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.