Language and the Theory of the Firm

Jacques Crémer, Luis Garicano and Andrea Prat

The Quarterly Journal of Economics, 2007, vol. 122, issue 1, 373-407

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.

Date: 2007
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Working Paper: Language and the Theory of the Firm (2006)
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