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The Internal Organization of the Firm and the Shape of Average Costs

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Author Info
Michael Keren
David Levhari

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Abstract

Do costs of coordination limit the size of firms? Do they lead to rising average costs at high output levels? A simple model of a firm which employs production and administrative labor, and where output is declining in coordination time by the latter, answers this question in two steps. First we derive a cost minimizing hierarchical structure for any given size of production labor. This structure shows similarity to that reported in the literature for both business and military organizations. Then we use the administrative technology that is developed to derive conditions under which average costs do eventually rise even in the presence of increasing returns to production labor. The presumption of a limit to the size of firms is shown to hold under reasonable, though not all, conditions

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 2 (Autumn)
Pages: 474-486
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Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:474-486

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  1. Van Zandt, Timothy, 2003. "Real-Time Hierarchical Resource Allocation with Quadratic Costs," CEPR Discussion Papers 4022, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Brink, R. van den & Ruys, P.H.M., 2005. "Technological change, wages and firm size," Discussion Paper 22, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
  3. Timothy Van Zandt, 1994. "Hierarchical Computation of the Resource Allocation Problem," Macroeconomics 9412001, EconWPA. [Downloadable!]
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  4. Ariel Pakes & Shmuel Nitzan, 1982. "Optimum Contracts for Research Personnel, Research Employment, and the Establishment of "Rival" Enterprises," NBER Working Papers 0871, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 1998. "A Theory of Supervision with Endogenous Transaction Costs," STICERD - Theoretical Economics Paper Series 356, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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  6. René van den Brink, 2006. "On Hierarchies and Communication," Tinbergen Institute Discussion Papers 06-056/1, Tinbergen Institute. [Downloadable!]
  7. René van den Brink & Robert P. Gilles, 2003. "Explicit and Latent Authority in Hierarchical Organizations," Tinbergen Institute Discussion Papers 03-102/1, Tinbergen Institute. [Downloadable!]
  8. Eyal Winter, 2001. "Scapegoats and Optimal Allocation of Responsibility," Discussion Paper Series dp266, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
  9. René Brink, 2008. "Vertical wage differences in hierarchically structured firms," Social Choice and Welfare, Springer, vol. 30(2), pages 225-243, February. [Downloadable!] (restricted)
  10. Rene van den Brink & Pieter H.M. Ruys, 2005. "Positional Wages, Market Wages and Firm Size," Tinbergen Institute Discussion Papers 05-020/1, Tinbergen Institute. [Downloadable!]
  11. Timothy Van Zandt & Roy Radner, 1998. "Real-Time Decentralized Information Processing and Returns to Scale," Discussion Papers 1233, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  12. Brink, Rene van den & Gilles, Robert P., 2005. "Explicit and latent authority in hierarchical organizations," Discussion Paper 75, Tilburg University, Center for Economic Research. [Downloadable!]
  13. Andrea Patacconi, 2005. "Optimal Coordination in Hierarchies," Economics Series Working Papers 238, University of Oxford, Department of Economics. [Downloadable!]
  14. John Duffy & Andreas Blume & April Franco, 2007. "Decentralized Organizational Learning: An Experimental Investigation," Working Papers 310, University of Pittsburgh, Department of Economics, revised Jul 2008. [Downloadable!]
  15. Sanghamitra Das & Ramprasad Sengupta, 2004. "Projection pursuit regression and disaggregate productivity effects: the case of the Indian blast furnaces," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(3), pages 397-418. [Downloadable!]
  16. Andreas Blume & April Franco, 2002. "Learning from failure," Staff Report 299, Federal Reserve Bank of Minneapolis. [Downloadable!]
  17. John Geanakoplos & Paul R. Milgrom, 1988. "A Theory of Hierarchies Based on Limited Managerial Attention," Cowles Foundation Discussion Papers 775R, Cowles Foundation, Yale University. [Downloadable!]
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  18. Jason R. Barro & Robert J. Barro, 1990. "Pay, Performance, and Turnover of Bank CEOs," NBER Working Papers 3262, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Christoff Loch, 1995. "Collaboration, Motivation, and the Size of Organizations," Working Papers _005, Xerox Research Park. [Downloadable!]
  20. McAfee, R. Preston & McMillan, John., 1990. "Organizational Diseconomies of Scale," Working Papers 728, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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