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On the "Adverse Selection" of Organizations

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Author Info
Matthias Kräkel () (University of Bonn and IZA Bonn)

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Abstract

According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2396.

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Length: 26 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2396

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Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
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Related research
Keywords: contests; foundation of organizations; internal rent seeking;

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Find related papers by JEL classification:
D2 - Microeconomics - - Production and Organizations
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ellingsen, Tore, 1997. " Efficiency Wages and X-Inefficiencies," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(4), pages 581-96, December. [Downloadable!] (restricted)
    Other versions:
  2. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February. [Downloadable!] (restricted)
    Other versions:
  3. Kai Konrad, 2002. "Investment in the Absence of Property Rights: The Role of Incumbency Advantages," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Konrad, Kai A., 2004. "Bidding in hierarchies," European Economic Review, Elsevier, vol. 48(6), pages 1301-1308, December. [Downloadable!] (restricted)
  5. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December. [Downloadable!] (restricted)
  6. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
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  7. Muller, Holger M & Warneryd, Karl, 2001. "Inside versus Outside Ownership: A Political Theory of the Firm," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 527-41, Autumn.
  8. Inderst, Roman & Müller, Holger M. & Wärneryd, Karl, 2000. "Influence Costs and Hierarchy," Sonderforschungsbereich 504 Publications 00-30, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
    Other versions:
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