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On the "Adverse Selection" of Organizations

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  • Kräkel, Matthias

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," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 168, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:168
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    References listed on IDEAS

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    1. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
    2. Avinash Dixit, 2008. "Strategic Behavior in Contests," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 431-438, Springer.
    3. Skaperdas, Stergios, 1992. "Cooperation, Conflict, and Power in the Absence of Property Rights," American Economic Review, American Economic Association, vol. 82(4), pages 720-739, September.
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    5. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February.
    6. Kai A. Konrad, 2004. "Bidding in hierarchies," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 547-554, Springer.
    7. Roman Inderst & Holger Müller & Karl Wärneryd, 2005. "Influence costs and hierarchy," Economics of Governance, Springer, vol. 6(2), pages 177-197, July.
    8. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    9. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 283-290.
    10. Tore Ellingsen, 1997. "Efficiency Wages and X‐Inefficiencies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 581-596, December.
    11. Kenneth J. Arrow, 1985. "The Potentials and Limits of the Market in Resource Allocation," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Issues in Contemporary Microeconomics and Welfare, chapter 2, pages 107-124, Palgrave Macmillan.
    12. 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.
    13. repec:bla:scandj:v:99:y:1997:i:4:p:581-96 is not listed on IDEAS
    14. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," IZA Discussion Papers 2391, Institute of Labor Economics (IZA).
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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," IZA Discussion Papers 2391, Institute of Labor Economics (IZA).
    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

    contests; foundation of organizations; internal rent seeking;
    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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