Contracting out, public policy and entrepreneurship

Relatively little is known about the impact of public policies on the decisions of firms to contract out parts of their production, despite widespread growth in this practice. The present paper uses a simple principal-agent model to explore the effects of various public policies which affect employers' incentives to outsource by re-grading their employees as independent self-employed contractors. Minimum wages are predicted to increase contracting out, as are payroll and income taxes under several plausible conditions, including worker preferences exhibiting constant relative risk aversion.