A theory of codetermination

Summary and conclusions This paper has developed a framework of theory within which codetermination, collective bargaining, individual bargaining, and workers' management may be compared. This has required a rather long digression on the theory of labor contracts in general when effort is endogenous but is wholly specified by the contract (section II) and when effort is multidimensional and labor contracts are incomplete (section III). When labor contracts are incomplete, suboptimization behavior results, and this in turn implies inefficiency. The inefficiency is displayed in a maximization problem by a structure which formally resembles the Lipsey-Lancaster second-best solution. Codetermination permits improved efficiency by creating a context of joint management decision in which some of the free variables may be jointly determined, with the result that some second-best constraints are relaxed. Thus the theory allows a possibility that power-sharing can in itself shift the effort-productivity frontier outward. This is an empirical question, of course, but one which is excluded from consideration by theories in the neoclassical and Illyrian tradition which are based on homogenous labor and complete labor contracts. Thus, the theory set forth here should supplant the less general neoclassical and Illyrian hypotheses unless and until evidence is offered which supports those hypotheses.The author is indebted to an anonymous referee for several suggestions which improved the paper, to W. Lynn Holmes and Paul Rappoport of Temple University and to Samuel Shrager of Temple University and Vilanova University for clarifying discussions on several aspects of the paper. The author is also indebted to other Temple University colleagues and to other scholars too numerous to mention for their help and encouragement. Errors and omissions are the fault of the author.