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Title: Incomplete Contracts and Firm Boundaries: New Directions

Author(s): Wouter Dessein

Publication Date: June 2012

Keyword(s): Adaptation, Coordination, Firm Boundaries, Incomplete contracts and Managerial direction

Programme Area(s): Industrial Organization

Abstract: The seminal work by Grossman and Hart (1986) made the study of firm boundaries susceptible to formal economic analysis, and illuminated an important role for markets in providing incentives. In this essay, I discuss some new directions that the literature has taken since. As a central challenge, I identify the need to provide a formal theory of the firm in which managerial direction and bureaucratic decision-making play a key role. Merging a number of existing incomplete contracting models, I propose two approaches with very different contracting assumptions. As in transaction cost economics, a central element in those theories is the presence of a central office who directs and coordinates the actions of subordinates. More novel, I highlight the superior ability of non-integrated firms to adapt to a changing environment.

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Bibliographic Reference

Dessein, W. 2012. 'Incomplete Contracts and Firm Boundaries: New Directions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9019