A Bargaining Model of Farrell Inefficiency
AbstractAn enormous number of empirical papers have estimated technical efficiency, the distance of firms inside a frontier, following the model of Farrell (1957). We propose a theory that explains the distance these empirical papers seek to measure. The theory is based on the idea that workers can bargain low ‘effort’ (high crew sizes etc.) if they and the firm have some monopoly power. We provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature. We consider the relation between competition and efficiency and show how the model extends readily to address public sector inefficiency, increasing returns and manager/firm agency problems.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1902.
Date of creation: Jun 1998
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Other versions of this item:
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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