Economic Efficiency, Competition and Equilibrium in Heterogeneous Production

Průša, Jan

This thesis provides a bridge between two strands of efficiency literature. As we describe in the first part, the theory of efficiency is generally focused on equilibrium and mild devia- tions from it. In contrast, empirical studies document large variations in efficiency that are persistent in real economies. We describe two theoretical concepts as driving forces behind fluctuating performance of companies. Firstly, efficiency is derived from competition and is dynamic by its nature. As production happens in time, changing supply and demand conditions induce the ne- cessity to continuously adjust production processes. These changes are implemented under conditions of uncertainty, which directly leads to regular inefficiencies, implying that out- of-equilibrium situations are normal rather than rare. Secondly, standard models typically rely on price exogeneity to separate technical and allocative components of overall economic efficiency. We point out that this assumption is likely to fail due to extreme heterogeneity of the units of analysis. We elaborate in detail on the significance of heterogeneity in efficiency models, especially the heterogeneity of capital. As a result we demonstrate how various combinations of heterogeneous assets imply further swings in efficiency. We show that integrating both...

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