Abstract

This paper surveys recent work in contract theory providing insights into the structure and the functioning of public organizations. While complete contracts approach provides a general theory of incentives, that approach fails to open the "black box" of organizations; thus, to pursue this goal, a number of authors turned on the incomplete contracting paradigm. In particular, the paper presents those recent contributions which aim to provide new insights into the internal organization and the functioning of government and Public administration referring to two variations of the grand-contract approach: the theory of collusion and the multi-principal incentive theory. Such a way it is followed to explain institutional choices in the public sector such as rigid rules and bureaucracy, delegation and administrative decentralization, non-commitment and short-term contracts, separation of administrative and institutional powers, and checks and balances inside public institutions. Furthermore, the links between such organizational aspects and incentives for public bureaucracies that derive are discussed.