On the “Adverse Selection” of Organizations
AbstractAccording 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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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2396.
Length: 26 pages
Date of creation: Oct 2006
Date of revision:
Publication status: published as 'On Adverse Selection of Technologies ' in: Journal of Institutional and Theoretical Economics, 2008, 164 (2), 343-355
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Other versions of this item:
- Matthias KrÃ¤kel, 2006. "On the â€œAdverse Selectionâ€ of Organizations," Bonn Econ Discussion Papers, University of Bonn, Germany bgse15_2006, University of Bonn, Germany.
- Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 168, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- D2 - Microeconomics - - Production and Organizations
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
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