We explore one possible source of merger failure: conflicting cultures. Firms with strong cultures are likely to exhibit greater efficiency in some activities, but are also likely to have some unique, idiosyncratic aspects to their cultures. This source of difference may pose an important obstacle to merger success. We test this hypothesis using laboratory experiments. In our experiments, we implement culture as an internal language that a "firm" must develop to perform its core activity. Each of two firms develops this language independently to become efficient at performing the activity. The activity is such that there are potential benefits to merging the firms into one larger one. This benefit is not realized, however, due to the difficulty in establishing a common language. We also explore the extent to which subjects anticipate problems created by conflicting languages.

Co-author Colin Camerer