Labor contracts are rules of governance between workers and employers over time. The efficiency of the transaction and the relationship can be affected by the provisions of the contract. It is argued that the characteristics of the firm and the workers determine what kinds of contracts and governance of the provisions of contracts are most efficient. Among other results, it is argued that collective bargaining, together with grievance procedures and arbitration, is the most efficient form of labor contracting and governance for large firms with skilled work forces.