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CEP occasional paper

Incomplete Contracts and the Internal Organisation of Firms

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.

Phillipe Aghion, Nicholas Bloom and John Van Reenen

13 March 2013     Paper Number CEPOP36

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This CEP occasional paper is published under the centre's Growth programme.