Firms, incomplete contracts, and organizational learning

Article type: Research Article

Authors: Foss, Nicolai J.

Affiliations: Department of Industrial Economics and Strategy, Copenhagen Business School, Nansensgade 19, 6, 1366 Copenhagen K, Denmark. Phone: +45 3815 2547; Fax: +45 3815 2535; E-mail: ESNJF@cbs.dk

Abstract: This explorative paper argues that the central problem of economic organization is adaptation to unforeseen contingencies. However, flexibility is a rather neglected issue in the theory of economic organization. This contrasts with much organization theory, in which the seeking and processing of information about the organization's key uncertainties is seen as a determinant of organizational form. The notion of incomplete contracts is argued to provide a means to bridging ideas from organizational economics and organization theory, particularly organizational learning. Incomplete contracts are not only important because they provide room for incentive problems, but more importantly because they allow firms to exploit processes of organizational learning that must always involve some unforeseen contingencies. Firms are seen as efficient institutional responses to learning processes that involve strongly complementary problem-solving activities.

Keywords: Theory of economic organization, incomplete firm contracts, organizational learning, existence of the firm

DOI: 10.3233/HSM-1996-15104

Journal: Human Systems Management, vol. 15, no. 1, pp. 17-26, 1996