Organizations as incomplete contracts

… when the firm purchases labor, in a world of incomplete contracts it gains a property right only to an ill-defined and highly variable amount of labor power embodied in a human being.

This is John R. Commons’ “managerial transaction”, one of the key reasons firms work. Effectively, firms rely on the fact that contracts are incomplete in order to outperform markets.

The same is true for public sector organizations: incomplete contracts – the ability to tell someone to do something that isn’t in their wage-labor agreement (and that they’ll likely do it) – is why organizations can outperform spot labor markets.