A bargaining model of Farrell inefficiency

An enormous number of empirical papers have estimated technical efficiency, the distance of firms inside a frontier, following the model of Farrell (F arrell, 1957. The measurement of productive efficiency. Journal of the Roya l Statistical Society Series A 120 (3), 253-290). 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 e tc.) if they and the firm have some monopoly power. We provide simple theor etical expressions for the empirical measures of technical and allocative e fficiency and compare them to those in the statistical literature. We also consider the relation between competition and efficiency. (C) 2000 Elsevier Science B.V. All rights reserved.