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Business Strategy, Human Capital, and Managerial Incentives

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  • George J. Mailath
  • Volker Nocke
  • Andrew Postlewaite

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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Bibliographic Info

Article provided by Wiley Blackwell 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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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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References

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  1. Brusco, Sandro & Panunzi, Fausto, 2005. "Reallocation of corporate resources and managerial incentives in internal capital markets," European Economic Review, Elsevier, vol. 49(3), pages 659-681, April.
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  4. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers.
  5. Cole Harold Linh & Mailath George J. & Postlewaite Andrew, 2001. "Efficient Non-Contractible Investments in Finite Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-34, March.
  6. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  7. Leonardo Felli & Kevin Roberts, 2000. "Does Competition Solve the Hold-up Problem?," Econometric Society World Congress 2000 Contributed Papers 1714, Econometric Society.
  8. Edward P. Lazear, 2003. "Firm-Specific Human Capital: A Skill-Weights Approach," NBER Working Papers 9679, National Bureau of Economic Research, Inc.
  9. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  10. 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.
  11. Harold L. Cole & George J. Mailath & Andrew Postlewaite, 1998. "Efficient non-contractible investments," Staff Report 253, Federal Reserve Bank of Minneapolis.
  12. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
  13. Lazear, Edward, 2003. "Firm-Specific Human Capital: A Skill-Weights Approach," IZA Discussion Papers 813, Institute for the Study of Labor (IZA).
  14. Meyer, M.A. & Olsen, T.E. & Torsvik, G., 1995. "Limited Intertemporal Commitment and Job Design," Economics Papers 102, Economics Group, Nuffield College, University of Oxford.
  15. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  16. David S. Scharfstein & Jeremy C. Stein, 1997. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," NBER Working Papers 5969, National Bureau of Economic Research, Inc.
  17. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
  18. 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.
  19. Cole, Harold L. & Mailath, George J. & Postlewaite, Andrew, 2001. "Efficient Non-Contractible Investments in Large Economies," Journal of Economic Theory, Elsevier, vol. 101(2), pages 333-373, December.
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Citations

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Cited by:
  1. Albert Banal-Estañol & Inés Macho-Stadler & Jo Seldeslachts, 2004. "Mergers, Investment Decisions and Internal Organisation," Working Papers 111, Barcelona Graduate School of Economics.
  2. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  3. Legros, Patrick & Newman, Andrew, 2009. "A Price Theory of Vertical and Lateral Integration," CEPR Discussion Papers 7211, C.E.P.R. Discussion Papers.
  4. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 69-91, January.
  5. Albert Banal-Estañol & Jo Seldeslachts, 2009. "Merger failures," Economics Working Papers 1192, Department of Economics and Business, Universitat Pompeu Fabra.
    • Albert Banal-Estañol & Jo Seldeslachts, 2005. "Merger Failures," CIG Working Papers SP II 2005-09, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).

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