Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 599: Competition Reduces X-Inefficiency - A note on a Limited Liability Mechanism

Johan Stennek ()
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Johan Stennek: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 91 Stockholm, Sweden

Abstract: 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.

Keywords: financial restriction; efficiency of a firm; disciplining power

JEL-codes: D21

29 pages, October 30, 1997

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