Inside vs Outside Ownership - A Political Theory of the Firm

Holger M. Müller () and Karl Wärneryd
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Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 99-82, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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.

Pages: 19 pages
Date: 1999-11-03
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Related works:
Working Paper: Inside vs. Outside Ownership: A Political Theory of the Firm (2000)
Working Paper: Inside vs Outside Ownership: A Political Theory of the Firm (1999)
Working Paper: Inside vs. Outside Ownership: A Political Theory of the Firm (1999)
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