Can you teach old dogs new tricks? On complementarity of human capital and incentives

Contract theory suggests that firm performance can be improved by appointing new managers and/or by introducing better incentives. Furthermore, these two changes should be complementary - their effects reinforce each other. Using data on privatized firms in the Czech Republic, this paper presents results that suggest complementarity between the appointment of new managers and introduction of incentives in a transition economy. The results also show that ignoring the complementarity may lead to the wrong conclusion that the effect of incentives is weak. Managerial incentives seem to work only after the new post-privatization managers are appointed. (c) 2006 Elsevier Ltd. All rights reserved