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

  • Staffan Canback

    (Henley Management College)

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.)

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File URL: http://128.118.178.162/eps/io/papers/9810/9810001.pdf
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Paper provided by EconWPA in its series Industrial Organization with number 9810001.

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Date of creation: 11 Oct 1998
Date of revision: 09 Jan 1999
Handle: RePEc:wpa:wuwpio:9810001
Contact details of provider: Web page: http://128.118.178.162

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  1. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
  2. Joskow, Paul L, 1988. "Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 95-117, Spring.
  3. Alfred D. Chandler, 1969. "Strategy and Structure: Chapters in the History of the American Industrial Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530090, June.
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. 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.
  6. Geanakoplos, John & Milgrom, Paul, 1991. "A theory of hierarchies based on limited managerial attention," Journal of the Japanese and International Economies, Elsevier, vol. 5(3), pages 205-225, September.
  7. Robert Axtell, 1999. "The Emergence of Firms in a Population of Agents," Working Papers 99-03-019, Santa Fe Institute.
  8. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  9. Kumar, Krishna B & Rajan, Raghuram G & Zingales, Luigi, 1999. "What Determines Firm Size?," CEPR Discussion Papers 2211, C.E.P.R. Discussion Papers.
  10. R. Joseph Monsen & Jr. & Anthony Downs, 1965. "A Theory of Large Managerial Firms," Journal of Political Economy, University of Chicago Press, vol. 73, pages 221.
  11. Schmalensee, Richard., 1984. "Do markets differ much?," Working papers 1531-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Richardson, G B, 1972. "The Organisation of Industry," Economic Journal, Royal Economic Society, vol. 82(327), pages 883-96, September.
  13. 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.
  14. 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.
  15. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. Mookherjee Dilip & Reichelstein Stefan, 2001. "Incentives and Coordination in Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-38, April.
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