Business Strategy, Human Capital, and Managerial Incentives, Second Version
15 Pages Posted: 26 Jun 2003
Date Written: June 23, 2003
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, both the internal organization of the firm and the determination of firm boundaries. 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.
Keywords: Human Capital, Managerial Incentives, Firm Boundaries, Firm Organization
JEL Classification: D23, L14, M40, M46
Suggested Citation: Suggested Citation
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