DP1902 A Bargaining Model of Farrell Inefficiency

Author(s): Jonathan Haskel, Amparo Sanchis
Publication Date: June 1998
Keyword(s): Competition, effort, technical efficiency, X-inefficiency
JEL(s): J24, L10
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1902

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.