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Specialization, Agency Cost and Firm Size

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  • Sungbin Cho
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    Abstract

    This paper extends the principal-agent model to determine the size of the firm as measured by the number of agent hired. Hiring more agents results in benefits and costs to the principal. The benefits are gains from specialization: higher productivity can be achieved if, as the number of agents increases, their task assignments become more specialized. However, increases in task specialization make monitoring more difficult and costly. In this paper I study peer monitoring among agents. Balancing productivity gains with monitoring costs determines the optimal size of the firm. This paper shows that agency costs due to moral hazard are one factor that sets limits on firm size in a model where it would otherwise be unbounded

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 705.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:feam04:705

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    Related research

    Keywords: Specialization; Firm size; Moral Hazard; Monitoring;

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