Language and the Theory of the Firm

An organization will often use a specialized technical language that is un-derstood by its members but not by others. We develop a theory of optimalorganizational languages and identify a key trade-o¤ between facilitatinginternal communication and encouraging communication with other organi-zations. "Dialects"are suboptimal: two organizations will either share thesame language or develop two entirely distinct set of technical words. Thisendogenous discontinuity in communication structure results in a disconti-nuity in …rm structure, and a limit on …rm scope. A broader scope allows formore synergies to be captured, but at the cost of less precise communicationwithin each unit. Our theory reconciles two recent phenomena within orga-nizations: the recent increase in information centralization and the reductionin hierarchical centralization.[...]