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The Incentive Costs of Internalizing ExternalitiesGeorge J. MailathUniversity of Pennsylvania - Department of Economics Volker NockeDepartment of Economics, University of Mannheim Andrew PostlewaiteUniversity of Pennsylvania - Department of Economics July 11, 2002 PIER Working Paper No. 02-018 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. Number of Pages in PDF File: 14 working papers seriesDate posted: July 31, 2002Suggested CitationContact Information
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