On the “Adverse Selection” of Organizations

Matthias Kräkel

No 2396, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: internal rent seeking; foundation of organizations; contests (search for similar items in EconPapers)
JEL-codes: D2 L2 M2 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-10
New Economics Papers: this item is included in nep-mic
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Published - published as 'On Adverse Selection of Technologies ' in: Journal of Institutional and Theoretical Economics, 2008, 164 (2), 343-355

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Related works:
Working Paper: On the "Adverse Selection" of Organizations (2006)
Working Paper: On the "Adverse Selection" of Organizations (2006)
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