KDI Journal of Economic Policy

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P-ISSN 1738-656X

Vol.27, No.2

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한국개발연구. Vol. 27, No. 2, December 2005, pp. 205-237

https://doi.org/10.23895/kdijep.2005.27.2.205

× KDI Open Access is a program of fully open access journals to facilitate the widest possible dissemination of high-quality research. All research articles published in KDI JEP are immediately, permanently and freely available online for everyone to read, download and share in terms of the Creative Commons Attribution 4.0 International License.

Product Market Competition and Internal Efficiency of the Firm

Sung bin Cho

Author & Article History

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Abstract

This paper analyzes a mechanism through which product market competition affects allocation of the managerial efforts. There are two types of firms, incumbents and entrants. Each incumbent firm delegates its control to a manager and cannot observe the manager's total effort. The managers of incumbent firms allocate their effort to two different activities: cost reduction (productive effort) and rent protection (unproductive effort). An increase in competition, measured by the number of incumbent firms, has two effects: an "output effect" which decreases the managerial incentive for productive effort, and an "effort substitution effect" that makes managers exert more productive effort and less unproductive effort. This paper identifies the conditions under which product market competition lowers the cost of providing incentives for productive effort and hence, to the conclusion that increased competition leads to increased efficiency.

Keywords

시장경쟁(Product Market Competition), 산출효과(Output Effect), 노력대체효과(Effort Substitution Effect), 경영자의 유인(Managerial Incentives), 내부효율성(Internal Efficiency)

JEL Code

D21, D43, L22

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