To prepare for a new class that I will be teaching this fall, I am re-reading some old papers. It struck me that although it was published in 1937, Coase's famous "The Nature of the Firm" paper has quite a bit to say about Uber and Lyft today. /1

Coase asked why, if the price mechanism is so good at organizing economic activity, do firms even exist? Why hire employees and not rely on the market to provide those services? The answers that Coase offered are that contracting is costly and contracts are incomplete. /2

So, it may be beneficial to integrate some of these contracts into a firm. The question then becomes what is the "boundary" of the firm. Now we come to Uber and Lyft and their drivers. /3

By classifying drivers as independent contractors, Uber and Lyft have moved these tasks from the firm into the market. This was made possible by technology, but it was *profitable* because it enabled Uber and Lyft to evade benefits and protections that employees normally get. /4

This, of course, rubbed people the wrong way. Currently, there is a showdown in California over whether it is legal for Uber and Lyft to classify drivers as contractors and not as employees. /5 https://www.theverge.com/2020/8/20/21377841/uber-lyft-california-judge-block-emergency-stay-employees

To me, the interesting question is why are relationships inside the firm so much more heavily regulated than relationships outside the firm? It is not clear that we should be legislating the boundary of the firm (like CA is attempting) or distorting it by labor laws. /6

If the legal protections of workers were the same regardless of whether the task is carried inside or outside of the firm, then the boundary of the firm would be determined more by Coase's fundamentals and less in an attempt to evade the laws. /7

Interestingly enough, Coase himself had noticed that gov't regulation can distort the boundary of the firm. It just seems that in his time the relationships *outside* of the firm were more heavily regulated than those inside of the firm, unlike today. /END