IDEAS home Printed from https://ideas.repec.org/a/bla/jomstd/v40y2003i2p431-457.html
   My bibliography  Save this article

Internal Market Failure: A Framework for Diagnosing Firm Inefficiency

Author

Listed:
  • Aidan R. Vining

Abstract

ABSTRACT The theory of market and government failure can be used to diagnose inefficiency within firms and to identify strategies to deal with these problems. Internal market failures (IMFs) – internal public good problems, internal negative and positive externalities, internal information asymmetries, internal monopolies, the presence of uncertainty – create inefficiencies within firms just as they do in normal markets. As well, self‐interested behaviour by executives and internal interest groups (rent‐seeking) are analogous to government, or governance, failures (IGFs). Associated with many of these internal market failure problems are generic solutions that can usefully inform executives in their efforts to improve efficiency within the firm. Internal governance failures, in contrast, normally require action by shareholders and boards of directors.

Suggested Citation

  • Aidan R. Vining, 2003. "Internal Market Failure: A Framework for Diagnosing Firm Inefficiency," Journal of Management Studies, Wiley Blackwell, vol. 40(2), pages 431-457, March.
    • Handle: RePEc:bla:jomstd:v:40:y:2003:i:2:p:431-457
    DOI: 10.1111/1467-6486.00346
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1467-6486.00346
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1467-6486.00346?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. John M. Abowd, 1990. "Does Performance-Based Managerial Compensation Affect Corporate Performance?," ILR Review, Cornell University, ILR School, vol. 43(3), pages 52, April.
    2. Carmichael, H Lorne & MacLeod, W Bentley, 2000. "Worker Cooperation and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 1-19, January.
    3. Douglas L. Kruse, 1993. "Profit Sharing: Does It Make a Difference?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ps.
    4. repec:bla:jfinan:v:43:y:1988:i:3:p:593-616 is not listed on IDEAS
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    6. Mariti, P & Smiley, R H, 1983. "Co-Operative Agreements and the Organization of Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 31(4), pages 437-451, June.
    7. Bryan Caplan, 2001. "Has Leviathan Been Bound? A Theory of Imperfectly Constrained Government with Evidence from the States," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 825-847, April.
    8. Drago, Robert & Garvey, Gerald T, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 1-25, January.
    9. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
    10. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    11. Ashton, Rh, 1990. "Pressure And Performance In Accounting Decision Settings - Paradoxical Effects Of Incentives, Feedback, And Justification," Journal of Accounting Research, Wiley Blackwell, vol. 28, pages 148-180.
    12. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    13. Wensley, Robin, 1999. "Product Strategies, Managerial Comprehension, and Organizational Performance," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(1), pages 33-42, Spring.
    14. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    15. Bill Taylor, 1999. "Patterns of Control within Japanese Manufacturing Plants in China: Doubts about Japanization in Asia," Journal of Management Studies, Wiley Blackwell, vol. 36(6), pages 853-873, November.
    16. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-978, October.
    17. Eccles, Robert G., 1981. "The quasifirm in the construction industry," Journal of Economic Behavior & Organization, Elsevier, vol. 2(4), pages 335-357, December.
    18. Button, Kenneth J & Weyman-Jones, Thomas G, 1992. "Ownership Structure, Institutional Organization and Measured X-Efficiency," American Economic Review, American Economic Association, vol. 82(2), pages 439-445, May.
    19. John Sutton, 1986. "Non-Cooperative Bargaining Theory: An Introduction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 709-724.
    20. Véronique Ambrosini & Cliff Bowman, 2001. "Tacit Knowledge: Some Suggestions for Operationalization," Journal of Management Studies, Wiley Blackwell, vol. 38(6), pages 811-829, September.
    21. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, vol. 25(9), pages 833-848, September.
    22. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    23. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    24. Masten, Scott E & Meehan, James W, Jr & Snyder, Edward A, 1991. "The Costs of Organization," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 1-25, Spring.
    25. Dixit, Avinash & Londregan, John, 1995. "Redistributive Politics and Economic Efficiency," American Political Science Review, Cambridge University Press, vol. 89(4), pages 856-866, December.
    26. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
    27. Vining, Aidan R. & Weimer, David L., 1990. "Government Supply and Government Production Failure: A Framework Based on Contestability ," Journal of Public Policy, Cambridge University Press, vol. 10(1), pages 1-22, January.
    28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    29. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    30. Bartel, Ann P, 1995. "Training, Wage Growth, and Job Performance: Evidence from a Company Database," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 401-425, July.
    31. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
    32. Vining, Aidan & Globerman, steven, 1999. "A conceptual framework for understanding the outsourcing decision," European Management Journal, Elsevier, vol. 17(6), pages 645-654, December.
    33. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-770, September.
    34. Canice Prendergast, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 523-534.
    35. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    36. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
    37. Romano Dyerson & Frank U. Mueller, 1999. "Learning, Teamwork and Appropriability: Managing Technological Change in the Department of Social Security," Journal of Management Studies, Wiley Blackwell, vol. 36(5), pages 629-652, September.
    38. John Paul Macduffie, 1995. "Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry," ILR Review, Cornell University, ILR School, vol. 48(2), pages 197-221, January.
    39. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
    40. Banker, Rajiv D. & Lee, Seok-Young & Potter, Gordon, 1996. "A field study of the impact of a performance-based incentive plan," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 195-226, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Aidan R. Vining, 2016. "What Is Public Agency Strategic Analysis (PASA) and How Does It Differ from Public Policy Analysis and Firm Strategy Analysis?," Administrative Sciences, MDPI, vol. 6(4), pages 1-31, December.
    2. Bruno S. Frey & Margit Osterloh, "undated". "Yes, Managers Should be Paid Like Bureaucrats," IEW - Working Papers 187, Institute for Empirical Research in Economics - University of Zurich.
    3. George, Rejie & Kabir, Rezaul, 2008. "Business groups and profit redistribution: A boon or bane for firms?," Journal of Business Research, Elsevier, vol. 61(9), pages 1004-1014, September.
    4. Michael Young & Terence Tsai & Xinran Wang & Shubo Liu & David Ahlstrom, 2014. "Strategy in emerging economies and the theory of the firm," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 331-354, June.
    5. Nicolai Foss, 2006. "Knowledge and Organization in the Theory of the Multinational Corporation: Some Foundational Issues," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 10(1), pages 3-20, March.
    6. Steven Globerman & Aidan Vining, 2004. "The Outsourcing Decision: A Strategic Framework," International Trade 0404007, University Library of Munich, Germany.
    7. Philipp Wetzel & Erik Hofmann, 2020. "Toward a Multi-Sided Model of Service Quality for Logistics Service Providers," Administrative Sciences, MDPI, vol. 10(4), pages 1-24, October.
    8. Margit Osterloh & Bruno S. Frey, "undated". "Corporate Governance for Crooks? The Case for Corporate Virtue," IEW - Working Papers 164, Institute for Empirical Research in Economics - University of Zurich.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    2. Brent Boning & Casey Ichniowski & Kathryn Shaw, 2007. "Opportunity Counts: Teams and the Effectiveness of Production Incentives," Journal of Labor Economics, University of Chicago Press, vol. 25(4), pages 613-650.
    3. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    4. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, April.
    5. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    7. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    8. Román, Francisco J., 2009. "An analysis of changes to a team-based incentive plan and its effects on productivity, product quality, and absenteeism," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 589-618, July.
    9. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    10. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    11. Sharon Novak & Scott Stern, 2009. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," Management Science, INFORMS, vol. 55(2), pages 311-332, February.
    12. Uwe Jirjahn & Jens Mohrenweiser, 2019. "Performance Pay and Applicant Screening," British Journal of Industrial Relations, London School of Economics, vol. 57(3), pages 540-575, September.
    13. Robert Gibbons, 2010. "Inside Organizations: Pricing, Politics, and Path Dependence," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 337-365, September.
    14. Peter Cappelli & Martin J. Conyon, 2018. "What Do Performance Appraisals Do?," ILR Review, Cornell University, ILR School, vol. 71(1), pages 88-116, January.
    15. 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.
    16. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    17. Christian Zehnder & Holger Herz & Jean-Philippe Bonardi, 2016. "A Productive Clash of Cultures: Injecting Economics into Leadership Research," CESifo Working Paper Series 6175, CESifo.
    18. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    19. Daniel Parent, 2001. "Incentive Pay in the United States: Its Determinants and Its Effects," CIRANO Working Papers 2001s-04, CIRANO.
    20. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    21. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    22. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    23. Banerjee, Swapnendu & Chakraborty, Somenath, 2022. "Individual versus Team Production with Social Preferences," MPRA Paper 120996, University Library of Munich, Germany.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jomstd:v:40:y:2003:i:2:p:431-457. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2380 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.