Division of Labor in Multi-business Firms: Human Capital, Job Design, and Labor Contracts

Birger Wernerfelt (MIT)

Abstract: We ask how division of labor is enhanced in multi-business firms. What human capital do the workers acquire, how are their jobs designed, and under what kinds of contracts do they work? To answer the questions in a way that is consistent with the existence of multi-business firms, we develop a simple model with endogenous human capital acquisition, job design, labor contracts, and firm size. We find conditions under which several different sets of human capital and job designs will be observed and characterize the mechanisms in which each is traded. The mechanisms used in equilibria include markets of different sizes, employment in single- and multi-business firms, and bilateral non-employment relationships. When they exist, multi-business firms allow workers to acquire human capital in, and work on, a narrow set of services, and they can therefore use dedicated employees to perform services that smaller firms buy in the market or get from employees with broader job descriptions. The theory of multi-business firms extends to factors of production other than labor and implies that firms diversify to leverage excess capacity of inputs that, because of sub-additive transactions-costs, cannot be traded in fractions or rented for short periods. As a test of this, we look at a sample of acquisitions and show that acquirers change the behavior of their targets to more closely resemble themselves.