Abstract
This paper presents an evolutionary model of the relationship between inter-firm competition and intra-firm organizational or X-efficiency. We model X-inefficiency within the firm as a prisoner's dilemma effort-monitoring problem, whose evolution is influenced by external competitive pressure from other firms. A closed form stochastic equilibrium displaying “survival of the fittest” dynastic cycles is derived and analyzed. The main result is that there exists a well defined sense in which competition is a surprisingly powerful force for efficiency.
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