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

  • Stennek, Johan

    ()

    (Institute for International Economic Studies, Stockholm University)

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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File URL: http://su.diva-portal.org/smash/get/diva2:327087/FULLTEXT01
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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 599.

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Length: 29 pages
Date of creation: 30 Oct 1997
Date of revision:
Handle: RePEc:hhs:iiessp:0599
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. 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.
  2. 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.
  3. Horn, H. & Lang, H. & Lundgren, S., 1991. "Managerial Effort Incentives, X-Inefficiency and International Trade," Papers 507, Stockholm - International Economic Studies.
  4. Nalebuff, Barry J & Stiglitz, Joseph E, 1983. "Information, Competition, and Markets," American Economic Review, American Economic Association, vol. 73(2), pages 278-83, May.
  5. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  6. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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