DOES MARKET SELECTION MECHANISM MATTER IN PRESENCE OF OPPORTUNITY COSTS?
DOES MARKET SELECTION MECHANISM MATTER IN PRESENCE OF OPPORTUNITY COSTS?

Summary/Abstract: The literature has always considered that the natural selection mechanism will eliminate all inefficient firms from the market and that only efficient ones will survive which will increase the aggregated efficiency of the market. By assuming that firms differ not only by their efficiency levels but by their opportunity costs too. This paper argues that the selection mechanism will lead the most efficient firms to exit and the inefficient ones to persist in the equilibrium, which may explain the persistence of inefficient firms observed in many empirical studies.

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