Optimal Dynamic Capital Budgeting
Name
SSRN-id1710884.pdf
Description
Accepted version
Size
555.82 KB
Format
Adobe PDF
Checksum (MD5)
ca0d74e360c4b2462daa446514ba2176
Author(s)
Malenko, Andrey
Date Issued
2019
Journal
Review of Economic Studies
Publisher
Oxford University Press (OUP)
Version
Author's final manuscript
Abstract
© The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1093/RESTUD/RDY043
