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Informational Rents and the Excessive Entry Theorem: The Case of Hidden Action

Author

Listed:
  • Marco de Pinto

    (University of Applied Labour Studies, Mannheim)

  • Lazlo Goerke

    (Institute for Labour Law and Industrial Relations in the EU, University of Trier, IZA Bonn and CESifo Muenchen)

  • Alberto Palermo

    (Institute for Labour Law and Industrial Relations in the EU, University of Trier)

Abstract
Entry in a homogeneous Cournot-oligopoly is excessive if there is business stealing. This prediction assumes that production costs reduce profits and welfare equally. However, this need not be the case. If there is asymmetric information, suppliers or employees can utilize their superior knowledge to extract informational rents. Rent payments reduce profits and deter entry, but affect neither the optimal number of firms nor welfare directly. Therefore, entry becomes insufficient if informational rents are large enough. In the context of a moral hazard model, we show that insufficient entry occurs if entry costs are sufficiently high. Such costs lower the number of firms and, thereby, raise informational rents.

Suggested Citation

  • Marco de Pinto & Lazlo Goerke & Alberto Palermo, 2023. "Informational Rents and the Excessive Entry Theorem: The Case of Hidden Action," IAAEU Discussion Papers 202301, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    • Handle: RePEc:iaa:dpaper:202301
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    References listed on IDEAS

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    More about this item

    Keywords

    Oligopoly; excessive entry; informational rents; moral hazard;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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