Diseconomies of scale in large corporations: Theory and empirical analysis

Abstract

Managerial diseconomies of scale are often discussed but seldom studied. The purpose of the current research is to open up avenues of inquiry into this potentially important topic. The research tests whether diseconomies of scale influence corporate performance. It uses Coasian transaction cost economics and Williamson’s thinking on the nature of diseconomies of scale and the limits of firm size (Williamson 1975, 1985; Riordan and Williamson 1985) to develop a theoretical framework for describing diseconomies of scale, economies of scale, and moderating factors. It validates the framework against the relevant literature and translates it into five hypotheses. The hypotheses are tested in structural equation models against the 784 largest firms in the U.S. manufacturing sector in 1998. The findings are consistent with Williamson’s limits-of-firm-size framework. -------------------------- This working paper is not for the faint of heart. It is 151 pages long and contains a fiendish statistical analysis. However, the research has been widely praised. For example, Dr. Robert Axtell of the Brookings Institution wrote: "First, I find it a very nice monograph and this is not just because the subject interests me. Your literature review is thorough, the statistical methodology is appropriate, and the results are clean and important. Second, I think you have significantly pushed the frontier of testing 'transaction cost' ideas. Adherents of that school will be in your debt. Third, and most specifically, I think your analysis of the U-shaped neoclassical cost function is excellent, and gives away your experience beyond academic economics--it takes a practitioner to debunk propositions that are empirically false, although logically compelling. My mentor, Herbert Simon, would have approved. Congratulations on a very strong piece of work!" Also, the research won first prize in the EDAMBA (European Doctoral Programmes Association in Management and Business Administration) competition for best European doctoral dissertation in 2002.bureaucratic failure, diseconomies of scale, transaction cost economics