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In-House Competition, Organizational Slack and the Business Cycle

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  • Kerschbamer, Rudolf
  • Tournas, Yanni
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    Abstract

    This paper analyses the impact of variations of product demand on the amount of internal slack in multi-plant firms in a model in which facilities can produce output at a privately known cost up to a previously-determined capacity level. In such a model, the amount of slack in the firm is shown to be pro-cyclical. Indeed, as capacity constraints become tighter in booms, slack increases in booms, because the power of in-house competition is reduced, while the opposite is true in downturns. Also, in downturns the firm may use high-cost facili-ties even when low-cost plants are not running at capacity.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2557.

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    Date of creation: Sep 2000
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    Handle: RePEc:cpr:ceprdp:2557

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    Related research

    Keywords: Capacity; Competition; Demand Fluctuations; Slack;

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    References

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    7. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
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    17. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
    18. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
    19. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
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    24. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
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