FIN-01-032

Inside vs Outside Ownership: A Political Theory ofthe Firm

April 23, 2001

Renée B. Adams, Heitor Almeida and Daniel Ferreira

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.


Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller

Karl Warneryd
Institution: Department of Economics, Stockholm School of Economics, Box 6501, S-113 83 Stockholm, Sweden.
Email: Karl.Warneryd@hhs.se

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