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Business Strategy, Human Capital, and Managerial IncentivesGeorge J. MailathUniversity of Pennsylvania - Department of Economics Andrew PostlewaiteUniversity of Pennsylvania - Department of Economics Volker NockeDepartment of Economics, University of Mannheim June 23, 2003 U of Penn, Inst for Law & Econ Research Paper 03-26 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.
Number of Pages in PDF File: 15 JEL Classification: D21, D82, M19, L23 working papers seriesDate posted: September 3, 2003Suggested CitationContact Information
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