Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking

Douglas Frank and Tomasz Obloj ()

No 999, HEC Research Papers Series from HEC Paris

Abstract: This paper explores conflicting implications of firm-specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more sophisticated “gaming” of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high-FSHC managers. Finally, profit losses increase more rapidly for high-FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits.

Keywords: FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-05-16
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cse, nep-cta, nep-eff and nep-hrm
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0999

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