Incomplete Contracts and the Internal Organization of Firms

15 March 2013 at 5:46 pm 2 comments

| Peter Klein |

That’s the title of a new NBER paper by Philippe Aghion, Nicholas Bloom, and John Van Reenen, indicating that organization design, from the perspective of incomplete-contracting theory, continues to be a hot topic among the top economists. Like all NBER papers this one is gated, but intrepid readers may be able to locate a freebie.

Incomplete Contracts and the Internal Organization of Firms
Philippe Aghion, Nicholas Bloom, John Van Reenen

NBER Working Paper No. 18842, February 2013

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.

Entry filed under: - Klein -, Recommended Reading, Strategic Management, Theory of the Firm.

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2 Comments Add your own

  • 1. Joe Eckstein (@empowerusjoe)  |  16 March 2013 at 10:34 am

    It wold be kind of tough to get empirical evidence of incompleted projects, without an NDA. The PDMA often hosts people who research innovation in firms. Maybe this is a practical example of how they can get better research – combining with other interest groups?

  • 2. Cook, Michael L.  |  16 March 2013 at 5:00 pm

    Peter, thanks, your contribution to the collective good is much appreciated. mlc

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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