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Rents and efficiency M/R chapter 8

Rents and efficiency M/R chapter 8. The primary aim Provide an analysis of efficiency in organisations when the Coase Theorem (‘no wealth effect’) cannot be applied Introduce the notion of rents and discuss implications for the analysis of efficient organisations. No Wealth Effect.

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Rents and efficiency M/R chapter 8

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  1. Rents and efficiencyM/R chapter 8 The primary aim Provide an analysis of efficiency in organisations when the Coase Theorem (‘no wealth effect’) cannot be applied Introduce the notion of rents and discuss implications for the analysis of efficient organisations.

  2. No Wealth Effect • Individual parties evaluate the benefits they receive and costs and risks they bear as being equivalent to some cash transfer • These evaluations do not depend on the amount of wealth they hold • People are able to make payments in whatever amounts required to divide the benefits of the transaction without affecting the costs or feasibility of any other aspect of the transaction.

  3. Wealth effect of rents • Rents discipline employees: • Higher earnings due to rents means that the costs of being detected and fired are higher, which may have a disciplinarian influence on the workers (positive effect on productivity). • Threat of firing sometimes a more efficient deterrent against cheating than ‘cash income’ (the first condition of ‘no wealth effect’ violated)

  4. The possibility to discipline by ”threat” derives from: • Employees’ talents are in short supply (rents) • Employee invest in specialized assets (quasi-rents).

  5. The value of the firms depends on rents and quasi-rents • The prospect of gaining from rents and quasi-rents may encourage employees to develop their skills • Attempts to reallocate rents and quasi-rents create incentives to initiate influence activities and increase the influence costs

  6. Rewarding in case of rent-seeking by the employees: • Calculation made by the employees • Shirk if possible • The probability for being detected is balanced against the gains of not being detected. • Decisions made depend on which wage the employer and the market offer.

  7. Conclusion: High income foster honest behaviour • For a certain level of monitoring by the employer, employees that have talents or skills that are scarce or have invested in specific knowledge assets gain higher rents and therefore are less motivated to cheat.

  8. Distinction between ‘incentive payments’ and ‘efficiency wages’ • ’ • A question of when concerns about efficiency and distribution can be separated and when separation is impossible.

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