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The dark side of competitive pressure

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Author Info

  • Jason G. Cummins
  • Ingmar Nyman

Abstract

One of the most basic principles in economics is that competitive pressure promotes efficiency. However, this pressure can also have a dark side because it makes firms reluctant to act on private information that is unpopular with consumers. As a result, firms that possess superior information about the consequences of their actions for consumers' welfare may choose not to use it. We develop this idea in a simple model of delegated investment in which agents are fully rational and risk neutral, and agency problems are absent. We show that competitive pressure obliges firms to make inefficient decisions when their information advantage over consumers is relatively small. This result could be applied to a broad range of economically important situations.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-43.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-43

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Keywords: Investments ; Competition;

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References

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  1. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  2. Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier.
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  5. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
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  7. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  8. Heidhues, Paul & Lagerlof, Johan, 2003. "Hiding information in electoral competition," Games and Economic Behavior, Elsevier, vol. 42(1), pages 48-74, January.
  9. Grant, Simon & King, Stephen & Polak, Ben, 1996. " Information Externalities, Share-Price Based Incentives and Managerial Behaviour," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 1-21, March.
  10. Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers 1242, Cowles Foundation for Research in Economics, Yale University.
  11. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Adam Brandenburger & Ben Polak, 1996. "When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 523-541, Autumn.
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Cited by:
  1. Alex Chu & Xingqiang Du & Guohua Jiang, 2011. "Buy, Lie, or Die: An Investigation of Chinese ST Firms’ Voluntary Interim Audit Motive and Auditor Independence," Journal of Business Ethics, Springer, vol. 102(1), pages 135-153, August.
  2. Kemal K?vanc Akoz & Cemal Eren Arbatli, 2013. "Manipulated voters in competitive election campaigns," HSE Working papers WP BRP 31/EC/2013, National Research University Higher School of Economics.
  3. Roland Hodler & Simon Loertscher & Dominic Rohner, 2010. "Biased experts, costly lies, and binary decisions," IEW - Working Papers 496, Institute for Empirical Research in Economics - University of Zurich.
  4. Jason G. Cummins & Ingmar Nyman, 2013. "Yes Men in Tournaments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 621-659, December.
  5. Ingmar Nyman & Matthew Baker, 2012. "Job Hoarding," Hunter College Department of Economics Working Papers 437, Hunter College: Department of Economics.

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