The Contractual Governance of Transactions within Firms

Magelssen, C, Mayer, K and Rich, B (2022) The Contractual Governance of Transactions within Firms. Organization Science, 33 (6). pp. 2226-2249. ISSN 1047-7039 OPEN ACCESS


A central theoretical premise is that firms internalize transactions that are not suited for formal contracting. Yet, there is growing evidence that firms rely on formal contracts to govern some of their transactions within the firm. This paper discusses why firms use formal contracts between units and develops propositions for when formal contracts arise. Internalization does not eliminate transactional problems, and informal agreements for transactions between units often suffer from problems understanding what the other unit will do and whether it will do what it promises. We argue that many of the features that make formal contracts valuable tools for market exchange are beneficial within firms, even if court enforcement of the contract is not possible. We suggest that formal contracts between units serve as communication and commitment devices that address coordination and incentive problems within the firm by providing clarity and credibility on the rights allocated to the units in the transaction.

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Item Type: Article
Subject Areas: Strategy and Entrepreneurship
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© 2022 INFORMS

Date Deposited: 08 Sep 2021 11:36
Date of first compliant deposit: 08 Sep 2021
Subjects: Contracts and agency
Last Modified: 20 Jun 2024 01:31

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