Distinguishing Useful and Wasteful Slack

Abstract

Can inefficiency be rational? Excess resources or slack may serve as a buffer against environmental shocks, help decouple organizations, ease planning and implementation, support innovation, and enable effective responses to competitors. Slack may however also be the result of inefficiency. In Bogetoft and Kerstens, Distinguishing useful and wasteful slack, we propose an approach to separate useful and wasteful slack. If an organization can maintain the same levels of output and slack at lower cost, there is wasteful or nonrationalizable spending. We develop ways to measure the extent to which total spending can be rationalized and show how to statistically estimate and test the usefulness of the available slack using bootstrapping.