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The Internal Organization of the Firm and the Shape of Average Costs

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  • Michael Keren
  • David Levhari

Abstract

Do costs of coordination limit the size of firms? Do they lead to rising average costs at high output levels? A simple model of a firm which employs production and administrative labor, and where output is declining in coordination time by the latter, answers this question in two steps. First we derive a cost minimizing hierarchical structure for any given size of production labor. This structure shows similarity to that reported in the literature for both business and military organizations. Then we use the administrative technology that is developed to derive conditions under which average costs do eventually rise even in the presence of increasing returns to production labor. The presumption of a limit to the size of firms is shown to hold under reasonable, though not all, conditions

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 2 (Autumn)
Pages: 474-486

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Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:474-486

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Cited by:
  1. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 667-695, 07.
  2. Timothy Van Zandt, 1994. "Hierarchical Computation of the Resource Allocation Problem," Macroeconomics 9412001, EconWPA.
  3. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  4. Barro, Jason R. & Barro, Robert J., 1990. "Pay, Performance, and Turnover of Bank CEOs," Scholarly Articles 3451300, Harvard University Department of Economics.
  5. Prat, Andrea, 1997. "Hierarchies of Processors with Endogenous Capacity," Journal of Economic Theory, Elsevier, vol. 77(1), pages 214-222, November.
  6. Callander, Steven & Plott, Charles R., 2005. "Principles of network development and evolution: an experimental study," Journal of Public Economics, Elsevier, vol. 89(8), pages 1469-1495, August.
  7. Stephen J. DeCanio & William E. Watkins, . "Information Processing and Organizational Structure," Computing in Economics and Finance 1997 163, Society for Computational Economics.
  8. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  9. PĂ©rez, Jessica Helen & Iranzo Sancho, Susana, 2012. "Determinants of Decentralization within the Firm: Some Empirical Evidence from Spanish Small and Medium- Sized Enterprise," Working Papers 2072/211755, Universitat Rovira i Virgili, Department of Economics.
  10. Tomohiro Hayashida & Ichiro Nishizaki & Rika Kambara, 2014. "Simulation Analysis for Network Formulation," Computational Economics, Society for Computational Economics, vol. 43(3), pages 371-394, March.
  11. Swank, Otto & Visser, Bauke, 2008. "The consequences of endogenizing information for the performance of a sequential decision procedure," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 667-681, March.
  12. Delmastro, Marco, 2002. "The determinants of the management hierarchy: evidence from Italian plants," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 119-137, January.
  13. Colombo, Massimo G. & Delmastro, Marco, 1999. "Some stylized facts on organization and its evolution," Journal of Economic Behavior & Organization, Elsevier, vol. 40(3), pages 255-274, November.
  14. James D Adams & Adam B Jaffe, 1994. "The Span of the Effect of R&D in the Firm and Industry," Working Papers 94-7, Center for Economic Studies, U.S. Census Bureau.
  15. Gradstein, Mark, 1998. "Optimal contest design: volume and timing of rent seeking in contests," European Journal of Political Economy, Elsevier, vol. 14(4), pages 575-585, November.

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