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Business Strategy, Human Capital, and Managerial Incentives
Author(s) -
Mailath George J.,
Nocke Volker,
Postlewaite Andrew
Publication year - 2004
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2004.00025.x
Subject(s) - incentive , business , externality , agency cost , agency (philosophy) , human capital , industrial organization , value (mathematics) , microeconomics , economics , finance , market economy , computer science , philosophy , epistemology , shareholder , corporate governance , machine learning
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. 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.