14 Pages Posted: 31 Jul 2002
Date Written: July 11, 2002
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: 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