Managerial diseconomies of scale: Literature survey and hypotheses anchored in transaction cost economics

This working paper tests Oliver Williamson’s proposition that transaction cost economics can explain the limits of firm size. A review of the relevant literature corroborates Williamson’s theoretical framework and five hypotheses are formulated: (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 working paper is the foundation for the doctoral thesis “Bureaucratic Limits of Firm Size: Empirical Analysis Using Transaction Cost Economics” (Canback 2002) available at http://canback.com/henley.htm, the British Library, and UMI. The thesis contains a full statistical analysis of the hypotheses described in this paper, based on a sample of 784 U.S. manufacturing firms.)