ABSTRACT
A g e n t s are problems. Their ability to operate in their own self-interest motivates much of the recent industrial organisation literature. This is reflected in the treatment of the firm as a nexus of contracts, both in terms of its external vertical relations and its internal organisational arrangements (Jensen, 1983). These internal contracts are designed to attenuate the problem of agency, defined as the costs of structuring, bonding, and monitoring an incentive contract between the principal and the agent. In contrast to the vertical integration issue, the choice of internal organisation as a contractual device promoting incentives and information flows between members of the firm has received much less attention.
