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Internal rent seeking, works councils, and optimal establishment size
Journal
European economic review
Volume
56
Number
4
Pages / Article-Number
711-726
Keywords
Establishment size, Rent-seeking, Works council
Abstract
Using a microeconomic model and data from the Establishment Panel of the German Institute for Employment Research, we analyze the optimal establishment size against the background of rent-seeking workers and the influence of works councils. The theoretical part shows that establishment size has a discouragement 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 -- together with technological considerations -- determines whether the employer chooses an inefficiently small or large establishment size. Introduction of a works council restores efficient establishment size although it is purely used as rent-seeking device. Whether the employer benefits from a works council or not, depends on the degree of contract incompleteness and the degree of worker coordination via a works council. The empirical part indicates dominance of the discouragement effect over the quantity effect in establishments without works council. As theoretically predicted, works councils are beneficial by disentangling rent-seeking and production issues, thus eliminating the influence of the two rent-seeking effects.
