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Monopoly Power and Expense-Preference Behavior: Theory and Evidence to the Contrary

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  • Michael Smirlock
  • William Marshall
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    Abstract

    The expense-preference theory of the firm implies that in noncompetitive product markets, managers hire labor beyond the profit-maximizing level. This theory has recently received empirical support from Edwards (1977) and Hannan and Mavinga (1980). In this article it is shown that for expense-preference behavior to exist, the effectiveness of the technology for conflict control between shareholders and managers must be related to market structure, which is a tenuous proposition. Further, once differences in monitoring costs due to variation in firm size are controlled for, the empirical evidence supports managerial profit-maximizing rather than expense-preference behavior.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 14 (1983)
    Issue (Month): 1 (Spring)
    Pages: 166-178

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    Handle: RePEc:rje:bellje:v:14:y:1983:i:spring:p:166-178

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    Cited by:
    1. Yamori, Nobuyoshi, 1998. "Bureaucrat-managers and corporate governance: expense-preference behaviors in Japanese financial institutions," Economics Letters, Elsevier, vol. 61(3), pages 385-389, December.
    2. Loretta J. Mester, 1989. "Owners versus managers: who controls the bank?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 13-23.
    3. repec:fth:prinin:179 is not listed on IDEAS
    4. Neuberger, Doris, 1997. "Structure, Conduct and Performance in Banking Markets," Thuenen-Series of Applied Economic Theory 12, University of Rostock, Institute of Economics.
    5. Wang, David Han-Min, 2010. "Corporate investment, financing, and dividend policies in the high-tech industry," Journal of Business Research, Elsevier, vol. 63(5), pages 486-489, May.

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