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Organizational Diseconomies of Scale

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  • McAfee, R. Preston
  • McMillan, John.

Abstract

Private information creates a cost of operating a hierarchy, which becomes larger as the hierarchical distance between the information source and the decision maker increases. When information about a firm's capabilities is dispersed among the individuals in the firm, production is inefficient even though everyone behaves rationally. Because hierarchies need rents in order to function, a firm with a long hierarchy may not be viable in a competitive industry. Copyright 1995 by MIT Press.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • McAfee, R. Preston & McMillan, John., 1990. "Organizational Diseconomies of Scale," Working Papers 728, California Institute of Technology, Division of the Humanities and Social Sciences.
    • Handle: RePEc:clt:sswopa:728
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    File URL: http://www.hss.caltech.edu/SSPapers/sswp728.pdf
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    References listed on IDEAS

    as
    1. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 527-544.
    2. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    4. repec:bla:ecorec:v:64:y:1988:i:187:p:295-306 is not listed on IDEAS
    5. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    6. Dearden, James & Ickes, Barry W & Samuelson, Larry, 1990. "To Innovate or Not to Innovate: Incentives and Innovation in Hierarchies," American Economic Review, American Economic Association, vol. 80(5), pages 1105-1124, December.
    7. Jean‐Jacques Laffont, 1988. "Hidden Gaming in Hierarchies: Facts and Models," The Economic Record, The Economic Society of Australia, vol. 64(4), pages 295-306, December.
    8. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    9. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
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