COMPETITION AND THE EVOLUTION OF EFFICIENCY

This paper presents an evolutionary model of the relationship between inter-firm competition and intra-firm organizational or X-efficiency. We model X-inefficiency within the firm as a prisoner's dilemma effort -monitoring problem, whose evolution is influenced by external competi tive pressure from other firms. A closed form stochastic equilibrium d isplaying ''survival of the fittest'' dynastic cycles is derived and a nalyzed. The main result is that there exists a well defined sense in which competition is a surprisingly powerful force for efficiency.