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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.

Suggested Citation

  • Nicola Meccheri, 2009. "Large Breach Penalties and Managers´ Incentives to Invest Inside or Outside Firms," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 598-621, December.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200912)165:4_598:lbpami_2.0.tx_2-x
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    References listed on IDEAS

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    1. 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.
    2. Felipe Balmaceda, 2005. "Firm-Sponsored General Training," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 115-134, January.
    3. 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.
    4. Cai, Hongbin, 2003. " A Theory of Joint Asset Ownership," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 63-77, Spring.
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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