MANAGERIAL DISECONOMIES OF SCALE 
              Literature Survey and Hypotheses Anchored 
                    in Transaction Cost Economics 
                              Working paper 
                                  by 
                             Staffan Canbäck 
                         Henley Management College 
                                April 1997 
                          [Updated February 2002] 
                            © 1997, 2002, Staffan Canbäck 
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                                                             CONTENTS
                          1.    SUMMARY.................................................................................................. 4
                          2.    INTRODUCTION TO THE RESEARCH............................................ 12
                                2.1   RESEARCH OBJECTIVES............................................................... 14
                                      2.1.1   Problem Definition............................................................... 14
                                      2.1.2   Importance of the Research................................................. 20
                                2.2   DIMENSIONS OF FIRM SIZE........................................................ 22
                                      2.2.1   Definition of the Firm........................................................... 22
                                      2.2.2   Definition of Size .................................................................. 25
                                2.3   TRENDS IN FIRM SIZE................................................................... 27
                          3.    LITERATURE REVIEW.......................................................................... 32
                                3.1   THEORETICAL FRAMEWORK.................................................... 32
                                      3.1.1   Reasons for Limits................................................................ 33
                                      3.1.2   Nature of Limits.................................................................... 35
                                      3.1.3   Economies of Scale............................................................... 41
                                      3.1.4   Moderating Influences on Firm-Size Limits..................... 41
                                3.2   EVIDENCE........................................................................................ 46
                                      3.2.1   Diseconomies of Scale.......................................................... 47
                                      3.2.2   Economies of Scale............................................................... 62
                                      3.2.3   Moderating Factors.............................................................. 67
                                      3.2.4   Industry Influence................................................................ 74
                                      3.2.5   Conclusion............................................................................. 75
                          4.    THEORETICAL FRAMEWORK AND HYPOTHESES....................78
                          5.    DISCUSSION AND INTERPRETATION........................................... 85
                          6.    CONCLUSION......................................................................................... 94
                          APPENDIX: LITERATURE REFERENCES PERTAINING TO 
                          DISECONOMIES OF SCALE......................................................................... 99
                          REFERENCES................................................................................................... 102
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                                FIGURES
              Figure 1. Theoretical Framework and Hypotheses.........................................7
              Figure 2. Neoclassical Relationship between Unit Cost and Output..........16
              Figure 3. McConnell/Stigler Relationship between Unit Cost and  
                  Output......................................................................................................17
              Figure 4. Production and Transaction Costs as a Function of Asset 
                  Specificity.................................................................................................45
              Figure 5. Theoretical Framework and Hypotheses.......................................83
              Figure 6. Stylised Cost Curves..........................................................................89
              Figure 7. Stylised Growth Curves....................................................................91
              Figure 8. Stylised Partial Performance Curve................................................93
                                TABLES
              Table 1. Summary of Findings..........................................................................10
              Table 2. Definition of the Firm and Firm Size................................................26
              Table 3. Links between Limiting Factors and Consequences ......................40
              Table 4. Comparison of Agency Costs and Transaction Costs....................55
              Table 5. Sources of Limits of Firm Size............................................................62
              Table 6. Potential Moderators of Diseconomies of Scale..............................74
              Table 7. Extended TCE-Based “Limits of Firm Size” Framework...............77
              Table 8. Summary of Findings..........................................................................86
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                              1. SUMMARY 
              This paper tests whether diseconomies of scale influence corporate 
              performance. It uses Coasian transaction cost economics (Coase 1937) 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 
              findings are consistent with Williamson’s limits-of-firm-size framework. 
              Diseconomies of scale are a neglected area of study (see also Chapter 2). 
              Observers from Knight ([1921] 1964) to Holmström and Tirole (1989) have 
              pointed out that our understanding of bureaucratic failure is low. The 
              neglect is to some extent due to a disbelief in the existence of diseconomies 
              of scale (e.g., Florence 1933, 12; Bain 1968, 176). It is also due to a dearth of 
              theoretical frameworks that can help inform our understanding of the 
              nature of diseconomies of scale. However, if diseconomies of scale did not 
              exist, then we would presumably see much larger firms than we do today 
              (Panzar 1989, 38). No business organisation in the United States has more
              This working paper is the foundation for the doctoral thesis “Bureaucratic Limits of Firm 
              Size: Empirical Analysis Using Transaction Cost Economics” (Canbäck 2002) available 
              at http://canback.com/henley.htm. The thesis contains a full statistical analysis of the 
              hypotheses described in this paper, based on a sample of 784 US manufacturing firms.