Supervision, Loss of Control, and the Optimum Size of the Firm

Abstract

We show that limitation of firm size caused by loss of control across hierarchic levels depends crucially on the nature of the supervision process. If the employees cannot identify the times at which their performance is monitored, there is no limit imposed on the firm size by the heights of the hierarchical structure. "Loss of control" may impose such a limit if the employees are aware of the times at which they are being monitored. The analysis also shows the rationale for hierarchical wage differentials for essentially identical employees.