MANAGERIAL EFFORT INCENTIVES, X-INEFFICIENCY AND INTERNATIONAL-TRADE

A contract-theoretic general equilibrium model is employed to investigate the old idea that international competition yields welfare gains by reducing internal slack - 'X-inefficiency' - in firms. This popular notion is partly supported in that trade is is shown to yield welfare gains by inducing increased supply of a non-contractible factor, which initially is socially under-supplied. However, it is also shown that common statements such as 'gains from reduced X-inefficiency' do not seem meaningful. Furthermore, contrary to popular belief, trade need not benefit the X-inefficient economy more than the X-efficient economy.