ORGANIZATIONAL DISECONOMIES OF SCALE

Private information creates a cost of operating a hierarchy, which bec omes larger as the hierarchical distance between the information sourc e and the decision maker increases. When information about a firm's ca pabilities is dispersed among the individuals in the firm, production is inefficient even though everyone behaves rationally. Because hierar chies need rents in order to function, a firm with a long hierarchy ma y not be viable in a competitive industry.