Language and the Theory of the Firm

Authors:
  • JCJ. Cremer
    J. Cremer
  • LGL. Garicano
    L. Garicano
  • APA. Prat
    A. Prat
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Abstract
We characterize efficient technical languages and study their interaction with the scope and structure of organizations. Efficient languages use precise words for frequent events and vague words for unusual ones. A broader organizational scope allows for more synergies to be captured, but reduces within-unit efficiency, since it requires a more generic language. A manager working as specialized translator may also be used to achieve between-unit coordination while maintaining separate languages. Our theory reconciles two recent well-documented phenomena within organizations: the recent increase in information centralization and the reduction in hierarchical centralization. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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