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This paper examines the efficiency rationale for democratic governance in economic organization. In addition to markets, hierarchies, and clans (the standard repertoire), democracy should be added as a viable and efficient form of organization, particularly for the modern knowledge-intensive economy. In fact, even using established organization theory and organizational economics, democratic governance would constitute a superior structural alternative under such conditions. Based on this theoretical argument and more than a decade of empirical research on the organization of new knowledge-based firms, as well as the governance of innovative activities in established firms, this paper advances a set of propositions articulating the efficient mix of governance mechanisms defining such democratic structural alternative; they include “partnership” rather than “exchange” employment contracts, “democratic” allocation of decision and control rights, negotiated rent-sharing, and open boundaries. The potential and due applications of these practices to situations where knowledge contributions are present but not prominent are highlighted.
