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Competition Reduces X-Inefficiency - A Note on a Limited Liability Mechanism

  • Stennek, J.

The study illustrates that a financial restriction may serve as a disciplining device on the internal efficiency of a firm, and that the disciplining power is higher the tougher the product market competition is. The financial restriction is modeled as a limited liability constraint, that is a non-negative profit constraint. Hence, this limited liability mechanism may, in part, account for the disciplining power of product market competition on firm efficiency, alleged by policy makers as well as economists.

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Paper provided by Stockholm - International Economic Studies in its series Papers with number 599.

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Length: 28 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:fth:stocin:599
Contact details of provider: Postal: UNIVERSITY OF STOCKHOLM, INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES, S- 106 91 STOCKHOLM SWEDEN.
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  1. Horn, H. & Lang, H. & Lundgren, S., 1991. "Competition, Long Run Contracts and Internal Inefficiencies in Firms," Papers 506, Stockholm - International Economic Studies.
  2. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  3. Hermalin, Benjamin E., 1991. "The Effects of Competition on Executive Behavior," Department of Economics, Working Paper Series qt7m13v5dd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  5. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  6. Nalebuff, Barry J & Stiglitz, Joseph E, 1983. "Information, Competition, and Markets," American Economic Review, American Economic Association, vol. 73(2), pages 278-83, May.
  7. Horn, H. & Lang, H. & Lundgren, S., 1991. "Managerial Effort Incentives, X-Inefficiency and International Trade," Papers 507, Stockholm - International Economic Studies.
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