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Monopoly Power and Expense-Preference Behavior: Theory and Evidence to the Contrary

Michael Smirlock and William Marshall
The Bell Journal of Economics
Vol. 14, No. 1 (Spring, 1983), pp. 166-178
Published by: RAND Corporation
DOI: 10.2307/3003544
Stable URL: http://www.jstor.org/stable/3003544
Page Count: 13
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Monopoly Power and Expense-Preference Behavior: Theory and Evidence to the Contrary
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Abstract

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.

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