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Incomplete Contracts and the Internal Organisation of Firms

  • Phillipe Aghion
  • Nicholas Bloom
  • John Van Reenen

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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File URL: http://cep.lse.ac.uk/pubs/download/occasional/op036.pdf
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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
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEPOP

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  1. 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.
  2. Francine Lafontaine & Margaret E. Slade, 2012. "Inter-Firm Contracts
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  8. Nicholas Bloom & Carol Propper & Stephan Seiler & John Van Reenen, 2010. "The Impact of Competition on Management Quality: Evidence from Public Hospitals," CEP Discussion Papers dp0983, Centre for Economic Performance, LSE.
  9. 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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  13. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  14. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, vol. 98(1), pages 145-79, March.
  15. Maria Guadalupe & Julie Wulf, 2010. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 105-27, October.
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