Diversification, Coordination Costs, and Organizational Rigidity: Evidence from Microdata

This paper examines the impact of coordination costs and organizational rigidity on the returns to diversification. The central thesis is that coordination costs offset economies of scope, while organizational rigidity increases coordination costs and constrains economies of scope. The empirical tests of this proposition identify the effects of coordination and organizational rigidity costs on business-unit and firm productivity, using novel data from the Economic Census on taxi and limousine firms. The key results show that coordination and organizational rigidity costs are economically and statistically significant, while organizational rigidity itself accounts for a 16% decrease in paid ride-miles per taxicab in incumbent diversifiers, controlling for the other costs and benefits of diversification and incumbency. The findings suggest that coordination costs in general and organizational rigidity costs in particular limit the scope of the firm.