Incomplete Contracts and Firm Boundaries: New Directions

30 Pages Posted: 28 Sep 2012

See all articles by Wouter Dessein

Wouter Dessein

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2012


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.

Keywords: Adaptation, Coordination, Firm Boundaries, Incomplete contracts, Managerial direction

JEL Classification: D23, D83, L23

Suggested Citation

Dessein, Wouter, Incomplete Contracts and Firm Boundaries: New Directions (June 2012). CEPR Discussion Paper No. DP9019, Available at SSRN:

Wouter Dessein (Contact Author)

Columbia Business School - Finance and Economics ( email )

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