Monday, 25 March 2013

Incomplete contracts and the internal organisation of firms

The theory of the firm - or organisational economics - spends much time on asking questions about the boundaries of the firm, about where one firm ends and the next one begins and where firms end and markets take over. But such questions are not the only ones asked by economists. Increasingly questions are also being asked about the internal organisation of firms. Like the boundary questions the standard approach to the internal structure of firms is that of incomplete contracts. Recently Philippe Aghion, Nicholas Bloom and John Van Reenen have released a NBER working paper that looks at the literature on the internal organisation of firms. Their paper is Incomplete Contracts and the Internal Organization of Firms and the abstract reads:
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.

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