Industrial Inefficiency and Downsizing

Where does corporate "fat" accumulate and how is it eliminated in response to competitive forces? This study finds that increases in industry-level import competition and merger activity, as well as declines in industry-level demand, explain layoffs and plant closures by inefficient firms. Downsizing in response to these competitive threats is often undertaken in a suboptimal fashion. Managers announce layoffs in spite of their convictions that such behavior undermines productivity. Further, managers close plants that are not among the most inefficient in their industry. The authors conclude that these puzzling managerial actions, though ostensibly inefficient, are perfectly consistent with profit-maximizing behavior.