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A Bargaining Model of Farrell Inefficiency

  • Haskel, Jonathan
  • Sanchis, Amparo

An enormous number of empirical papers have estimated technical efficiency, the distance of firms inside a frontier, following the model of Farrell (1957). We propose a theory that explains the distance these empirical papers seek to measure. The theory is based on the idea that workers can bargain low ‘effort’ (high crew sizes etc.) if they and the firm have some monopoly power. We provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature. We consider the relation between competition and efficiency and show how the model extends readily to address public sector inefficiency, increasing returns and manager/firm agency problems.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1902.

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Date of creation: Jun 1998
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Handle: RePEc:cpr:ceprdp:1902
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  1. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  2. Haskel, Jonathan & Sanchis, Amparo, 1998. "A Bargaining Model of Farrell Inefficiency," CEPR Discussion Papers 1902, C.E.P.R. Discussion Papers.
  3. Louis S. Jacobson & Robert J. LaLonde & Daniel Sullivan, 1992. "Earnings Losses of Displaced Workers," Upjohn Working Papers and Journal Articles 92-11, W.E. Upjohn Institute for Employment Research.
  4. Andrews, Martyn & Simmons, Robert, 1995. "Are Effort Bargaining Models Consistent with the Facts? An Assessment of the Early 1980s," Economica, London School of Economics and Political Science, vol. 62(247), pages 313-34, August.
  5. Johnson, George E, 1990. "Work Rules, Featherbedding, and Pareto-optimal Union-Management Bargaining," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages S237-59, January.
  6. Muellbauer, John, 1984. "Aggregate Production Functions and Productivity Measurement: A New Look," CEPR Discussion Papers 34, C.E.P.R. Discussion Papers.
  7. Andrew Oswald, 1984. "Efficient Contracts are on the Labour Demand Curve: Theory and Facts," Working Papers 555, Princeton University, Department of Economics, Industrial Relations Section..
  8. Haskel, Jonathan & Sanchis, Amparo, 1995. "Privatization and X-Inefficiency: A Bargaining Approach," CEPR Discussion Papers 1192, C.E.P.R. Discussion Papers.
  9. Bauer, Paul W., 1990. "Recent developments in the econometric estimation of frontiers," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 39-56.
  10. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  11. Border, K.C. & Segal, U., 1995. "Preferences Over Solutions to the Margaining Probem," UWO Department of Economics Working Papers 9518, University of Western Ontario, Department of Economics.
  12. Horn, Henrik & Lang, Harald & Lundgren, Stefan, 1994. "Competition, long run contracts and internal inefficiencies in firms," European Economic Review, Elsevier, vol. 38(2), pages 213-233, February.
  13. Nickell, Stephen & Wadhwani, Sushil & Wall, Martin, 1992. "Productivity growth in U.K. companies, 1975-1986," European Economic Review, Elsevier, vol. 36(5), pages 1055-1085, June.
  14. Seiford, Lawrence M. & Thrall, Robert M., 1990. "Recent developments in DEA : The mathematical programming approach to frontier analysis," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 7-38.
  15. Schmidt, Peter & Knox Lovell, C. A., 1979. "Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers," Journal of Econometrics, Elsevier, vol. 9(3), pages 343-366, February.
  16. Green, Alison & Mayes, David, 1991. "Technical Inefficiency in Manufacturing Industries," Economic Journal, Royal Economic Society, vol. 101(406), pages 523-38, May.
  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. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1993. "Long-term earnings losses of high-seniority displaced workers," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-20.
  19. Richard E. Caves, 1992. "Industrial Efficiency in Six Nations," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031930, June.
  20. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
  21. Border, Kim C. & Segal, Uzi, 1995. "Preferences Over Solution to the Bargaining Problem," Working Papers 923, California Institute of Technology, Division of the Humanities and Social Sciences.
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