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Organizational Diseconomies of Scale

McAfee, R. Preston and McMillan, John (1990) Organizational Diseconomies of Scale. Social Science Working Paper, 728. California Institute of Technology , Pasadena, CA. (Unpublished)

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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.

Item Type:Report or Paper (Working Paper)
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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.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:728
Record Number:CaltechAUTHORS:20170901-134249115
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81082
Deposited By: Jacquelyn Bussone
Deposited On:05 Sep 2017 23:55
Last Modified:03 Oct 2019 18:38

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