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Firm Size, Economic Situation and Influence Activities

Author

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  • Kräkel, Matthias
Abstract
This paper discusses the optimal firm size in the presence of influence activities, and the level of individual rent-seeking dependent on the economic situation of the firm. Since firm size has a discouraging 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 determines whether the employer chooses an inefficiently small or large firm size. In the given setting, a bad economic situation leads to both a higher probability of a substantial loss and a reduction of productivity. The productivity effect and the two other effects together determine the optimal level of individual rent-seeking.

Suggested Citation

  • Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 167, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:167
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    File URL: https://epub.ub.uni-muenchen.de/13384/1/167.pdf
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    References listed on IDEAS

    as
    1. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February.
    2. Meyer, Margaret & Milgrom, Paul & Roberts, John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 9-35, Spring.
    3. Kai A. Konrad, 2004. "Bidding in hierarchies," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 547-554, Springer.
    4. Kai A. Konrad, 2000. "Sabotage in Rent-Seeking Contests," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 409-419, Springer.
    5. Roman Inderst & Holger Müller & Karl Wärneryd, 2005. "Influence costs and hierarchy," Economics of Governance, Springer, vol. 6(2), pages 177-197, July.
    6. Ewerhart, Christian & Schmitz, Patrick W., 2000. ""Yes men", integrity, and the optimal design of incentive contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 43(1), pages 115-125, September.
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    9. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    10. Bagwell, Laurie Simon & Zechner, Josef, 1993. "Influence Costs and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 975-1008, July.
    11. Holger M. Müller & Karl Wärneryd, 2001. "Inside versus outside ownership: a political theory of the firm," Springer Books, in: Roger D. Congleton & Kai A. Konrad & Arye L. Hillman (ed.), 40 Years of Research on Rent Seeking 2, pages 679-693, Springer.
    12. Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 168, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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    Cited by:

    1. Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Bonn Econ Discussion Papers 15/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    Keywords

    economic situation; firm size; influence activities; politicking; rent-seeking;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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