Incomplete Contracts and the Internal Organization of Firms

36 Pages Posted: 1 Mar 2013 Last revised: 26 Jun 2023

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: February 2013

Abstract

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

Suggested Citation

Aghion, Philippe and Bloom, Nicholas and Van Reenen, John Michael, Incomplete Contracts and the Internal Organization of Firms (February 2013). NBER Working Paper No. w18842, Available at SSRN: https://ssrn.com/abstract=2226814

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nicholas Bloom

Stanford University - Department of Economics ( email )

Landau Economics Building, Room 231
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Stanford, CA 94305-6072
United States
650-725-7836 (Phone)

HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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London WC2A 2AE
United Kingdom
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+44 20 7955 6848 (Fax)

Institute for Fiscal Studies (IFS) ( email )

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London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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