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Product market competition, efficiency and agency costs: an empirical analysis

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  • Rachel Griffith

    (Institute for Fiscal Studies and University of Manchester)

Abstract

Policy makers in Europe have been concerned that lack of product market competition have led productivity to lag behind the US. Theoretical models are ambiguous about the direction of the effect that product market competition should have on productivity. On the one hand increasing competition lowers firm's profits and thus reduces incentives to exert effort (the Schumpeterian effect), on the other hand it reduces agency costs (or increases the risk of bankruptcy) thus increasing incentives to exert effort. This paper uses panel data on UK establishments over the period 1980-1996 to investigate the relationship between product market competition and productivity levels and growth rates. The introduction of the European Union Single Market Programme (SMP) is used as an instrument for the change in product market competition. The SMP was ex ante expected to affect competition in some industries but not others. It is shown that the Lerner Index fell in the affected industries after the SMP by more than in the non-affected. The results suggest that the increase in product market competition brought about by SMP led to an increase in overall levels of efficiency and growth rates. The sample of firms is then split into those with a principal-agent set up and those without. The increase in efficiency occurred in principal-agent type firms, and not in those where managerial control and ownership were more closely related. These results suggest that product market competition can play an important role in reducing agency costs and may explain some of the poor performance of European economies.

Suggested Citation

  • Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers W01/12, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:01/12
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    File URL: http://www.ifs.org.uk/wps/wp0112.pdf
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    References listed on IDEAS

    as
    1. Griliches, Zvi, 1998. "R&D and Productivity," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226308869.
    2. Rachel Griffith, 1999. "Using the ARD establishment level data to look at foreign ownership and productivity in the UK," IFS Working Papers W99/06, Institute for Fiscal Studies.
    3. Griffith, Rachel, 1999. "Using the ARD Establishment Level Data to Look at Foreign Ownership and Productivity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 109(456), pages 416-442, June.
    4. Ghosal, Vivek, 2000. "Product market competition and the industry price-cost markup fluctuations:: role of energy price and monetary changes," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 415-444, April.
    5. Richard E. Caves, 1992. "Industrial Efficiency in Six Nations," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031930, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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