Harvard Law School
Corporate Law Research Seminar
Professor Mark Roe
Preliminary Draft: Comments warmly welcomed. Please do not cite.
* firstname.lastname@example.org. I would like to thank Professor Mark J. Roe for helpful comments, conversation, and
advice. I would also like to thank the participants in Professor Roe’s 2007-2008 Corporate Law Research Seminar
for their enthusiastic and thoughtful feedback. All errors are my own. A final draft will be posted in fall 2008.
Product market competition is often said to mitigate managerial agency problems.1 The
usual story is that managers who operate firms in non-competitive markets face little pressure to
produce goods efficiently, but managers who operate firms in competitive markets must
eliminate all inefficiencies--or face extinction. The theoretical literature, however, is mixed,
with recent scholars struggling to formalize the hypothesis.2 Likewise, the empirical evidence is
scant. Early studies often suffered from omitted variables bias, and recent studies have focused
not on product market competition, in general, but on finer distinctions, instead.3 Consequently,
views on the effectiveness of product market competition vary greatly, with early scholars
suggesting that managerial slack cannot exist in competitive industries, but recent scholars
coming to much more modest conclusions.4
1 See, e.g., Armen A. Alchian, Uncertainty, Evolution, and Economic Theory, 58 J. POL. ECON. 211 (1950); Mark J.
Roe, Corporate Law’s Limits, 31 J. LEGAL STUD. 233 (2002); George J. Stigler, The Economics of Scale, 1 J. L. &
ECON. 54 (1958). See also Andrei Shleifer and & Robert W. Vishny, A Survey of Corporate Governance 52 J. OF
FIN. 737 (1997) (arguing that firms with suboptimal governance structures will be forced out