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On the "Adverse Selection" of Organizations

By Matthias Kräkel

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.

Topics: Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, B4 - Die Gestaltung von Turnieren im Rahmen der Corporate Governance, ddc:330
Year: 2006
OAI identifier: oai:epub.ub.uni-muenchen.de:13383
Provided by: Open Access LMU

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