Nber Working Paper Series Incomplete Contracts and the Internal Organization 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. Philippe Aghion Department of Economics Harvard University 1805 Cambridge St Cambridge, MA 02138 and NBER [email protected] Nicholas Bloom Stanford University Department of Economics 579 Serra Mall Stanford, CA 94305-6072 and NBER [email protected] John Van Reenen Department of Economics London School of Economics Centre for Economic Performance Houghton Street London WC2A 2AE UNITED KINGDOM and NBER [email protected]