Incomplete Contracts and the Internal Organization of Firms

Philippe Aghion; Nicholas Bloom; John Van Reenen

doi:10.3386/w18842

Incomplete Contracts and the Internal Organization of Firms

Philippe Aghion, Nicholas Bloom & John Van Reenen

Working Paper 18842

DOI 10.3386/w18842

Issue Date 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.

This paper was prepared for the "Grossman and Hart at 25" conference in Brussels. We are grateful for comments by our discussants, John Roberts and Bentley MacLeod, the editor and two anonymous referees, and research assistance from Megha Patnaik. We would like to thank the Economic and Social Research Council for their financial support through the Centre for Economic Performance. The empirical part builds heavily on joint work with Raffaella Sadun. A more detailed working paper version is available online as Aghion et al. (2012). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Nicholas Bloom
I worked for McKinsey and company as a management consultant from 2001-2002. I have not received any funding from them after that time.

I am part of the Toulouse Network for Information Technology, which carries out research on IT and productivity. From this network I receive an annual honorarium, which is funded by Microsoft.

I do occasional consulting on management practices for government and policy agencies, like the Canadian Government, the World Bank, the European Union, the British Government, and the European Bank of Reconstruction and Development.

I produced a report in 2008 for the World Economic Forum on management practices in private equity for which I received an honorarium.

I occasionally am a paid speaker at corporate events at which I discuss among other things management practices.
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Philippe Aghion, Nicholas Bloom, and John Van Reenen, "Incomplete Contracts and the Internal Organization of Firms," NBER Working Paper 18842 (2013), https://doi.org/10.3386/w18842.

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