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Large Breach Penalties and Managers´ Incentives to Invest Inside or Outside Firms

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  • Nicola Meccheri

Abstract

Managers´ incentives to invest in firms´ specific activities (internal investments) are compared with those to realize activities to increase their alternative market opportunities (external investments) when a managerial contract establishes a large breach penalty in the event of employment termination and wage bargaining occurs according to the outside-option principle. First, it is shown that internal and external investments are incentive substitutes from the manager´s viewpoint. Furthermore, large breach penalties against firms reduce managers´ incentives to invest inside (and raise those to invest outside) the incumbent employment relationship. By contrast, large breach penalties against managers perform better in enhancing managers´ firm-specific investments.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 165 (2009)
Issue (Month): 4 (December)
Pages: 598-621

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200912)165:4_598:lbpami_2.0.tx_2-x

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