Monopoly Power and Expense-Preference Behavior: Theory and Evidence to the Contrary
The expense-preference theory of the firm implies that in noncompetitive product markets, managers hire labor beyond the profit-maximizing level. This theory has recently received empirical support from Edwards (1977) and Hannan and Mavinga (1980). In this article it is shown that for expense-preference behavior to exist, the effectiveness of the technology for conflict control between shareholders and managers must be related to market structure, which is a tenuous proposition. Further, once differences in monitoring costs due to variation in firm size are controlled for, the empirical evidence supports managerial profit-maximizing rather than expense-preference behavior.
Volume (Year): 14 (1983)
Issue (Month): 1 (Spring)
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