The Information Costs of Organization: NLP Measures of Decision Making Capacity

Abstract

Coase’s puzzle of economic organization asks why can’t a larger firm do everything a smaller firm can do and more. Most studies underrepresent problems in decision making capacities which have been difficult to quantify. This study corroborates a more complete theory of firm using applications from natural language processing and information theory. Probit models regress an explanatory variable from textual analysis over annual reports against a discrete measure of organizational boundaries from financial disclosures. These estimates provide a cost calculus for organizing a marginal transaction internally or through markets, offering further implications for policy and managerial practice.