An empirical application of transaction-costs theory to organizational design characteristics

The environmental uncertainty component of transaction-costs theory was used to predict the organizational structural characteristics of size (number of employees) and horizontal differentiation (number of vice presidents) using financial and management information from the COMPACT DISCLOSURE data base (which contains the most recent annual and periodic reports for more than 12,000 public companies). Organizations were categorized as low- or high-uncertainty industries according to Dess and Beard's (1984) Dynamism Scale, and net sales volume was controlled. As predicted, high-uncertainty companies had significantly higher horizontal differentiation than low-uncertainty firms, a finding that supports the transaction-costs expectation that organizations may require more departments or personnel to cope with increasing uncertainty. Surprisingly, low-uncertainty firms were found to have significantly more employees than high-uncertainty organizations, which is the opposite of what transaction-costs theory predicts. Possible explanations for this unexpected finding and further potential limitations are discussed.