Inside vs Outside Ownership: A Political Theory of the Firm
If contracting within the firm is incomplete, managers will expend resources on trying to appropriate a share of the surplus that is generated. We show that outside ownership may alleviate the deadweight losses associated with such costly distributional conflict, even if all it does is add another level of conflict. In case managers have to be provided with incentives to make firm-specific investments, there is a tradeoff between minimizing rent-seeking costs and maximizing output. This suggests, among other things, an explanation of why some firms are organized as partnerships and others as stock corporations.
|Date of creation:||11 Nov 1999|
|Date of revision:|
|Publication status:||Published in RAND Journal of Economics, 2001, pages 527-541.|
|Contact details of provider:|| Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden|
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