The Incentive Costs of Internalizing Externalities
14 Pages Posted: 31 Jul 2002
There are 2 versions of this paper
The Incentive Costs of Internalizing Externalities
The Incentive Costs of Internalizing Externalities
Date Written: July 11, 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. This incentive cost arises as a natural consequence of the manager's firm-specific human capital.
Note: Please note that this paper is the updated version of PIER 02-012.
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