Bureaucratic limits of firm size: Practitioner's summary
AbstractThe research tests Oliver Williamson’s proposition that transaction cost economics can explain the limits of firm size. Williamson suggests that diseconomies of scale are manifested through four interrelated factors: atmospheric consequences due to specialisation, bureaucratic insularity, incentive limits of the employment relation and communication distortion due to bounded rationality. Furthermore, Williamson argues that diseconomies of scale are counteracted by economies of scale and can be moderated by adoption of the multidivisional organisation form and by high internal asset specificity. Combined, these influences tend to cancel out and thus there is not a strong, directly observable, relationship between a large firm’s size and performance. A review of the relevant literature, including transaction cost economics, sociological studies of bureaucracy, information-processing perspectives on the firm, agency theory, and studies of incentives and motivation within firms, as well as empirical studies of trends in firm size and industry concentration, corroborates Williamson’s theoretical framework and translates it into five hypotheses: (1) Bureaucratic failure, in the form of atmospheric consequences, bureaucratic insularity, incentive limits and communication distortion, increases with firm size; (2) Large firms exhibit economies of scale; (3) Diseconomies of scale from bureaucratic failure have a negative impact on firm performance; (4) Economies of scale increase the relative profitability of large firms over smaller firms; and (5) Diseconomies of scale are moderated by two transaction cost-related factors: organisation form and asset specificity. The hypotheses are tested by applying structural equation models to primary and secondary cross-sectional data from 784 large U.S. manufacturing firms. The statistical analyses confirm the hypotheses. Thus, diseconomies of scale influence the growth and profitability of firms negatively, while economies of scale and the moderating factors have positive influences. This implies that executives and directors of large firms should pay attention to bureaucratic failure.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0311001.
Length: 5 pages
Date of creation: 10 Nov 2003
Date of revision: 03 Jun 2005
Note: Type of Document - pdf; prepared on WinXP; pages: 5; figures: included
Contact details of provider:
Web page: http://22.214.171.124
bureaucratic failure; diseconomies of scale; transaction cost economics;
Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-16 (All new papers)
- NEP-CDM-2003-11-16 (Collective Decision-Making)
- NEP-ENT-2003-11-16 (Entrepreneurship)
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Biased towards bosses
by chris dillow in Stumbling and Mumbling on 2012-01-08 11:46:16
- Arguing for co-ops I: growth
by chris dillow in Stumbling and Mumbling on 2008-10-05 10:21:19
- The utopia of better government
by chris dillow in Stumbling and Mumbling on 2008-01-09 12:44:06
- Skype's lessons
by chris dillow in Stumbling and Mumbling on 2007-10-02 10:15:12
- Jag for sale: three questions
by chris dillow in Stumbling and Mumbling on 2007-06-12 13:53:03
- Defending left-libertarianism
by chris dillow in Stumbling and Mumbling on 2012-11-15 11:40:20
- The management question
by ? in Stumbling and Mumbling on 2013-09-10 13:49:00
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.