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Title: A Bargaining Model of Farrell Inefficiency

Author(s): Jonathan Haskel and Amparo Sanchis

Publication Date: June 1998

Keyword(s): Competition, effort, technical efficiency and X-inefficiency

Programme Area(s): Human Resources

Abstract: An enormous number of empirical papers have estimated technical efficiency, the distance of firms inside a frontier, following the model of Farrell (1957). We propose a theory that explains the distance these empirical papers seek to measure. The theory is based on the idea that workers can bargain low ?effort? (high crew sizes etc.) if they and the firm have some monopoly power. We provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature. We consider the relation between competition and efficiency and show how the model extends readily to address public sector inefficiency, increasing returns and manager/firm agency problems.

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Bibliographic Reference

Haskel, J and Sanchis, A. 1998. 'A Bargaining Model of Farrell Inefficiency'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1902