Simple Models of a Human-Capital-Based Firm: a Reference Point Approach
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Simple Models of a Human-Capital-Based Firm: a Reference Point Approach Paul Walker
Received: 24 May 2013 / Accepted: 16 June 2014 # Springer Science+Business Media New York 2014
Abstract One important feature of the knowledge economy is the increased importance placed on human capital, especially when dealing with the firm. We apply the reference point approach to contracts to the modelling of a human-capital-based firm. First, a model of firm scope is offered which argues that the organisation of a humancapital-based firm depends on the “types” of human capital involved. Having a firm based on a homogeneous group of human capital leads to a different organisational form than that of a firm which involves a heterogeneous group of human capital. Second, a simple model of a human-capital-based firm is discussed. Three organisational forms are considered: an investor-owned firm, a labour-owned firm and a market transaction involving the use of an independent contractor. Results are given that show when each of these forms is optimal. The effects of a firm’s size and scope on organisation are considered as is the question of why are there conversions from worker to investor ownership. Keywords Knowledge firm . Contracts . Theory of the firm . Reference points . Human capital JEL Classification D23 . D86 . L22
Introduction The importance of knowledge to production and firm organisation has long been recognised. In 1888, Edwin Cannan noted, with regard to knowledge and production, that,
Thanks to Ronda Kantor, Alan Woodfield and an anonymous referee for comments on the previous drafts of this paper. P. Walker (*) Christchurch, New Zealand e-mail: [email protected]
J Knowl Econ
The first, and perhaps the most important, of the three causes which have led to the increase of the productiveness of industry is increase of knowledge. As regards this cause it is scarcely necessary to say anything. Everyone can see how enormously the productiveness of industry has been increased by the growth of men’s knowledge of mechanics, chemistry, electricity, and other departments of science. In consequence of the growth of knowledge a few men can now do not only what it used to require many men to do, but also what could not formerly have been done by any number of men in any length of time (Cannan 1903: 12–3). while Alfred Marshall wrote 2 years later, with regard to knowledge and organisation, that Capital consists in a great part of knowledge and organization: and of this some part is private property and other part is not. Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants. Organization aids knowledge; it has many forms, e.g. that of a single business, that of various businesses in the same trade, that of various trades relatively to one another, and that of the State providing security for all and help for many. The distinction between public and private property in knowledge and organization is of great and growing importance: in some respects of more import
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