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The Costs and Benefits of Homogeneity , with an Application to Culture Clash

Firms are more homogenous than society in general. This paper studies the costs and benefits of, in particular, homogeneity in beliefs and preferences. It shows that, in a world with differing priors, such homogeneity facilitates delegation and coordination, reduces monitoring and influence activities, improves the quality of communication, and increases effort and expected utility. It reduces, however, the incentives to collect new information. Starting from the definition of culture as shared beliefs and preferences, these results have implications for an economic theory of ‘culture clash’ in mergers and acquisitions. In particular, when two firms that are each internally homogenous but different from each other, try to merge, agency problems will generally increase and hurt their performance, although the decrease in homogeneity may sometimes have beneficial effects. The paper derives specific empirical implications.