Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 344: Inside vs Outside Ownership: A Political Theory of the Firm

Holger M. Müller and Karl Wärneryd ()
Additional contact information
Holger M. Müller: Department of Economics, Postal: University of Mannheim, A5, D-68131 Mannheim, Germany
Karl Wärneryd: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

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

Keywords: Outside ownership; rent-seeking; conflict; property rights; theory of the firm.

JEL-codes: D23; D74; G32; G34; L22

18 pages, November 11, 1999

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