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Business Strategy, Human Capital, and Managerial Incentives

  • George J. Mailath
  • Volker Nocke
  • Andrew Postlewaite

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 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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