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Whether competition forces ¢rms toward e¤cient behaviour is an open question. We consider a duopoly with ¢rms run by managers and a¡ected by adverse selection on costs. In contrast to recent literature, we point out that, to have a genuine e¡ect on ¢rm X-ine¤ciency, competition must change managerial incentives. By introducing the availability of some signal on the rivals' behaviour we show that, if costs are correlated, the contractual use of that signal can render private managerial information unin£uential. This result stresses the informational role of the market and suggests scope for future work.

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