Incomplete Contracts and the Internal Organization of Firms

• Published in: Journal of law, economics, & organization Vol. 30; no. suppl_1; pp. i37 - i63
• Main Authors: Aghion, Phillipe, Bloom, Nicholas, Van Reenen, John
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-05-2014; Oxford Publishing Limited (England)
• Subjects: Business entities; Contract management; Contracts; Corporate debt; Decentralization; Decision making; Decision theory; Delegation of authority; Economic theory; Financial performance; Formal authority; Human capital; Incomplete contracts; Industrial productivity; Information technology; Investors; Labor productivity; Organization; Preferences; Productivity; Studies
• ISSN: 8756-6222; 1465-7341
• DOI: 10.1093/jleo/ewt003

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.