Published September 5, 2017
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Organizational Diseconomies of Scale
- Creators
- McAfee, R. Preston
- McMillan, John
Abstract
This paper models strategic behavior within firms. The principal (e.g., the firm's owner) is handicapped by not knowing as much about the firm's capabilities as the agent(s) (e.g., the manager). The agent can extract some rents from his private information. The principal can retrieve some of these rents at the expense of introducing a distortion, paying the agent less than the full value of his marginal product. As a result the firm operates inefficiently. The degree of this inefficiency varies with demand elasticity and with the length of the firm's managerial hierarchy. The costs of operating the hierarchy create a limit to the size of the firm.
Additional Information
We thank Bengt Holmstrllm, Hideshi Itoh, Eric Rasmussen, Michael Rothschild, and seminar participants at Berkeley, Columbia, UCLA, UCSD, Yale, and the Decentralization Conference at Caltech for useful comments. Published as McAfee, R. Preston, and John McMillan. "Organizational diseconomies of scale." Journal of Economics & Management Strategy 4, no. 3 (1995): 399-426.Attached Files
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Additional details
- Eprint ID
- 81082
- Resolver ID
- CaltechAUTHORS:20170901-134249115
- Created
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2017-09-05Created from EPrint's datestamp field
- Updated
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2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 728