ABSTRACT
Mr Boss decides to set up a business to earn profits. To be precise, he decides to use workers to produce pins. The perfect world in which Mr Boss lives has certain peculiar characteristics. There are many workers who, to avoid unemployment, are eager to work for a wage. All individuals are self-interested but loyal, and nobody conceals information. Both Mr Boss and his workers are risk neutral. It is not difficult for anyone to collect the information necessary to take a personal decision, nor does anyone find the economic calculations complicated. All agreements are simple and there are no transaction costs. Furthermore, whatever the technique used to produce pins, the means of production and working skills are not tied to the production of pins and can be disinvested at any time without loss of value, apart from normal depreciation. Finally a criterion of valuation is in force, called ‘the principle of equivalence’, according to which the price of any commodity coincides with its production cost and the present value of its prospective yields. Mr Boss has a major problem: what kind of agreement should he propose to the workers to make them produce profits for him? He considers several options.
