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Incomplete Contracts and the Internal Organization 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. 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 (JEL O31, O32, O33, F23).

Suggested Citation

  • Phillipe Aghion & Nicholas Bloom & John Van Reenen, 2014. "Incomplete Contracts and the Internal Organization of Firms," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 37-63.
  • Handle: RePEc:oup:jleorg:v:30:y:2014:i:suppl_1:p:i37-i63.
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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