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Diseconomies of scale in large corporations: Theory and empirical analysis

  • Staffan Canback

    (Pyx Institute & Henley Management College)

Managerial diseconomies of scale are often discussed but seldom studied. The purpose of the current research is to open up avenues of inquiry into this potentially important topic. The research tests whether diseconomies of scale influence corporate performance. It uses Coasian transaction cost economics and Williamson’s thinking on the nature of diseconomies of scale and the limits of firm size (Williamson 1975, 1985; Riordan and Williamson 1985) to develop a theoretical framework for describing diseconomies of scale, economies of scale, and moderating factors. It validates the framework against the relevant literature and translates it into five hypotheses. The hypotheses are tested in structural equation models against the 784 largest firms in the U.S. manufacturing sector in 1998. The findings are consistent with Williamson’s limits-of-firm-size framework. -------------------------- This working paper is not for the faint of heart. It is 151 pages long and contains a fiendish statistical analysis. However, the research has been widely praised. For example, Dr. Robert Axtell of the Brookings Institution wrote: "First, I find it a very nice monograph and this is not just because the subject interests me. Your literature review is thorough, the statistical methodology is appropriate, and the results are clean and important. Second, I think you have significantly pushed the frontier of testing 'transaction cost' ideas. Adherents of that school will be in your debt. Third, and most specifically, I think your analysis of the U-shaped neoclassical cost function is excellent, and gives away your experience beyond academic economics--it takes a practitioner to debunk propositions that are empirically false, although logically compelling. My mentor, Herbert Simon, would have approved. Congratulations on a very strong piece of work!" Also, the research won first prize in the EDAMBA (European Doctoral Programmes Association in Management and Business Administration) competition for best European doctoral dissertation in 2002.

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File URL: http://econwpa.repec.org/eps/io/papers/0402/0402001.pdf
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Paper provided by EconWPA in its series Industrial Organization with number 0402001.

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Length: 151 pages
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpio:0402001
Note: Type of Document - Acrobat PDF; pages: 151; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. McAfee, R. Preston & McMillan, John., 1990. "Organizational Diseconomies of Scale," Working Papers 728, California Institute of Technology, Division of the Humanities and Social Sciences.
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  4. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 335-61, October.
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  11. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, 1999. "What Determines Firm Size?," NBER Working Papers 7208, National Bureau of Economic Research, Inc.
  12. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  13. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-80, December.
  14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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  17. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
  18. N. Gregory Mankiw, 1998. "Teaching the Principles of Economics," Eastern Economic Journal, Eastern Economic Association, vol. 24(4), pages 519-524, Fall.
  19. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
  20. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, December.
  21. Riordan, Michael H. & Williamson, Oliver E., 1985. "Asset specificity and economic organization," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 365-378, December.
  22. Rasmusen, Eric & Zenger, Todd, 1990. "Diseconomies of Scale in Employment Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 65-92, Spring.
  23. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
  24. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  25. Patrick Bolton & David S. Scharfstein, 1998. "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 95-114, Fall.
  26. Mueller, Willard F & Hamm, Larry G, 1974. "Trends in Industrial Market Concentration, 1947 to 1970," The Review of Economics and Statistics, MIT Press, vol. 56(4), pages 511-20, November.
  27. Henry Ogden Armour & David J. Teece, 1978. "Organizational Structure and Economic Performance: A Test of the Multidivisional Hypothesis," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 106-122, Spring.
  28. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123.
  29. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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