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Firms, Incomplete Contracts and Organizational Learning

  • Nicolai J. Foss

This explorative paper argues that the central problem of economic organization is adaptation to unforeseen contingencies. However, flexibility is a rather neglected issue in the theory of economic organization. This contrasts with much organization theory, in which the seeking and processing of information about the organization's key uncertainties is seen as a determinant of organizational form. The notion of incomplete contracts is argued to provide a means to bridging ideas from organizational economics and organization theory, particularly organizational learning. Incomplete contracts are not only important because they provide room for incentive problems, but more importantly because they allow firms to exploit processes of organizational learning that must always involve some unforeseen contingencies. Firms are seen as efficient institutional responses to learning processes that involve strongly complementary problem-solving activities.

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File URL: http://www3.druid.dk/wp/19960002.pdf
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Paper provided by DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies in its series DRUID Working Papers with number 96-2.

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Date of creation: 1996
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Handle: RePEc:aal:abbswp:96-2
Contact details of provider: Web page: http://www.druid.dk/

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  1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  2. Richardson, G B, 1972. "The Organisation of Industry," Economic Journal, Royal Economic Society, vol. 82(327), pages 883-96, September.
  3. Witt, Ulrich, 1998. "Imagination and leadership - The neglected dimension of an evolutionary theory of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 35(2), pages 161-177, April.
  4. Dow, Gregory K., 1987. "The function of authority in transaction cost economics," Journal of Economic Behavior & Organization, Elsevier, vol. 8(1), pages 13-38, March.
  5. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  6. Henderson, Rebecca., 1994. "The evolution of integrative capability : innovation in cardiovascular drug discovery," Working papers 3711-94., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
  8. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
  9. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June.
  10. Brian J Loasby, 1994. "Understanding Markets," Working Papers Series 94/4, University of Stirling, Division of Economics.
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