The Effects of Competition on Executive Behavior

Economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems. This article investigates this presumption. It finds that the effects of competition on executive behavior can be decomposed into four effects, each of which is of potentially ambiguous sign. Theory thus offers no definitive defense of this presumption. This article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems. In some sets, important conditions are that increased competition reduce the executive's expected income and that agency goods (e.g., shirking) be normal goods for the executive. The article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition.