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Business Strategy, Human Capital, and Managerial Incentives

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Author Info
George J. Mailath
Volker Nocke
Andrew Postlewaite

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Abstract

We posit that the value of a manager's human capital depends on the firm's business strategy. The resulting interaction between business strategy and managerial incentives affects the organization of business activities. We illustrate the impact of this interaction on firm boundaries in a dynamic agency model. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managerial effort. This incentive cost is a natural consequence of the manager's business-strategy-specific human capital. Copyright Blackwell Publishing 2004.

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Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 13 (2004)
Issue (Month): 4 (December)
Pages: 617-633
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Handle: RePEc:bla:jemstr:v:13:y:2004:i:4:p:617-633

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May. [Downloadable!] (restricted)
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  3. Meyer, Margaret A & Milgrom, Paul & Roberts, Donald John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," CEPR Discussion Papers 665, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February. [Downloadable!] (restricted)
  5. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May. [Downloadable!] (restricted)
  6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  7. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
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  8. Harold L. Cole & George J. Mailath & Andrew Postlewaite, . "Efficient Non-Contractible Investments," Penn CARESS Working Papers 08d6793d32cab8f6e1f46dac0, Penn Economics Department. [Downloadable!]
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  9. Brusco, Sandro & Panunzi, Fausto, 2000. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CEPR Discussion Papers 2532, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Lazear, Edward P., 2003. "Firm-Specific Human Capital: A Skill-Weights Approach," IZA Discussion Papers 813, Institute for the Study of Labor (IZA). [Downloadable!]
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  11. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December. [Downloadable!] (restricted)
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  12. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March. [Downloadable!] (restricted)
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  13. Felli, Leonardo & Roberts, Kevin W S, 2002. "Does Competition Solve the Hold-up Problem?," CEPR Discussion Papers 3535, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  15. Trond E. Olsen, 1996. "Agency Costs and the Limits of Integration," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 479-501, Autumn. [Downloadable!] (restricted)
  16. Meyer, Margaret A. & Olsen, Trond E. & Torsvik, Gaute, 1996. "Limited intertemporal commitment and job design," Journal of Economic Behavior & Organization, Elsevier, vol. 31(3), pages 401-417, December. [Downloadable!] (restricted)
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  17. Maija Halonen, 1995. "Reputation and Allocation of Ownership," STICERD - Theoretical Economics Paper Series 289, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Albert Banal-Estañol & Jo Seldeslachts, 2005. "Merger Failures," CIG Working Papers SP II 2005-09, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  3. Albert Banal-Estaño & Inés Macho-Stadler & Jo Seldeslachts, 2004. "Mergers, Investment Decisions and Internal Organisation," CIG Working Papers SP II 2004-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
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