Inside Vs Outside Ownership: A Political Theory of the Firm

21 Pages Posted: 3 Nov 2008

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Karl Warneryd

Stockholm School of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2001

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 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.

Suggested Citation

Mueller, Holger M. and Warneryd, Karl, Inside Vs Outside Ownership: A Political Theory of the Firm (April 2001). NYU Working Paper No. FIN-01-032, Available at SSRN: https://ssrn.com/abstract=1294575

Holger M. Mueller (Contact Author)

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Karl Warneryd

Stockholm School of Economics ( email )

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