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Incomplete Contracts and the Internal Organisation of Firms

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  • Phillipe Aghion
  • Nicholas Bloom
  • John Van Reenen

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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Occasional Papers with number 36.

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Date of creation: Mar 2013
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Handle: RePEc:cep:cepops:36

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEPOP

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Keywords: uncertainty;

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  2. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
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  8. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
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  10. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March.
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Cited by:
  1. MORIKAWA Masayuki, 2014. "Are Large Headquarters Unproductive? Evidence from a panel of Japanese companies," Discussion papers 14036, Research Institute of Economy, Trade and Industry (RIETI).

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