The impact of complexity and managerial diseconomies on hierarchical governance

Brahm, F and Tarzijan, J (2012) The impact of complexity and managerial diseconomies on hierarchical governance. Journal of Economic Behavior and Organization, 84 (2). pp. 586-599. ISSN 0167-2681

Abstract

Based on data from Chilean construction projects, we evaluate how the boundary choice of a focal activity is affected by the number of activities integrated elsewhere in a project and by the level of “between complexity” and “within complexity” of those activities. Our results show that managerial diseconomies of scale, which arise when contractors integrate more activities, and the different types of complexity, affect the relative advantages of hierarchical governance. In a novel result, we also show that interactions between the number of integrated activities and the types of complexity affect the relative merits of hierarchical governance to handle an activity, meaning that complexity and the extent of a project's integration are systematically intertwined in the explanation of boundary choices. Our findings indicate a need for research on interdependencies between different boundary choices and suggest that the evaluation of these interdependencies should consider the complexity of activities.