Why Form or Join Organizations

Consider a small manufacturing organization with a boss-entrepreneur and a 

This is something of a puzzle tliat grows worse as we continue to ponder the two structures. There just don t appear to be many significant differences between them at first. Both structures make the same widgets both structures have the same number of people in the same roles. The only difference between them is that the organization chooses not to turn to the free market as frequently as does the confederation to hire its help (nor does the employee choose to turn to the free market to look for work as often as does the temp). In odier words, employers 

Note that this temporal commitment of the individual to the organization and vice versa is not necessarily some warm and fuzzy joining of hands. The search costs for better jobs or employees are simply too high to recommend more frequent attempts to find better ones. In other words, the initial time commitment comes at the behest of economics, pure and simple. There the matter can stand without going a step further, but in many situations the time breeds trust and mutual reliance, and it is this opportunity that is exploited by high-performance organizations. 

Transaction costs in employment are apparently balanced against the difficulty of finding a sufficiently good match between employer and employed. Here we build a simple quantitative model using straightforward engineering reasoning. 

Imagine that every time the widget entreprenem hires a new employee, a transaction cost C is incurred. The hiring of a successful employee results in the employer realizing a marginal value V per time unit, but the probability of success in hiring is assumed to be probability p on each hire. Thus the expected profit P per time period to the employer may be written as follows  

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