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Inside vs Outside Ownership: A Political Theory of the Firm

  • Müller, Holger M.

    (Department of Economics)

  • Wärneryd, Karl

    ()

    (Dept. of Economics, Stockholm School of Economics)

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.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 344.

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Length: 18 pages
Date of creation: 11 Nov 1999
Date of revision:
Publication status: Published in RAND Journal of Economics, 2001, pages 527-541.
Handle: RePEc:hhs:hastef:0344
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