Berkeley-Haas and IZA

We study contractual arrangements that support e ¢ cient production in a knowledge-intensive economy. Such production is plagued by informational problems, since both the di ¢ culty of the questions posed to experts and the skill of those experts are hard to as-sess. We show that spot markets are, in general, not e ¢ cient since lemons (in this market, self-employed agents with intermediate skills) cannot be appropriately excluded. However, an ex-ante, \u85 rm-like contractual arrangement, involving hierarchies in which experts are full residual claimants of output and compensate non-experts via incentive contracts, is guar-anteed to deliver the \u85rst best (uniquely so whenever some agents are self-employed). This simple characterization of the optimal ex-ante arrangement suggests a rationale for the or-ganization of \u85rms and the structure of compensation in knowledge-intensive sectors.