; and (4) is paid after each round of play according to a schedule chosen by the principal for that period. The game's solution is presented and characterized. Conditions are shown to exist under which the agent is not induced to reveal her private information until some interior point of the game. That is, in the language of information theory, there exists no direct mechanism by which to generate the allocations achieved in this game; in the language of conflict theory, workers restrict output in order to preclude further exploitation. Under these conditions, the expected payoff to the principal is shown to be inversely related to the agent's level of skill, even though skill raises productivity and is public knowledge. This result establishes the choice-theoretic foundation of Braverman's "labor degradation" hypothesis. This research offers a new interpretation of labor skill which bears important economic implications. Insofar as skilled laborers have superior information about production and are costly to replace, their employment within a system of capitalist production relations implies a tradeoff between higher productivity and higher agency costs. Exploring the ramifications of this tradeoff is the task of an exciting program of theoretical and empirical research.