Internal rent seeking, works councils, and optimal establishment size
AbstractUsing a microeconomic model and data from the Establishment Panel of the German Institute for Employment Research, we analyze the optimal establishment size against the background of rent-seeking workers and the influence of works councils. The theoretical part shows that establishment size has not only a discouragement effect on the level of individual rent seeking but also a quantity effect as the number of rent seekers increases. The interplay of both effects – together with technological considerations – determines whether the employer chooses an inefficiently small or large establishment size. Introduction of a works council restores efficient establishment size although it is purely used as rent-seeking device. Whether the employer benefits from a works council or not depends on the degree of contract incompleteness and the degree of worker coordination via a works council. The empirical part indicates dominance of the discouragement effect over the quantity effect in establishments without works council. As theoretically predicted, works councils are beneficial by disentangling rent-seeking and production issues, thus eliminating the influence of the two rent-seeking effects.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 56 (2012)
Issue (Month): 4 ()
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Establishment size; Rent-seeking; Works council;
Other versions of this item:
- Michael Beckmann & Matthias Kräkel, 2011. "Internal Rent Seeking, Works Councils, and Optimal Establishment Size," Working papers 2011/14, Faculty of Business and Economics - University of Basel.
- J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
- J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
- J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
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