X-Inefficiency, Competition and Market Information

Whether competition forces firms toward efficient behavior is an open question. The authors consider a duopoly with firms run by managers and affected by adverse selection on costs. In contrast to recent literature, they point out that, to have a genuine effect on firm X-inefficiency, competition must change managerial incentives. By introducing the availability of some signal on the rivals' behavior, the authors show that, if costs are correlated, the contractual use of that signal can render private managerial information uninfluential. This result stresses the informational role of the market and suggests scope for future work. Copyright 1997 by Blackwell Publishing Ltd