Information Technology, Coordination Costs, and Firm Size

The primary objective of this study is to empirically examine the impact of IT on firm size - a principal determinant of organizational structure. Our study is based on microeconomics theory and transaction costs theory. In microeconomics theory IT is viewed as a factor of production that can be freely substituted for capital and labor. As the cost of IT falls, it is substituted for labor that historically has a rising cost. Hence, IT should result in a decline in the number of middle managers and clerical workers (i.e. firm size) as IT substitutes for their labor (labor substitution effect)