Delegation and Efficiency in a Mixed Oligopoly

Fatima Barros

Annals of Economics and Statistics, 1994, issue 33, 51-72

Abstract: The present work analyses the effect of delegation on the market outcome when agents have private information about the firms' productivity. Two types of firms are considered: managerial firms (delegation) and entrepreneurial firms (no delegation). Due to the asymmetry of information managerial firms are less efficient (productive efficiency) because they must pay informational rents to their managers. The existence of delegating firms leads the market outcome further away from the competitive one. However the presence of non-delegating firms limits the agents' informational rents. We show that there is an improvement in terms of allocative efficiency in the market when one of the managerial firms is a non-profit maximizer. However this improvement has a negative counterpart in terms of productive efficiency: firstly, the welfare maximizing firm leads to an increase of the average cost of each unit of output, due to the large inequality between firms' production and to increasing marginal costs; secondly, the public firm bears a larger informational rent than private firms. The public firm is welfare improving mainly when the number of competing firms is small and/or the proportion of managerial firms is large. In certain cases the entrepreneurial firms substitute the role of the public firm as a regulation mechanism.

Date: 1994
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