Incomplete Contracts and the Internal Organization of Firms

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. We then overview the empirical evidence on the determinants of decentralization and on the effects...

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Bibliographic Details
Published in:Journal of law, economics, & organization economics, & organization, 2014-05, Vol.30 (suppl_1), p.i37-i63
Main Authors: Aghion, Phillipe, Bloom, Nicholas, Van Reenen, John
Format: Article
Language:English
Subjects:
Business entities
Contract management
Contracts
Corporate debt
Decentralization
Decision making
Decision theory
Delegation of authority
Economic theory
Financial performance
Formal authority
Human capital
Incomplete contracts
Industrial productivity
Information technology
Investors
Labor productivity
Organization
Preferences
Productivity
Studies
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Summary: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. 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.
ISSN:8756-6222
1465-7341
DOI:10.1093/jleo/ewt003