Abstract: "Language and the Theory of the Firm"
An organization will often use a specialized technical language that is understood by its members but not by the rest of the world. We develop a theory of optimal organizational languages and identify a key trade-off between facilitating internal communication and encouraging communication with other organizations. "Dialects" tend to be suboptimal: two organizations will either share the same language or develop two entirely distinct set of technical words. This endogenous discontinuity in communication structure is reflected in a discontinuity in firm structure. We explore a number of predictions of our model and we relate them to changes in firm structure associated to technological progress. Our theory reconciles two recent phenomena within organizations: the increase in information centralization and the reduction in hierarchical centralization (‘empowerment’).