DATE DOWNLOADED: Sat Mar 11 16:03:12 2023 SOURCE: Content Downloaded --- rom HeinOnline Citations: Bluebook 21st ed. Seth Oranburg & Liya Palagashvili, Transaction Cost Economics, Labor Law, and the Gig Economy, 50 J. LEGAL Stud. S219 (2021). ALWD 7th ed. Seth Oranburg & Liya Palagashvili, Transaction Cost Economics, Labor Law, and the Gig Economy, 50 J. Legal Stud. S219 (2021). APA 7th ed. Oranburg, S., & Palagashvili, L. (2021). Transaction cost economics, labor law, and the gig economy. Journal o --- Legal Studies, 50(2 (Pt. 2), S219-S238. Chicago 17th ed. Seth Oranburg; Liya Palagashvili, "Transaction Cost Economics, Labor Law, and the Gig Economy," Journal o --- Legal Studies 50, no. 2 (Pt. 2) (June 2021): S219-S238 McGill Guide 9th ed. Seth Oranburg & Liya Palagashvili, "Transaction Cost Economics, Labor Law, and the Gig Economy" (2021) 50:2 (Pt. 2) J Legal Stud S219. AGLC 4th ed. Seth Oranburg and Liya Palagashvili, 'Transaction Cost Economics, Labor Law, and the Gig Economy' (2021) 50(2 (Pt. 2) Journal o --- Legal Studies S219 MLA 9th ed. Oranburg, Seth, and Liya Palagashvili. "Transaction Cost Economics, Labor Law, and the Gig Economy." Journal o --- Legal Studies, vol. 50, no. 2 (Pt. 2), June 2021, pp. S219-S238. HeinOnline. OSCOLA 4th ed. Seth Oranburg & Liya Palagashvili, 'Transaction Cost Economics, Labor Law, and the Gig Economy' (2021) 50 J Legal Stud S219 -- Your use o --- this HeinOnline PDF indicates your acceptance o --- HeinOnline's Terms and Conditions o --- the license agreement available at https://heinonline.org/HOL/License -- The search text o --- this PDF is generated --- rom uncorrected OCR text. -- To obtain permission to use this article beyond the scope o --- your license, please use: Copyright In --- ormation Transaction Cost Economics, Labor Law, and the Gig Economy Seth Oranburg and Liya Palagashvili ABSTRACT The rapid growth o --- technology not only is creating innovative goods and services, but it is also altering the workplace and the traditional understanding o --- relationships between em- ployee and employer. This can be seen today with the rise o --- the gig economy and alternative work arrangements. Our paper seeks to explain how technology has reduced the transaction costs o --- contracting in the market. In particular, we identi --- y the innovations that have led to reductions in triangulation, trans --- er, trust, and measurement costs. These costs are relevant --- or creating greater exchanges between consumers and labor suppliers and, hence, more work --- or contractors and --- reelancers. Innovations that reduce measurement costs also reduce the --- irm's costs o --- outsourcing contract work relative to employing. We conclude with a discussion o --- the radical implications --- or labor law. You will never get to per --- ection because transaction costs are al- ways positive, but they can be reduced. (Epstein 2015a, p. 791) 1. INTRODUCTION Richard Epstein's scholarship connects a broad range o --- topics including law, economics, and society. In particular, Epstein has written extensively on labor regulations, with an emphasis on the virtues o --- contract-at-will employment. In his seminal work on the topic, he argued that parties SETH ORANBURG is Assistant Pro --- essor at Duquesne University School o --- Law and a Pro- gram A --- --- iliate Scholar at the Classical Liberal Institute at New York University School o --- Law. LIYA PALAGASHVILI is Assistant Pro --- essor o --- Economics at State University o --- New York, Purchase College, and a Research Fellow at the Classical Liberal Institute at New York University School o --- Law. We thank Richard Epstein, Michael Munger, two reviewers, the Coase-Sandor Institute --- or Law and Economics, and the participants and organizers o --- the con --- erence honoring Richard Epstein at the University o --- Chicago. We also thank the John Templeton Foundation --- or its support through a grant. The opinions expressed in this article are those o --- the authors and do not necessarily re --- lect the views o --- the John Templeton Foundation. [Journal o --- Legal Studies, vol. 50 (June 2021)] © 2021 by The University o --- Chicago. All rights reserved. 0047-2530/2021/5002-0025$10.00 S219 S220 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 should be permitted as o --- right to adopt the contract-at-will --- orm i --- they so desire because such --- reedom o --- contract advances both individual au- tonomy and e --- --- icient operation o --- labor markets (Epstein 1984). Epstein's earlier work laid the --- oundation --- or his de --- ense o --- the contract at will by arguing that workers' compensation should be the outgrowth o --- a volun- tary arrangement (Epstein 1982). Now we --- ind ourselves in a period o --- rapid change in labor markets as the traditional relationship between employee and employer is being disrupted by technological advancements, and the relevance o --- these la- bor laws are coming under scrutiny. Most notably, this change can be seen in the rise o --- the gig economy and the --- reelance movement. One estimate is that 15.8 percent o --- workers in the current labor --- orce en- gage in gig, contractor, or --- reelance work as their main source o --- income, which is a more than 50 percent increase o --- workers in alternative work arrangements as their main job --- rom 2005 to 2015 (Katz and Krueger 2016). Other measures indicate that there were 57.3 million --- reelancers in 2017-which means that close to 36 percent o --- the US labor --- orce en- gaged in --- reelancing, as either a main or side source o --- income (Edelman Intelligence 2017). When measuring the number o --- 1099-MISC (contrac- tor) versus W-2 (employee) tax --- orms, Dourado and Koopman (2015) --- ind that there has been a 22 percent increase in the use o --- 1099-MISC --- orms since 2000, and over that same period there was a decline o --- 3.5 percent in W-2 --- orm usage. Over the last --- ew years, --- reelance work has grown three times more than the growth o --- the US work --- orce (Edelman Intelligence 2017). However one measures it, there seem to be unprece- dented changes to the nature o --- work in the United States that appear to be accelerating. 1 Why might this be happening? Can we expect it to con- tinue? What does this mean --- or labor law? To answer these questions, this paper draws on the transaction costs --- ramework to understand how technological innovations have led to changes in transaction costs-in particular, reductions in triangulation, trans --- er, trust, and measurement costs. The --- all in these transaction costs creates increased direct exchanges between consumers and labor suppli- ers (herea --- ter, CLS exchanges) and hence more independent contractor types o --- work. Innovations that reduce measurement costs also reduce the --- irm's costs o --- outsourcing contract work relative to employing. These --- actors can help explain the rise o --- --- reelancing, contracting, and gig work today. I --- technological changes continue to lower these transaction costs, 1. For more on the growth o --- work --- or --- reelancers and contractors, see also Manyika et al. (2016) and MBO Partners (2017). LABOR LAW AND THE GIG ECONOMY / S221 there will be even greater growth in the number o --- contractors as CLS networks expand and --- irms rely less on inde --- inite long-term employment contracts --- or labor and instead substitute usage o --- the market. At the out- set, we acknowledge that the various reductions in transaction costs that we identi --- y in this paper are not the only --- actors leading to the trans --- or- mation o --- work today. Accordingly, the law needs to recognize that these --- ormerly alterna- tive --- orms o --- work may soon predominate in the labor market, and labor laws written in the 1930s may be outdated and inapplicable to the new type o --- jobs that are emerging today. It is time to revisit the Epsteinian insights on labor and discuss whether Epstein's arguments --- or re --- orming labor law are more or less merited given technological change and the growth o --- the gig and --- reelance economy. In particular, laws based on hours worked may not be applicable to a new economy where input mea- sures (hours worked) may no longer be the relevant units (Epstein 2019). Labor laws regarding health, retirement, and other bene --- its will also lose relevance as the employee-employer relationship dissipates, and a move toward a portable bene --- its regime may be the best solution. The paper proceeds as --- ollows: Section 2 introduces the --- ramework and identi --- ies the speci --- ic transaction cost mechanisms relevant --- or our analysis. Section 3 applies the transaction costs --- ramework to under- standing the technological innovations related to the growth o --- gig and contracting work. Section 4 discusses what these workplace changes mean --- or labor and employment law, and Section 5 concludes. 2. THE TRANSACTION COSTS FRAMEWORK Much o --- the literature on the study o --- alternative labor arrangements and --- irms' decisions to contract out labor has --- ocused on identi --- ying the characteristics o --- --- irms that will predict a pre --- erence --- or contracting out or sta --- --- ing up (Davis-Blake and Uzzi 1993; Kalleberg and Schmidt 1996; Uzzi and Barsness 1998). Other scholars have --- ocused on the characteris- tics o --- workers who pre --- er to be contractors instead o --- employees (Howe 1986; Williams 1989; Cohen and Haber --- eld 1993). Yet others have ex- plored market conditions that could predict more or less long-term em- ployment (Abraham and Taylor 1996; Weil 2014). One important theoretical --- ramework --- or the contracting versus em- ploying decision has its underpinnings in the transaction costs econom- ics literature, which has its beginnings in Ronald Coase's seminal paper S222 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 "The Nature o --- the Firm" (Coase 1937). Transaction costs re --- er to all costs associated with carrying out an exchange, which includes the costs o --- originating, negotiating, consummating, monitoring, and en --- orcing a contract --- or any given exchange. Coase explains how positive transaction costs are responsible --- or the creation and growth o --- --- irms. This is because it may be less costly --- or --- irms to set up and create one contract (an em- ployment contract) when a job has to be done repeatedly instead o --- creat- ing an in --- inite series o --- potentially costly contracts in the market. 2 In other words, transaction costs make the use o --- the market system somewhat costly --- or ongoing exchanges. From this, it --- ollows that the higher the cost o --- transacting across markets, the greater the advantage o --- organizing within the --- irm. Or the corollary: as transaction costs decrease, there will be a tendency --- or greater use o --- the market system rather than the --- irm. Coase's --- oundational work is ambiguous about the speci --- ics o --- transaction costs, but subsequent scholars investigated their particulars, identi --- ying concepts such as search, bargaining, and monitoring costs, among others (Alchian and Demsetz 1972; Williamson 1981; Cheung 1983; Grossman and Hart 1986; Holmstrbm and Milgrom 1991). The relevance o --- transaction costs --- or the gig economy is as --- ollows: i --- technological advancements can reduce the costs o --- transacting outside the --- irm (in the market) rather than inside the --- irm, this cost reduction can help explain the rise o --- contractor work. Munger (2015, 2018) is one o --- the --- irst to apply the transaction costs approach to one sector o --- the new economy, the sharing economy (such as Uber and Airbnb), and speci --- i- cally on the product and service side. We extend Munger's discussions to analyzing the labor market, and in doing so, we identi --- y the mechanisms and types o --- transaction costs relevant --- or understanding the increase in contractor, --- reelance, and gig work. In the --- ollowing sections, we explain how changes in the costs o --- triangulation, trans --- er, and trust impact di- rect CLS transactions (re --- erred to as a peer-to-peer relationship) and how changes in measurement costs impact the market between --- irms and labor suppliers, although these costs are generally applicable to both markets. 3 2. Coase (1937, p. 391) explains that the owner "does not have to make a series o --- contracts with the --- actors with whom he is co-operating within the --- irm, as would be necessary o --- course, i --- this cooperation were a direct result o --- the working o --- the price mechanism." 3. Changes in triangulation, trans --- er, and trust costs are most clearly illustrated by peer-to-peer transactions, because they can be quite high in the sort o --- one-o --- --- exchanges that are now --- acilitated by technology plat --- orms, although they likewise impact a --- irm's decision to hire or contract out --- or services. LABOR LAW AND THE GIG ECONOMY / S223 2.1. Triangulation Costs Triangulation costs are a category o --- transaction costs coined by Munger (2018) to encompass both search and in --- ormation costs (Dahlam 1979) and bargaining costs (Alchian and Demsetz 1972; Dahlam 1979). Search and in --- ormation costs re --- er to costs in determining what is available on the market, including in --- ormation about the ability and location o --- each counterparty. Bargaining costs are the costs o --- coming to an agreement between the parties. For example, when buying a home, the search costs are the costs associated with --- inding and determining the home's condi- tion. Bargaining costs are the costs o --- negotiating a price and the condi- tions o --- the transaction with the seller. Munger groups these two cate- gories o --- search and in --- ormation costs and bargaining into one, calling it triangulation costs. We --- ollow suit to simpli --- y the discussion. Taken together, triangulation costs include the costs o --- --- inding the counterparty and agreeing to the terms o --- the transaction. 4 We provide an illustration o --- how triangulation costs are relevant --- or peer-to-peer exchanges: person A wants to have a painting hung in his or her apartment, but the costs o --- --- inding person B, who is nearby and will- ing to hang the painting and has the ability to do so, and then negotiating the terms o --- agreement may be too high. I --- triangulation costs are too high, the exchange may not occur. In general, i --- the cost o --- discovering buyers and suppliers o --- a particular service and coming to an agreement --- or each transaction is high, then there will be --- ewer opportunities --- or exchange and thus --- ewer peer-to-peer transactions. Thus, our hypothesis incorporating technological change is as --- ollows: i --- technology can reduce the costs o --- both discovering one another and coming to an agreement, then there will be more peer-to-peer transactions, and thus more con- tracting o --- labor, in which a consumer directly pays a labor supplier --- or providing a particular good or service. 2.2. Trans --- er Costs Trans --- er costs are the costs o --- "trans --- erring payment and goods that [are] immediate and as invisible as possible" (Munger 2018, p. 9). Where tri- angulation costs re --- er to the ability to get in --- ormation about each party and to come to an agreement, trans --- er costs re --- er to the ability to process payments and to physically provide the good or service. This includes 4. We --- ollow the use o --- Munger's triangulation costs to simpli --- y the discussion, but the conclusion would be the same even i --- these costs were analyzed separately. S224 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 handling and storage costs, direct transport costs, costs o --- money trans- --- er or veri --- ication processes, and the legal constraints that --- urther impact the trans --- er o --- payments and goods and services. For example, person A knows that person B is willing and able to provide the service o --- hanging the painting, but person B does not have the ability to receive credit card payments. I --- person A has only a credit card, they may not be able to transact, because trans --- er costs are too high. Similarly, i --- person B needs to employ costly transport to per --- orm this service, that increases trans --- er costs, and again the parties will not transact i --- such costs are too high. In general, trans --- er costs rise inversely to the ease o --- trans --- er o --- payments and goods or services, so i --- the process o --- providing the goods or services and paying --- or them is less costly, then there will be more peer-to-peer contracting. 2.3. Trust Costs Even i --- person A and person B are easily able to --- ind each other and come to an agreement --- or hanging a painting, and they have --- ew problems with trans --- erring the service and the payment, there may still be signi --- icant concerns with having a stranger visit one's home or with the quality o --- the service rendered. These are trust costs, and i --- they are too high, then the peer-to-peer transaction may not occur. Trust re --- ers to the ability to outsource "assurance o --- honesty and per --- ormance" (Munger 2018, p. 9). Person A could --- ind out whether person B is skilled in hanging a painting and can be trusted to enter his or her home, but it could involve a costly process o --- calling neighbors, --- inding someone who might know someone who might know person B, and so --- orth. Person B might likewise be con- cerned that person A will --- ail to make the payment once services are ren- dered. When assuring trust is costly, parties may decide not to exchange. But i --- trust becomes easier to assess with less costly in --- ormation, then parties to a transaction will be more likely to exchange, thus expanding opportunities --- or buyers and sellers to contract with each other. In other words, i --- the costs o --- --- inding that each party can be trusted are lower, this --- urther increases peer-to-peer transactions. 2.4. Measurement Costs Important to the --- irm's decision to hire or contract is the ability o --- em- ployers to measure the per --- ormance o --- the worker or the output he or she produces. These are measurement costs, and they can be higher when multiple workers are engaged in a single project. Alchian and Demsetz LABOR LAW AND THE GIG ECONOMY / S225 (1972) discuss the theory o --- team production and explain how --- irms solve the di --- --- iculty o --- ascertaining individual contributions. Cheung (1983) ex- plains that since some components o --- a particular good or service are assembled in a way that makes the separation o --- workers' contributions costly, --- irms hire employees. In other words, i --- an individual worker's contributions are per --- ectly de --- inable and measureable, then --- irms could directly buy his or her out- put in the marketplace. But many outputs require joint or team produc- tion, in which it is di --- --- icult to ascertain individual contributions. In these cases, it is easier to employ workers and measure and monitor individual inputs ( --- or example, hours worked) as a proxy --- or outputs. For example, it is easier to commission a writer to produce a screenplay or a manu- script than it is to contract separately with many lawyers to structure an acquisition. Screenwriting is an individual task, so a --- irm can simply pay a screenwriter --- or a --- inished product. Structuring an acquisition requires many workers' e --- --- orts because it may require several thousand person- hours o --- work to be completed in a --- ew weeks' time, and it is hard to correlate an individual lawyer's e --- --- ort with a success --- ul result, so the ac- quirer will hire a law --- irm, and the --- irm will monitor the workers' inputs ( --- or example, billable hours). Thus, when measurement costs are lower, --- irms will tend to contract out rather than sta --- --- up (employ). I --- technology can lead to the per --- or- mance o --- individual workers being more de --- inable and measureable, then --- irms are more likely to contract out the labor than to hire an employee. Williamson (1981, p. 564) similarly re --- ers to this type o --- transaction cost but calls it "the ease with which the productivity o --- human assets can be evaluated."' 3. APPLICATION TO THE GIG ECONOMY Be --- ore we begin to apply the mechanisms and speci --- ic transaction costs to understanding the labor market side and the gig economy, we provide a description o --- how the sale o --- goods and services and the type o --- trans- 5. In the transaction costs literature, monitoring costs are a type o --- transaction cost that, i --- decreased, would lead to greater usage o --- contract labor. It is important to note, however, that i --- technology reduces the input-monitoring costs, this can lead to greater usage o --- employees rather than contractors, given other --- actors --- or why the --- irms are re- lying on the proxy measure o --- inputs rather than outputs. Cheung (1983) elaborates on this analysis. S226 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 actions have changed with new technologies. Such changes have created new sets o --- economic activities, --- or example, the sharing economy and the on-demand economy. 3.1. Descriptions o --- New Economies To contrast the new economies, consider how goods are created in a tra- ditional manu --- acturing economy. For a car, --- irst, coal and ore are mined and smelted to make steel. The steel has more value than the coal and ore did in the ground. Second, the steel is transported to an automotive --- ac- tory, where it has more value as a car door panel. Third, the door panel is incorporated with inputs --- rom other upstream producers such as glass windshields and electronic components to create a --- unctional car. A com- pleted car that can drive is worth more than the sum o --- its static parts. Fourth, the --- inished product (the new car) is transported --- rom a central- ized manu --- acturing --- acility in, say, Indiana, to retail auto dealers all over America, where it is more convenient --- or prospective buyers to test and acquire it. Fi --- th, salespeople at the dealerships in --- orm buyers about the car's --- eatures, help them secure --- inancing, and teach them to use the tech- nical --- eatures o --- the vehicle. Sixth, independent a --- termarket maintenance and repair service providers help keep the car running. Each step in this process, which can be visualized as a river on which inputs --- low --- rom up- stream supply to downstream sales, adds value to the product. In contrast, the sharing economy is based on resource reallocation. The resources that were extracted and sold in the traditional economy may be underutilized. For example, consider a vacant home. The home is built --- rom materials extracted via the traditional economy. It is sold to someone who later no longer has as much use --- or it, but it is not a good candidate --- or resale because o --- tax or other reasons. The vacant home is an underutilized asset. The sharing economy provides technological solu- tions to make better use o --- this asset: the Airbnb plat --- orm connects indi- viduals who have vacant homes with individuals who will pay to stay in them. Cars are also underutilized assets when they sit in driveways and park- ing garages. GetAround is a peer-to-peer car-sharing plat --- orm in which individuals borrow an idle car, and car owners place a piece o --- technol- ogy on their car that tracks its location and locks and unlocks it. With the tap o --- an app, owners can indicate when they want to make their car available or when they are taking it o --- --- the market. A borrower uses the app to --- ind available cars and unlocks them. When the borrower is LABOR LAW AND THE GIG ECONOMY / S227 --- inished, the app --- inds a new parking spot --- or the car, under a set o --- con- ditions --- or how --- ar the owner would like it to be --- rom the original loca- tion. The plat --- orm also processes payments and insurance in --- ormation and provides users' ratings. These are examples o --- the on-demand economy, a digital market- place that matches consumers' wants with providers to immediately de- liver those goods and services.6 It includes companies such as InstaCart, Handy, and Postmates; these plat --- orms connect buyers and sellers to all types o --- goods and services to be rendered on demand. Typically, on- demand economies utilize contract work precisely because the on-demand business models necessitate a --- lexible labor supply (Palagashvili 2017). A decade ago, these types o --- exchanges would have been too costly to --- acilitate, and it would have been easier to buy or rent a car in the traditional manner. But with new technologies-especially Web plat --- orm technology-peer-to-peer bike sharing, clothes sharing, and a host o --- other assets are now proli --- erating in the market. 3.2. Transaction Costs and the Gig Economy As technology is reducing transaction costs and allowing --- or the emer- gence o --- the sharing economy, peer-to-peer networks, and on-demand goods and services, it is also altering labor markets. Epstein recognized that this is precisely how the gig economy plat --- orms work: "The network is live, and thus able to make instantaneous adjustments in price to re --- lect changes in supply and demand. The apps are easy to use, and sign-up is costless" (Epstein 2015a). This remarkable reduction in transaction costs has sweeping implications --- or labor and its regulation. With the reduction in transaction costs, it is becoming more common --- or --- irms to rent workers rather than create long-term contracts with them (in a sense, to buy them). Meanwhile, consumers are increasingly buying labor directly-via Web plat --- orms-thus leading to the emergence o --- the gig economy. For example, Amazon Mechanical Turk (MTurk) is a Web plat --- orm that operates "a crowdsourcing marketplace that makes it easier --- or individuals and businesses to outsource the processes and jobs to a distributed work --- orce who can per --- orm these tasks virtually." 7 The MTurk plat --- orm --- acilitates posting job ads and o --- --- ering services, which makes it easier and cheaper --- or buyers and sellers o --- labor to --- ind each 6. The on-demand economy is de --- ined as the "economic activity created by technol- ogy o --- other companies or providers that --- ul --- ill consumer demand via the immediate and --- lexible provisioning o --- goods and services" (International Bar Association 2011, p. 6). 7. Amazon Mechanical Turk, Overview (https://www.mturk.com). S228 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 other. Amazon supports MTurk with a highly advanced Web payment system, and it incorporates a robust bilateral rating system that in --- orms people about the trustworthiness o --- market participants. In general, per- --- ormance o --- work via MTurk is cheap to observe: --- or example, a worker might be paid $1 to watch a 1-minute video and write the --- irst --- ive words that come to mind. It is easy to determine whether the video was played and words were entered. While the tasks currently per --- ormed on MTurk are generally mun- dane, they may become more complex as technology continues to reduce transaction costs o --- contracting in the market. In Oranburg and Pala- gashvili (2020), we point to how blockchain technology and smart con- tracts can --- urther reduce transaction costs and can lead to --- urther dissipa- tion o --- the employee-employer relationship. Munger predicts this as well; as technology continues to reduce transaction costs, "the very notion o --- a --- irm may start to be eroded. A group o --- people, each o --- whom has de- veloped a set o --- specialized skills and a reputation based on ratings on so --- tware such as LinkedIn, would be hired --- or a project" (Munger 2015, p. 206). 3.2.1. Triangulation Costs in the Gig Economy. Thanks to the Internet and speci --- ic so --- tware plat --- orms and agreements, the costs o --- discovering buyers and sellers have become so low that it has enabled opportunities --- or suppliers o --- labor to directly contract with consumers. This reduction in triangulation costs not only --- acilitates the peer-to-peer economy per- spective; it also in some cases diminishes the necessity o --- --- irms. Plat --- orm technology has driven down triangulation costs, making a broader range o --- work suitable --- or contracting arrangements. So --- tware used on these plat --- orms includes such --- eatures as advanced global positioning systems (GPS) techniques to easily locate consumers who want a particular service with suppliers who are willing to provide it. The so --- tware also allows --- or users to easily indicate pre --- erences, in- cluding the willingness to buy and/or sell at particular price points, which thus enables the algorithm to instantly --- ind a match between two parties. Quick and simple search --- unctions, internal messaging systems, and dash- boards to keep track o --- interested parties signi --- icantly increase the ability and reduce the cost to search and --- ind a particular buyer or seller. In this way, the technology reduces search costs and thus the ability --- or two par- ties to --- ind and match with one another. Furthermore, the plat --- orm is a --- ormal channel --- or standard provision LABOR LAW AND THE GIG ECONOMY / S229 o --- services. Contracting costs are reduced as terms are essentially crowd- sourced --- rom the --- eedback o --- millions o --- plat --- orm users, so that users converge to a --- ocal contract based on reasonable expectations. Further- more, in some cases, such as with Uber, the price is set by the plat --- orm, and that --- urther reduces the bargaining costs, which could be signi --- icantly high i --- a user incurred them every time he or she took an Uber ride. 3.2.2. Trans --- er Costs in the Gig Economy. With the innovations in credit cards, online payment systems such as Paypal and Venmo, and payment veri --- ication technologies, the trans --- er costs o --- payment have --- allen. This allows --- or companies to hold --- unds in escrow. In the case o --- Uber, the plat --- orm holds the rider's payment in escrow --- or the driver until the ride is completed, and the --- unds are automatically released when the desti- nation is reached. Drivers no longer have to worry that a rider will have insu --- --- icient --- unds to pay when the ride is over. Furthermore, the trans --- er o --- physical goods or services is made easier with location tracking and GPS technologies that can reduce the costs o --- moving the particular good or service. For example, the process o --- re- ceiving and providing a ride on Uber is simple: riders do not need to give directions to drivers to pick them up or to drop them o --- --- at their desig- nated locations. The so --- tware provides everything and includes in --- orma- tion about tra --- --- ic or construction problems that may get in the way o --- de- livering the service o --- a ride. These new technologies reduce the trans --- er costs, thus allowing more exchanges between consumers and suppliers o --- the service, hence the emergence o --- gig economy work. 3.2.3. Trust Costs in the Gig Economy. Gig economy plat --- orms employ rating and review systems that make it much easier to learn about the honesty and probable per --- ormance o --- a potential counterparty via in --- or- mation on the Internet. Depending on the so --- tware, there are personal pro --- iles o --- users where one can observe relevant in --- ormation that is a proxy --- or trust. In --- ormation about both buyers and suppliers is crowd- sourced and up-to-date, which means that i --- a particular driver is rated poorly at any given moment, that rating is automatically updated on the driver's pro --- ile. Drivers can also rate riders, so i --- a rider harasses a driver, that in --- ormation is added to the rider's pro --- ile. This robust two-way rating system employed by most gig economy plat --- orms provides valu- able trust in --- ormation that would be unavailable or too costly in a tra- ditional economy, where phone calls or personal knowledge is needed to ensure trust. Thus, with this technology, both parties have better in --- or- S230 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 mation about the counterparty be --- ore they agree to the transaction. In the example discussed above, in which person A would like a stranger to come into his or her home to hang a painting, TaskRabbit, the plat --- orm that enables this type o --- transaction, utilizes so --- tware to provide vetting and rating systems --- or both buyers and suppliers. Thus, new technology reduces the problem o --- trust, allowing --- or greater CLS transactions and hence more gig type o --- work. 3.2.4. Measurement Costs in the Gig Economy. Technology enables the creation o --- discrete outputs that can be separated into individual contri- butions and hence reduces the problem o --- measurement costs --- aced by employers. Innovations in so --- tware --- or automated surveys, aggregation o --- reviews, and big data also provide low-cost methods o --- measuring, thus allowing workers to be compensated directly --- or their per --- ormance. This can be best illustrated by innovations in so --- tware developing, which is the largest process that --- irms have outsourced in the --- orm o --- contractor labor. High-level decomposition o --- a so --- tware design technique called mod- ular programming, in which code is written in a set o --- discrete, indepen- dent, interchangeable modules, allows --- or the separation o --- individual contributions. Each module contains everything necessary to per --- orm just one aspect o --- the overall program's --- unction. This is distinguishable --- rom a monolithic application in terms o --- both code structure and industrial organization. With modular programming, no one person or team is re- sponsible --- or creating the whole program. Instead, the program is broken down into discrete projects. Each project can be completed by a small team or even one person. The success or --- ailure o --- each project can be easily evaluated by determining whether the module per --- orms its discrete --- unction. In other words, because o --- modular programming, so --- tware coding is much less o --- a team production exercise. Instead o --- the entire code either --- unctioning or not (which would make it hard to determine which programmer broke the code), modules-the output-can easily be measured and attributed to individual e --- --- orts. 4. CONSIDERATIONS FOR LABOR LAW Does the emergence o --- the gig and --- reelance economy have radical impli- cations --- or labor law? Labor law is predicated on people working as em- ployees. But the rise o --- plat --- orm technology that --- acilitates people work- LABOR LAW AND THE GIG ECONOMY / S231 ing together --- lexibly in independent-contractor arrangements challenges the relevance o --- labor law as currently de --- ined. The nature o --- the --- irm as --- irst articulated by Coase and built on by other scholars predicts that reductions in the transaction costs identi --- ied in this paper will lead to greater utilization o --- market arrangements --- or labor (that is, contract- ing out). We discussed the speci --- ic technologies that are leading to the reduction o --- those transaction costs and the theoretical reason why the technologies are creating more contract work and decentralizing labor markets. These --- actors, according to Coase, will result in a shrinking o --- the --- irm and more contracting on the market --- or labor. This means --- ewer employees and more independent contractors. And that, in turn, means --- ewer --- irms and people who are subject to labor law. Although we predict an expansion o --- the labor contract at will in this new economy, the Fair Labor Standards Act o --- 1935 and other labor laws and regulations do not accommodate a world in which most work- ers are legally de --- ined as independent contractors. In --- act, those laws have the perverse e --- --- ect o --- discouraging employers --- rom hiring employees and encouraging them to instead use contract labor. This issue is especially pressing now that gig economy workers such as Uber drivers, who con- tractually agreed to be classi --- ied as independent contractors at the incep- tion o --- their work arrangement, are suing to retroactively be classi --- ied as employees and to receive employment bene --- its. A judicial --- iat against the use o --- independent contractors thus threatens to destroy the labor inno- vation that is the gig economy. As Epstein claims, "Now that labor mar- kets are extensively regulated, the private evolution [o --- the relationship between employees and employers] has been brought to a halt" (Epstein 2015b). I --- courts cast doubt on the en --- orceability o --- independent contrac- tor and at-will work agreements, the entire gig economy could disappear. Moreover, in addition to the general distortions to labor markets caused by labor regulation, some o --- these labor laws, such as minimum- wage laws and overtime regulations, may not even be applicable to a new economy in which input measures ( --- or example, hours worked) are no longer the units --- or payment. Epstein (2019) discusses how re- cent minimum-pay laws in New York City impacting --- or-hire vehicle drivers are causing challenges --- or gig economy ride-sharing workers who drive with multiple plat --- orms at any given hour; such workers receive pay per ride rather than per hour to better align incentives --- or shorter trips. Moreover, hourly pay arrangements misalign incentives, as Epstein (2018, p. 51) argues: "The only possible chance o --- making this scheme S232 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 work --- or people who work --- or a single company is to work exclusively o --- --- the time reported --- or each, which o --- course gives drivers a perverse in- centive to slow down their trips." Since the nature o --- the gig economy o --- - ten involves per-output rather than per-hour pay ( --- or reasons that also in- clude working with multiple plat --- orms in any given hour), Epstein (2018, p. 51) right --- ully argues that "[t]he di --- --- iculty o --- converting piece rate into hourly wage is a thousand times more di --- --- icult in this context than it is on the --- actory --- loor." Harris and Krueger (2015) also discuss this problem o --- immeasur- ability o --- work hours, as many --- reelance and gig workers do not have standard work hours and the boundary between work and nonwork has dissolved. In some sense, these jobs look more like those o --- academics (with no real boundaries between work and nonwork) than o --- manu --- ac- turing workers clocking in --- or a clear 9-5 pm work shi --- t, which makes it even more di --- --- icult to apply traditional overtime-pay regulations. Harris and Krueger also point to --- urther challenges --- or labor regulations o --- " --- or whom?" work, since --- reelancers and contractors already work --- or many di --- --- erent institutions and individuals simultaneously. In their proposal --- or re --- orming labor laws --- or gig economy workers, Harris and Krueger (similar to Epstein) argue that it makes little sense to apply hour-based rules such as the minimum-wage and overtime regulations to contractors, --- reelancers, and gig economy workers. In theory, though, minimum-wage regulations could be updated as minimum price per output that work- ers could be --- orced to charge. However, this would be counterproductive --- or the new economy because it would inter --- ere with the process o --- how underutilized resources have become increasingly utilized in the gig econ- omy. In the above example o --- GetAround, i --- regulations required that all car owners charge above a certain price, then many o --- them will be priced out o --- the market, and their cars will continue to sit idly in their driveways. As more workers and employers e --- --- ectively opt out o --- labor law by engaging in alternative work arrangements, the --- orce o --- labor law does seem to be coming to an end. The e --- --- orts thus --- ar to --- orce workers and employers to be in an employment relationship and to retroactively re- categorize independent contractors as employees has resulted in turmoil in the courts and the markets, but little good has come --- rom trying to --- orce the square peg o --- how people work today into the round hole o --- 1930s-era labor law (Palagashvili 2017). E --- --- orts to apply hours-based la- LABOR LAW AND THE GIG ECONOMY / S233 bor regulations to contractor-type work, which is o --- ten based on pay per output, can create --- urther problems --- or the new economy. Instead, there should be radical re --- orms to labor law that --- ocus on developing a regime that works --- or the workers who are voluntarily de- ciding to participate in this new economy. This requires divorcing the bene --- its that workers receive --- rom employment --- rom any one employer. Presently, many i --- not all o --- the bene --- its associated with work are tied to a speci --- ic employer. This can be problematic as more work becomes contract-based and the legal structure continues to encourage employer- provided bene --- its; more workers may be --- aced with less health insurance coverage and --- ewer other employment bene --- its. Labor regulations need to move toward allowing and encouraging portable bene --- its plans. The move toward a portable bene --- its solution will be --- acilitated i --- employ- ment bene --- its are unbundled (Oranburg 2018). Presently, employment comes with a rigid bundle o --- bene --- its-including health insurance, li --- e insurance, disability insurance, personal days, sick days, retirement plan contributions, and more-which are expensive and redundant when a worker has multiple jobs. As more workers turn to gig work on mul- tiple plat --- orms, --- lexible and portable employment bene --- it packages will become necessary. Interestingly, private portable bene --- its are already beginning to appear among retirement bene --- its. Companies such as Honest Dollar are provid- ing competitive individualized 401(k) bene --- its plans to contractors and --- reelancers. This evidences some market demand --- or the legal change that we recommend. We have suggested a --- lexible approach to labor unions (Oranburg and Palagashvili 2020) and a new classi --- ication o --- shared worker that un- bundles the rights and responsibilities o --- employment (Oranburg 2018). Further research is needed to investigate the speci --- ics o --- how a portable bene --- its regime can be implemented --- or workers in the new economy. 5. CONCLUSION In the spring 1988 special issue o --- the Journal o --- Law, Economics, and Organization celebrating 50 years o --- Coase's "Nature o --- the Firm," Rosen (1999, p. 53) posits that i --- --- actors such as monitoring costs, joint production, or transport costs did not exist, then it would be "di --- --- icult S234 / THE JOURNAL OF LEGAL STUDIES / VOLUME 50 (2) / JUNE 2021 to imagine why complete decentralization o --- labor markets would --- ail to achieve e --- --- icient allocations. Most workers would be, in some sense, sel --- -employed." Thirty years a --- ter that publication, are we beginning to see the onset o --- just that type o --- decentralized world created by the broader reduction in transactions costs due to technological change? While --- irms may not completely dissipate, they may shrink, and there may be a general shi --- t away --- rom sta --- --- ing up and toward contracting out as technology continues to reduce transaction costs. We do not claim that technological change will cause traditional em- ployment to dissipate completely, as there are a number o --- countervailing --- actors. O --- course, there are also --- actors beyond transaction costs that would encourage --- irms to contract out instead o --- sta --- --- up.8 Epstein in par- ticular has extensively elaborated on the regulatory costs o --- employment. Use o --- the state regulatory apparatus to cause a wealth trans --- er --- rom em- ployers to employees, Epstein argues, will inevitably --- ail because private actors will pre --- er to engage in regulatory arbitrage. Indeed, the legal risks associated with terminating an employee, the mandatory bene --- its that must be provided to employees, and the statutory rights o --- employees to collectively bargain are all costs that --- irms must bear when they sta --- --- up instead o --- contracting out. The decision to contract out may thus be understood as a type o --- regulatory arbitrage in which it pays to avoid the state's regulatory apparatus. To the extent that regulatory arbitrage is more e --- --- icient --- or private actors than compliance with the regulation, private actors will do otherwise than comply. The rise o --- the gig and --- reelance economy has some drawbacks as well. Epstein once argued that the mechanisms in contract-at-will employment are sel --- -en --- orcing and thus labor law is not necessary because "[g]etting a new employee is di --- --- icult, as is --- inding a job, so that both parties have an incentive to preserve the relationship" (Epstein 2015a, p. 795). This argument is less true today than when he wrote those words. The gig economy has made both getting a new employee and --- inding a new job easier. As a result, parties have --- ewer incentives to preserve their relation- ship now than previously. Indeed, employers are struggling with employ- ees ghosting, in which they simply --- ail to show up --- or work, never to be heard --- rom again. Moreover, the cost o --- getting a worker or --- inding a job is likely to continue to decline as the gig economy grows, while the em- ployment market may become more anonymous. There --- ore, to the extent 8. For example, there are sociological --- actors such as changing attitudes toward the nature o --- work with the rise o --- the creative class (Florida 2012). LABOR LAW AND THE GIG ECONOMY / S235 that we --- ound com --- ort in in --- ormal constraints on employers' and work- ers' behavior when imposing labor regulations on the traditional econ- omy, our com --- ort level may decline as transaction costs decline and lead to more gig work. 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