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On the “Adverse Selection” of Organizations

  • Matthias Kräkel


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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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse15_2006.

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Length: 24
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:bon:bonedp:bgse15_2006
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
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  1. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
  2. 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.
  3. Konrad, Kai A., 2001. "Investment in the absence of property rights: the role of incumbency advantages
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    ," Discussion Papers, Research Unit: Market Processes and Governance FS IV 01-18, Social Science Research Center Berlin (WZB).
  4. Konrad, Kai A., 2003. "Bidding in hierarchies
    [Das Bieten in Hierarchien]
    ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2003-27, Social Science Research Center Berlin (WZB).
  5. Inderst, Roman & Mueller, Holger M & Wärneryd, Karl, 2002. "Distributional Conflict in Organisations," CEPR Discussion Papers 3315, C.E.P.R. Discussion Papers.
  6. Ellingsen, Tore, 1997. "Efficiency Wages and X-Inefficiencies," SSE/EFI Working Paper Series in Economics and Finance 180, Stockholm School of Economics.
  7. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
  8. 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.
  9. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
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