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Incomplete Contracts and Firm Boundaries: New Directions

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  • Wouter Dessein

Abstract

The seminal work by Grossman and Hart (1986 "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 94 Journal of Political Economy 691–19.) made the study of firm boundaries susceptible to formal economic analysis, and illuminated an important role for markets in providing incentives. In this essay, I discuss some new directions that the literature has taken since. As a central challenge, I identify the need to provide a formal theory of the firm in which managerial direction and bureaucratic decision-making play a key role. Merging a number of existing incomplete contracting models, I propose two approaches with very different contracting assumptions. As in transaction cost economics, a central element in those theories is the presence of a central office that directs and coordinates the actions of subordinates. More novel, I highlight the superior ability of nonintegrated firms to adapt to a changing environment. JEL: D23, D83, D86, L22, L23.

Suggested Citation

  • Wouter Dessein, 2014. "Incomplete Contracts and Firm Boundaries: New Directions," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 13-36.
    • Handle: RePEc:oup:jleorg:v:30:y:2014:i:suppl_1:p:i13-i36.
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    File URL: http://hdl.handle.net/10.1093/jleo/ews044
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    Citations

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    Cited by:

    1. Leila Agha & Keith Marzilli Ericson & Xiaoxi Zhao, 2020. "The Impact of Organizational Boundaries on Healthcare Coordination and Utilization," NBER Working Papers 28179, National Bureau of Economic Research, Inc.
    2. Aristotelis Boukouras, 2015. "Separation of Ownership and Control: Delegation as a Commitment Device," Discussion Papers in Economics 15/02, Division of Economics, School of Business, University of Leicester.
    3. Petros G. Sekeris & Dimitrios Xefteris, 2021. "Strategic Delegation to Organizations," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 900-922, December.
    4. Michael Powell, 2015. "An Influence-Cost Model of Organizational Practices and Firm Boundaries," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 104-142.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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