Does “economies of scale” really make a business efficient?
A major challenge (some business theorist hold that the major challenge) of managing the larger firm is the principal/agent problem. There (theoretically should be) minimal waste in a sole proprietorship because every penny that’s being wasted is coming out of his pocket. A firm with 100,000 employees has a much harder time creating proper incentives for each employee to manage the shareholders’ money as if it were his own. Indeed, large firms create perverse incentives, making actually in an individual best interest to be wasteful. Travel and entertainment policies are classic examples of this — a big company will glady reimburse an employee’s $500 hotel room and a $40 room-service breakfast, but won’t give an employee a nickel’s better pay if instead he spends $69.99 staying at the Motel 6 and $6.99 on a Grand Slam Breakfast at the Denny’s next door. The incredible increase in stock option compensation was designed to overcome the principal / agent problem, at least at the level of
