Regulation as a cause of firm fragmentation:the case of the Spanish construction industry

Team members organize their relationships to achieve efficient incentives in accordance with institutional constraints. When these constraints change, the rights and tasks of members are reallocated, generating a new contractual structure [or governance mechanism] that solves more easily the problem of collective action associated with team production. We show how this process has worked in the case of 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, and technical change does not seem to account for this process.