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The Incentive Costs of Internalizing Externalities

George J. Mailath
University of Pennsylvania - Department of Economics

Volker Nocke
Department of Economics; University of Oxford - Department of Economics

Andrew Postlewaite
University of Pennsylvania - Department of Economics

May 2002

PIER Working Paper No. 02-012

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.

Working Paper Series

Date posted: May 27, 2002 ; Last revised: August 14, 2002

Suggested Citation

Mailath, George J., Nocke, Volker and Postlewaite, Andrew, The Incentive Costs of Internalizing Externalities (May 2002). PIER Working Paper No. 02-012. Available at SSRN: http://ssrn.com/abstract=313400 or doi:10.2139/ssrn.313400

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Contact Information

Volker Nocke (Contact Author) Department of Economics ( email ) D-68131 Mannheim Germany HOME PAGE: http://nocke.vwl.uni-mannheim.de
University of Oxford - Department of Economics ( email ) Manor Road Building Manor Road Oxford, OX1 3BJ United Kingdom HOME PAGE: http://www.econ.ox.ac.uk/members/volker.nocke/
George J. Mailath University of Pennsylvania - Department of Economics ( email ) 3718 Locust Walk Philadelphia, PA 19104 United States 215-898-7749 (Phone) 215-573-2057 (Fax) HOME PAGE: http://www.ssc.upenn.edu/~gmailath
Andrew Postlewaite University of Pennsylvania - Department of Economics ( email ) 3718 Locust Walk Philadelphia, PA 19104 United States 215-898-7350 (Phone) 215-573-2057 (Fax) HOME PAGE: http://www.econ.upenn.edu/~apostlew

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