As demand in an industry shrinks, pressure for the reduction of capacity arises. A key issue is whether plants which, from an efficiency perspective, should reduce output in fact do so. Focusing on the Japanese cement industry, we examine whether less efficient plants reduce capacity. We find that less efficient firms are not more likely to reduce capacity than more efficient firms; however, less efficient plants within a multi-plant firm are more likely to reduce capacity than more efficient plants. In addition, we find that this divestment pattern has led to a substantial drop in industry-wide allocative efficiency.
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