Regulation as Cause of Firm Fragmentation: The Case of the Spanish Construction Industry

Team members organize their relationship to achieve efficient incentives in accordance with the institutional constraints. When these constraints change, members’ rights and tasks are reallocated, generating a new contractual structure or governance mechanism, be better able to solve the problem of collective action associated with team production. We show how this process has worked in the case of the Spanish construction firms, in which more restrictive labor and tax regulations have induced parties to substitute market contracts for labor contracts because of the need to avoid moral hazards. We argue that this explains the increased fragmentation of the Spanish construction industry. On the contrary, technical change does not seem to account for this process.