Heigh Ho, Heigh Ho: flexible labor contracts with real option characteristics
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What is the strategic value of flexible labor contracts to workers? To answer this question, we examine workers’ labor supply decisions when choosing among alternative work arrangements ranging from permanent and pensionable to fixed-term, shift work, zero-hour, and on-call to gigs. We then introduce the concept of real options as a framework in which to analyze contract valuation from the workers’ perspective. For a non-standard employment contract to have real option value, the contract must both lead to future choices and enable advantageous access to future opportunities. Using case studies from a diverse set of industries and guided by the real options framework, we examine when contract flexibility contains valuable real option characteristics for the utility maximizing worker, or the profit maximizing firm, or, surprisingly, both.
KeywordsAlternative work arrangements Flexibility Gig economy Real options Standard labor contract
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