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On the “Adverse Selection” of Organizations

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  • Kräkel, Matthias

    (University of Bonn)

Abstract

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.

Suggested Citation

  • Kräkel, Matthias, 2006. "On the “Adverse Selection” of Organizations," IZA Discussion Papers 2396, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2396
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    References listed on IDEAS

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    Cited by:

    1. Jean-Pierre Tranchant, 2011. "Decentralization and Ethnic Conflict: The Role of Empowerment," Working Papers halshs-00557126, HAL.
    2. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," Bonn Econ Discussion Papers 16/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Jean Pierre TRANCHANT, 2007. "Decentralization and Ethnic Conflict: The Role of Empowerment," Working Papers 200705, CERDI.

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    More about this item

    Keywords

    internal rent seeking; foundation of organizations; contests;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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