The theory of irrelevance of the size of the firm

This paper formalizes Cheung, Cease, Stigler, and Young's theory of irrelev ance of the size of the firm. This theory states that if division of labor develops within the firm, the average size of the firm and productivity go up side by side. If division of labor develops between firms, the average s ize of fil ms decreases as productivity goes up. Inframarginal analysis of the trade off between positive network effects of division of labor on aggr egate productivity and transaction costs can predict recently popular busin ess practices of down sizing, oursourcing, contracting out, focusing on cor e competence, and disintegration. We present evidence for a negative correl ation between average employment of labor by firms and productivity. (C) 20 00 Elsevier Science B,V. All rights reserved. JEL classification: D23; L11; L22; L23.