Internal Rent Seeking, Works Councils, and Optimal Establishment Size

Michael Beckmann () and Matthias Kräkel
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Michael Beckmann: University of Basel

Working papers from Faculty of Business and Economics - University of Basel

Abstract: Using a microeconomic model and data from the Establishment Panel of the German Institute for Employment Research, we analyze the optimal establishment size against the background of rent-seeking workers and the influence of works councils. The theoretical part shows that establishment size has a discouragement effect on the level of individual rent seeking but also a quantity effect as the number of rent seekers increases. The interplay of both effects together with technological considerations determines whether the employer chooses an inefficiently small or large establishment size. Introduction of a works council restores efficient establishment size although it is purely used as rent-seeking device. Whether the employer benefits from a works council or not, depends on the degree of contract incompleteness and the degree of worker coordination via a works council. The empirical part indicates dominance of the discouragement effect over the quantity effect in establishments without works council. As theoretically predicted, works councils are beneficial by disentangling rent-seeking and production issues, thus eliminating the influence of the two rent-seeking effects.

Keywords: establishment size; rent-seeking; works council (search for similar items in EconPapers)
JEL-codes: J51 J52 J53 L25 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-bec
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Related works:
Journal Article: Internal rent seeking, works councils, and optimal establishment size (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2011/14

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