Internal rent seeking, works councils, and optimal establishment size

Michael Beckmann and Matthias Kräkel

European Economic Review, 2012, vol. 56, issue 4, 711-726

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 not only 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: 2012
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Citations: View citations in EconPapers (7)

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Working Paper: Internal Rent Seeking, Works Councils, and Optimal Establishment Size (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:56:y:2012:i:4:p:711-726

DOI: 10.1016/j.euroecorev.2012.01.005

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