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The Market Mechanism as an Incentive Scheme
Oliver D. Hart
The Bell Journal of Economics
Vol. 14, No. 2 (Autumn, 1983), pp. 366-382
Published by: RAND Corporation
Stable URL: http://www.jstor.org/stable/3003639
Page Count: 17
You can always find the topics here!Topics: Financial management, Input prices, Prices, Supply, Product markets, Marginal costs, Economic competition, Market competition, Market prices, Capital costs
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It is often argued that competition in the product market reduces managerial slack. We formalize this idea. Suppose that there is a common component to firms' costs, i.e., as one firm's (total and marginal) costs fall, so do those of other firms. Then when costs fall, profit-maximizing firms expand. This reduces product prices and gives the manager of a nonprofit-maximizing firm less opportunity for discretionary behavior than if his firm's costs had fallen alone and product prices had not changed. Hence average managerial slack is lower under competition than if there is a single nonprofit-maximizing monopolistic firm.
The Bell Journal of Economics © 1983 RAND Corporation