Organizational Diseconomies of scale |
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| Authors: | R. Preston McAfee John McMillan |
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| Affiliation: | Department of Economics University of Texas at Austin Austin, TX 78712–1173;Graduate School of International Relations and Pacific Studies University of California, San Diego La Jolla, CA 92093–0519 |
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| 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. |
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