ABSTRACT
This chapter aims to develop a theory of contracts model for firm growth. It explores the model using the agency problem in the Hudson’s Bay Company, contractual relations between independent firms, and quantitative tests of the transition between alternative contractual arrangements as examples. The chapter addresses the role of ‘culture’ in shaping organizational design. The theory of contracts model depicts economic institutions as nexuses of explicit or implicit contracts for transacting in services or goods. The existence of hidden action and hidden information makes the contractual relationship between the agent and principal a problem of decision-making under uncertainty. The design of contracts, including decision-making structures, incentive schemes, and information flows, depend on the ‘completeness’ of contracting. The data comprise information on 448 British multinational firms that invested in a sales branch or production plant between 1870 and 1939. Information was collected from business histories, firm archives, the Stock Exchange Yearbook, and data in public record offices.
