Spoiling synergy

- Assets (or agents, activities) may be complementary but substitutes at the margin.
- Substitution at the margin may lead agents to underinvest in effort.
- When the effort effect dominates the synergy effect, a merger may be inefficient.

Assets may be complementary-producing more return together-but substitute at the margin-generating lower marginal return when assets are together, leading agents to underinvest. When the effort effect dominates the synergy effect, merging complementary assets may not be efficient.