In-house competition, organizational slack, and the business cycle |
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Authors: | Rudolf Kerschbamer Yanni Tournas |
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Affiliation: | a Department of Economics, University of Vienna, Hohenstaufengasse 9, A-1010 Vienna, Austria b Department of Economics, University of Innsbruck, Universitätsstrasse 15, A-6020 Innsbruck, Austria c Center for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, UK d Department of Economics, Rutgers University, New Brunswick, NJ, USA |
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Abstract: | Multiplant firms pit their facilities against each other for production assignments. The present paper studies the consequences of this practice in a model where production is limited by capacity constraints and asymmetric information allows facilities to accumulate slack. It shows the amount of slack per unit of output to be pro-cyclical. Indeed, as capacity constraints become more acute in economic booms, the power of in-house competition for quota assignments is reduced and slack per unit of output increases, while the opposite is true in downturns. Moreover, in downturns firms may use higher cost facilities even when lower cost plants are not running at capacity since this boosts X-efficiency in low-cost plants. |
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Keywords: | D20 D82 F23 L22 |
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