Internal Rent Seeking, Works Councils, and Optimal Establishment Size
Using 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 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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