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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.

Suggested Citation

  • George J. Mailath & Volker Nocke & Andrew Postlewaite, 2004. "Business Strategy, Human Capital, and Managerial Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 617-633, December.
    • Handle: RePEc:bla:jemstr:v:13:y:2004:i:4:p:617-633
    DOI: 10.1111/j.1430-9134.2004.00025.x
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    Cited by:

    1. Bharat N. Anand & Alexander Galetovic & Alvaro Stein, 2004. "Incentives Versus Synergies in Markets for Talent," Documentos de Trabajo 179, Centro de Economía Aplicada, Universidad de Chile.
    2. 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.
    3. Albert Banal-Estañol & Ines Macho-Stadler & Jo Seldeslachts, 2003. "Mergers, Investment Decisions and Internal Organisation," CESifo Working Paper Series 944, CESifo.
    4. Albert Banal‐Estañol & Jo Seldeslachts, 2011. "Merger Failures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 589-624, June.
    5. Hyoung-Goo Kang & Wonseok Woo & Richard M. Burton & Will Mitchell, 2018. "Constructing M&A valuation: how do merger evaluation methods differ as uncertainty and controversy vary?," Journal of Organization Design, Springer;Organizational Design Community, vol. 7(1), pages 1-46, December.
    6. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 725-770.
    7. MORITA, Hodaka & TANG, Cheng-Tao, 2017. "Asset Specificity, Human Capital Acquisition, and Labor Market Competition," Discussion paper series HIAS-E-42, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    8. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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