The Incentive Costs of Internalizing Externalities

14 Pages Posted: 27 May 2002

See all articles by George J. Mailath

George J. Mailath

University of Pennsylvania - Department of Economics; Research School of Economics, ANU

Volker Nocke

University of Mannheim

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

We present a dynamic agency model in which changes in the structure of a firm affect its value due to altered incentives. 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 managers to exert effort.

Note: Please note that this paper has been updated to PIER 02-018.

Suggested Citation

Mailath, George J. and Nocke, Volker and Postlewaite, Andrew, The Incentive Costs of Internalizing Externalities (May 2002). Available at SSRN: https://ssrn.com/abstract=313400 or http://dx.doi.org/10.2139/ssrn.313400

George J. Mailath

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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HOME PAGE: http://web.sas.upenn.edu/gmailath/

Research School of Economics, ANU ( email )

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College of Business and Economics
Canberra, ACT 2601
Australia

Volker Nocke (Contact Author)

University of Mannheim ( email )

Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew