Inside versus Outside Ownership: A Political Theory of the Firm

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 l...

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Bibliographic Details
Published in:The Rand journal of economics 2001-10, Vol.32 (3), p.527-541
Main Authors: Muller, Holger M, Wärneryd, Karl
Format: Article
Language:English
Subjects:
Business organization
Business structures
Capital investments
Collaboration
Conflict
Contracts
Deadweight loss
Distribution
Economic aspects
Economic models
Economics
Firm theory
Human capital
Incentives (Business)
Investment strategies
Management
Methods
Ownership
Ownership incentives
Partnering
Rent seeking behavior
Strategic management
Studies
Surplus
Total costs
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Summary: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 conflict costs and maximizing output. This suggests, among other things, an explanation of why some firms are organized as partnerships and others as stock corporations.
ISSN:0741-6261
1756-2171
DOI:10.2307/2696367