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Product Market Competition and Agency Costs

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  • Baggs, Jennifer
  • de Bettignies, Jean-Etienne

Abstract

We model the effects of product market competition on agency costs, and develop two main empirical predictions. First, competition, by reducing agency costs, unambiguously increases the importance firms place on quality improvements. This leads to higher powered incentives, and in turn to increased effort and quality. Second, these effects are increasing in the severity of agency problems, and should be stronger in large, hierarchical corporations (where agency problems are more severe) than in entrepreneurial firms. We test the predictions of our model using a unique dataset with both firm and employee characteristics.

Suggested Citation

  • Baggs, Jennifer & de Bettignies, Jean-Etienne, 2006. "Product Market Competition and Agency Costs," Analytical Studies Branch Research Paper Series 2006287e, Statistics Canada, Analytical Studies Branch.
    • Handle: RePEc:stc:stcp3e:2006287e
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    File URL: https://www150.statcan.gc.ca/n1/en/catalogue/11F0019M2006287
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    References listed on IDEAS

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    1. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
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    Cited by:

    1. Ahmed Ennasri, 2010. "Incitations Managériales et Concurrence : Synthèse de la Littérature," Studies and Syntheses 10-03, LAMETA, Universtiy of Montpellier, revised Oct 2010.
    2. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
    3. Can Erutku, 2016. "Competition and Agency Cost," Economics Bulletin, AccessEcon, vol. 36(2), pages 634-639.
    4. Ester Manna, 2013. "Intrinsically Motivated Agents: Blessing or Curse for Firms?," 2013 Papers pma1910, Job Market Papers.
    5. Kira R. Fabrizio & Nancy L. Rose & Catherine D. Wolfram, 2007. "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency," American Economic Review, American Economic Association, vol. 97(4), pages 1250-1277, September.
    6. Lacetera, Nicola & Zirulia, Lorenzo, 2012. "Individual preferences, organization, and competition in a model of R&D incentive provision," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 550-570.
    7. Sue-Fung Wang & Yow-Jen Jou & Ke-Chiun Chang & Kun-Wei Wu, 2014. "Industry Competition, Agency Problem, and Firm Performance," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 76-93, December.
    8. Evangelia Chalioti, 2015. "Incentive contracts under product market competition and R&D spillovers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 305-328, February.

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    Keywords

    Employment and unemployment; Hours of work and work arrangements; Labour; Wages; salaries and other earnings;
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