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Inside versus outside ownership: a political theory of the firm

In: 40 Years of Research on Rent Seeking 2

Author

Listed:
  • Holger M. Müller

    (New York University and CEPR)

  • Karl Wärneryd

    (Stockholm School of Economics and CESifo)

Abstract

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 conflict costs and maximizing output. This suggests, among other things, an explanation of why some firms are organized as partnerships and others as stock corporations.

Suggested Citation

  • Holger M. Müller & Karl Wärneryd, 2001. "Inside versus outside ownership: a political theory of the firm," Springer Books, in: Roger D. Congleton & Kai A. Konrad & Arye L. Hillman (ed.), 40 Years of Research on Rent Seeking 2, pages 679-693, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-79247-5_41
    DOI: 10.1007/978-3-540-79247-5_41
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