The Incentive Costs of Internalizing Externalities

14 Pages Posted: 31 Jul 2002  

George J. Mailath

University of Pennsylvania - Department of Economics

Volker Nocke

University of Mannheim

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Multiple version iconThere are 2 versions of this paper

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.

Notes: Please note that this paper is the updated version of PIER 02-012.

Suggested Citation

Mailath, George J. and Nocke, Volker and Postlewaite, Andrew, The Incentive Costs of Internalizing Externalities (July 11, 2002). PIER Working Paper No. 02-018. Available at SSRN: https://ssrn.com/abstract=320781 or http://dx.doi.org/10.2139/ssrn.320781

George J. Mailath (Contact Author)

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
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215-898-7749 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~gmailath

Volker Nocke

University of Mannheim ( email )

Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
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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