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On the "Adverse Selection" of Organizations

  • Kräkel, Matthias

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 Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 168.

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Date of creation: Oct 2006
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Handle: RePEc:trf:wpaper:168
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  1. Konrad, Kai A., 2004. "Bidding in hierarchies," European Economic Review, Elsevier, vol. 48(6), pages 1301-1308, December.
  2. Roman Inderst & Holger Müller & Karl Wärneryd, 2005. "Influence costs and hierarchy," Economics of Governance, Springer, vol. 6(2), pages 177-197, 07.
  3. Inderst, Roman & Mueller, Holger M & Wärneryd, Karl, 2002. "Distributional Conflict in Organisations," CEPR Discussion Papers 3315, C.E.P.R. Discussion Papers.
  4. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  5. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
  6. 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.
  7. Konrad, Kai A., 2001. "Investment in the absence of property rights: the role of incumbency advantages
    [Investitionsanreize bei unvollständigen Eigentumsrechten: die Rolle von Asymmetrien in Aneignungskonflikten]
    ," Discussion Papers, Research Unit: Market Processes and Governance FS IV 01-18, Social Science Research Center Berlin (WZB).
  8. Ellingsen, Tore, 1997. " Efficiency Wages and X-Inefficiencies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 581-96, December.
  9. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
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