Large Breach Penalties and Managers´ Incentives to Invest Inside or Outside Firms
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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Volume (Year): 165 (2009)
Issue (Month): 4 (December)
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References listed on IDEAS
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- Yeon-Koo Che & Tai-Yeong Chung, 1999.
"Contract Damages and Cooperative Investments,"
RAND Journal of Economics,
The RAND Corporation, vol. 30(1), pages 84-105, Spring.
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- Felipe Balmaceda, 2005. "Firm-Sponsored General Training," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 115-134, January.
- Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, April.
- Cai, Hongbin, 2003. " A Theory of Joint Asset Ownership," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 63-77, Spring. Full references (including those not matched with items on IDEAS)
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