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Product Market Competition and Agency Costs

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  • Baggs, Jennifer
  • de Bettignies, Jean-Etienne

Abstract

We model the effects of product market competition on agency costs, and develop two main empirical predictions. First, competition, by reducing agency costs, unambiguously increases the importance firms place on quality improvements. This leads to higher powered incentives, and in turn to increased effort and quality. Second, these effects are increasing in the severity of agency problems, and should be stronger in large, hierarchical corporations (where agency problems are more severe) than in entrepreneurial firms. We test the predictions of our model using a unique dataset with both firm and employee characteristics.

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Bibliographic Info

Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2006287e.

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Date of creation: 04 Dec 2006
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Handle: RePEc:stc:stcp3e:2006287e

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Keywords: Employment and unemployment; Hours of work and work arrangements; Labour; Wages; salaries and other earnings;

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References

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  1. Green, Alison & Mayes, David, 1991. "Technical Inefficiency in Manufacturing Industries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(406), pages 523-38, May.
  2. Caves, Richard E, 1980. "Industrial Organization, Corporate Strategy and Structure," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 18(1), pages 64-92, March.
  3. Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers, Institute for Fiscal Studies W01/12, Institute for Fiscal Studies.
  4. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19894, London School of Economics and Political Science, LSE Library.
  5. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  6. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers, Centre for Economic Performance, LSE dp0182, Centre for Economic Performance, LSE.
  7. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers, Center for Economic Studies, U.S. Census Bureau 01-06, Center for Economic Studies, U.S. Census Bureau.
  8. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1425-1436, September.
  9. Jean-Etienne de Bettignies, 2004. "Product Market Competition and the Boundaries of the firm," Econometric Society 2004 North American Winter Meetings, Econometric Society 248, Econometric Society.
  10. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics, University of Munich, Department of Economics 19772, University of Munich, Department of Economics.
  11. Haskel, Jonathan, 1991. "Imperfect Competition, Work Practices and Productivity Growth," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 53(3), pages 265-79, August.
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Cited by:
  1. Nicola Lacetera & Lorenzo Zirulia, 2011. "Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision," NBER Working Papers 17031, National Bureau of Economic Research, Inc.

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