Effects of Competition and Exit Threats on Organizational Performance: A natural experiment from an accidental overbuilding of schools

We test the proposition that increased competition and exit threats improve agent incentives and performance. Government overestimation of post-1997 Chinese immigration caused varying degrees of over-building in Hong Kong school districts. In the early 2000s, Hong Kong government addressed this over-building by announcing that schools which could not recruit enough students would be closed. Schools in the over-built districts faced more competition, and many eventually closed. We find that school scores were significantly higher in the less over-built districts, suggesting that schools perform better under weaker exit threats. However, school scores were significantly lower in the more over-built districts, suggesting that higher exit threats worsen organizational performance.