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Governance Coordination Cost (GCC) — a structural variable linking institutional scale, governance layering, and macroeconomic productivity outcomes.
Productivity in mature economies has been slowing for decades. Standard explanations focus on technology, demographics, or labour markets. This paper offers a different account.
As institutions grow and mature, they accumulate governance layers—compliance requirements, approval chains, oversight committees, documentation obligations. Each layer is individually rational. But collectively, they create Governance Coordination Cost that absorbs an increasing share of institutional capacity.
GCC is not waste. It includes both necessary governance cost (coordination required for institutional integrity) and compounding governance cost (coordination from layered duplication, authority ambiguity, and defensive risk management). The problem is that GCC grows nonlinearly with institutional scale—and institutions have no structural incentive to reduce it.
The formula: Effective Productivity = Output / (Labour + GCC)
GCC is a function of six structural variables that determine how much coordination an institution requires to authorise decisions:
GCC = f(A, L, C, E, R, D)
Decision rights scattered across differentiated units, creating combinatorial coordination interfaces
Path-dependent accumulation of oversight structures that rarely contract
Total regulatory and reporting obligations requiring interpretive alignment
How often and how far decisions must travel before reaching authorised resolution
Sensitivity to reputational and legal risk, driving defensive behaviour
Audit, reporting, and record-keeping requirements that grow with oversight
Comparing a mature, regulated institution against a lean organisation across all six GCC variables
The critical insight: GCC doesn’t grow proportionally with institutional size. It accelerates. ∂²GCC/∂Scale² > 0. Each additional layer of governance creates coordination requirements with every existing layer.
Illustrative. As institutional scale increases, GCC absorbs a growing share of capacity while effective output declines.
GCC grows nonlinearly because five mechanisms reinforce each other:
As decision rights are distributed across more units, bilateral coordination requirements grow superlinearly. Ten units with shared authority don't need ten coordination paths — they need forty-five.
New oversight layers are added after failures but almost never removed. This creates a ratchet effect where governance can only grow, regardless of whether the original risk persists.
Each new regulation requires not just compliance but interpretation — alignment with existing rules, conflict resolution between frameworks, and ongoing monitoring of regulatory evolution.
Risk-averse institutions over-invest in governance not because it reduces risk, but because it provides defensible process in the event of failure. The goal shifts from effectiveness to audit trail.
Technology makes more behaviour observable, which paradoxically increases GCC. More data means more that can be audited, reviewed, and reported — expanding the compliance surface rather than reducing it.
Effective Productivity = Output / (Labour + GCC)
When GCC rises faster than output, effective productivity declines — even if technological productivity improves. This explains a puzzle: how can economies invest heavily in technology yet show stagnating productivity? Because governance overhead absorbs the gains.
This connects to two established observations in economics:
Governance-intensive sectors resist productivity gains because their core work is coordination, not production. Adding technology to a coordination problem often adds complexity rather than reducing it.
Administrative personnel expand not because of laziness but because governance coordination cost grows structurally. Parkinson observed the symptom; GCC identifies the mechanism.
GCC is not an argument for deregulation. It is an argument for governance architecture innovation. The key distinction:
Coordination from layered duplication, authority ambiguity, and defensive risk management. Grows nonlinearly. Can be reduced through architectural redesign without compromising institutional integrity.
Coordination required for institutional integrity — accountability, legitimacy, and stakeholder protection. This is proportionate and irreducible. The goal is never to eliminate it.
Every institution has an optimal point where governance is proportionate to its risk, complexity, and legitimacy expectations:
Governance Density* = f(Risk, Complexity, Legitimacy Expectations)
Below this point, the institution lacks accountability. Above it, coordination overhead reduces rather than enhances institutional effectiveness.
Under-governed
Accountability gaps
Optimal zone
Governance Density*
Over-governed
Compounding overhead
Why doesn’t GCC self-correct? Because governance operates under a structural asymmetry:
Adding governance: individually rational, low personal risk
After a failure, recommending additional oversight is always defensible. No one is blamed for being too careful.
Removing governance: high personal risk, uncertain benefit
Recommending the removal of a review process means accepting personal liability if something goes wrong. The asymmetry ensures layers can only accumulate.
The paper extends the basic GCC model to include capital structure effects:
GCC = f(A, L, C, E, R, D; H, V)
Short capital horizons (annual budgets, quarterly reporting) increase governance density because each renewal cycle requires re-justification, re-approval, and re-documentation.
Volatile funding sources amplify defensive governance. When survival is uncertain, institutions over-invest in compliance to signal legitimacy to funders — creating governance for optics rather than integrity.
GCC can be measured and managed. Architectural integration — reducing authority fragmentation, simplifying escalation pathways, eliminating documentation duplication — can reduce E, A, and D without increasing risk exposure.
Regulation generates GCC. This doesn't mean less regulation, but regulation designed with coordination cost in mind. Interoperable compliance frameworks reduce interpretive overhead across jurisdictions.
Governance is a design variable, not an inherited constraint. The same institutional integrity can be achieved with radically different coordination architectures — and the difference shows up in productivity.