Multilateral Contracting and the Employment Relationship

This paper studies the structure of the employment relationship in organizations. It investigates the trade-off firms face between making commitments to their workforce as a whole (multilateral relational contracts), and making more limited commitments to individuals or smaller groups of employees (bilateral relational contracts). Multilateral contracts bind the firm more strongly to implicit commitments, improving motivation, but are difficult to adjust in response to changes in the environment. Bilateral contracts make workforce changes easier to implement. The framework helps to explain the use of relative performance evaluation, why firms rely on temporary employees, and the adoption of two-tier workforces.