Literature Review and Hypotheses Development. Contractual arrangements are well recognized by Xxxxx’x thesis “The Nature of the Firm” (1937). Scholars indicate that contractual agreement is not enough for the proper employment relationship (Xxxxxxxxxxx, 1984; Xxxx, 1993). Employer can practice his/her authority to give employees directions, but it may cause alienation of the employees and further it is not able to override employee’s autonomy. This is because employer’s authority does not enable himself/herself to be put in a position to decide what employees are going to do. Therefore, employer’s authority has restricted power to plan employee’s individual pay-off. Therefore, it is better to assume that a contractual exchange without well-defined limits allow residue subjective power to the employer and to the employee. Based on the residual rights most of the employees who have competencies and skills may seek opportunistic behaviour (Xxxx, 1993) comparing to less experienced and less skilled employees in the business organizations. For this reason, the authority holds limited rights (at least partially) to direct these employees towards production activities by using its only legal power of control. In this sense, residual rights situation of each party creates an independent subjective probability that is beyond the control or sanction power of the contractual agreement. If one party does good or wrong thing it will affect the other party and vice versa. Now the situation of employment relationship is based on the assurance or agreement between an employer and an employee. Since, “the person with assurance game preferences will behave cooperatively as long as he can be assured that the other person will behave like cooperatively” (Nida-Rumelin, 1997, p. 122). If one party chooses his/her actions ignoring other party’s existence, and then the other party also does a same action. If one party tries to dominate or exploit other party, then other party also chooses non-cooperation as their dominant strategy. Thus, important to understand that the incomplete contracts intensifying exploitation capability of the other party through following an opportunistic behaviour, if both not select cooperate strategy. As discussed by Xxxxxxx (1964) and Xxxxxxxxxxx (1984), contract is not complete on knowledge specificity and the employee’s effort side that creates residual subjective power to the employee. These residual rights are allowed to have a free choice power to the both party. In fact, ethic based behavio...
