Working Paper: CEPR ID: DP2544
Authors: László Halpern; Gábor Kőrösi
Abstract: One of the major tasks facing a transition economy is to create the competitive environment of a properly functioning market economy. It is widely believed that competition has a positive effect on efficiency, but the theoretical and empirical support is quite scarce. The objective of this paper is to investigate the link between competition and efficiency for the Hungarian corporate sector during various phases of the transition process. We employ frontier production functions for exploring differences among groups of firms, and for identifying the typical adjustment process of each group separately throughout the transition period until 1997. Groups are defined according to industries, size, and ownership.The estimated production functions indicate a gradual improvement in efficiency and a shift from decreasing to increasing returns to scale due to a growing share of small firms entering the higher returns regime. Market shares can be explained by the degree of internal and external competition and by the efficiency of the firm.The transitional recession in 1990–1 was followed by a fast consolidation period, with rapidly increasing firm level efficiency and improving returns to scale. This consolidation period ended in 1994–5, and after that mean firm level efficiency only changed slowly. Massive investments largely increased the market share of the better performing firms and sectors, resulting in rapid economic growth. However, this economic growth may become vulnerable if productive efficiency fails to improve faster.
Keywords: efficiency; firm in transition economy; production functions
JEL Codes: C23; D21; D24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition (L13) | efficiency (D61) |
| transitional recession (P27) | efficiency (D61) |
| adoption of new accounting standards (M48) | efficiency (D61) |
| tough bankruptcy law (K35) | efficiency (D61) |
| small firms entering market (M13) | efficiency (D61) |
| efficient firms (D22) | market share (L17) |
| efficiency (D61) | productivity (O49) |
| market characteristics (D49) | firm performance (L25) |