performance diversity and national identity evidence from association football the increasing national diversity of coworkers has no consensus on its impact on performance using a team s predominant nationality as a proxy for national diversity and national identity there is robust evidence that it affects team and individual performance detailed worker level data from a highly globalized industry association football show a nonlinear relationship between performance and the predominant nationality of a team s roster as the number of members from the predominant nationality increases performance declines however beyond a threshold level performance rises it follows that performance benefits from national diversity when the predominant nationality is small and from national identity when it is large jel m14 z21 z22 j15

is diversity good or bad evidence from esports teams analysis we use esports data to construct an empirical model to measure the effect of diversity on team performance different kinds of diversities are considered diversity of culture diversity of languag

managerial bargaining power in the determination of compensation contracts and corporate investment this paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision the model relates the compensation scheme to outside share ownership and managerial bargaining position using the methods of mechanism design under asymmetric information a shift in favor of effort is documented in the case where managerial bargaining strength is weak while a shift toward more use of capital investment results from strong managerial bargaining power the model distinguishes managerial equity holdings from contingent compensation contracts our results are related to the empirical literature on pay performance sensitivities

capital budgeting and delegation abstract as part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it in our model delegation is a way to save on costly investigation of proposed projects therefore it is more extensive the larger are the costs of such investigations this delegation takes advantage of the fact that the lower level manager s preferences are assumed to be similar though not identical to those of the higher level

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

capital budgeting in multidivision firms information agency and incentives author s bernardo antonio e cai hongbin luo jiang abstract we consider a firm with two investment projects divisions each run by a manager who can provide i unverifiable information about the quality of either or both projects and ii unverifiable access to valuable resources that can enhance the cash flows of either or both projects we then examine the extent to which capital allocation and managerial compensation schemes can be designed jointly to mitigate the information and incentive problems within the firm we find that the firm underinvests in capital in both projects relative to the first best level optimal managerial profit sharing increases in the quality of both projects and managers underinvest resources in both projects interestingly the underinvestment problem in one project is less severe when the other project is higher quality this effect will be stronger when the moral hazard problem is more acute and project returns are more highly correlated we also predict that multi division firms will invest more less than single division firms when other divisions in the firm perform well poorly

can socialism in internal capital markets occur in the absence of managerial rent seeking socialism in internal capital markets sicm is the phenomenon whereby multi division firms underinvest in high profit segments and overinvest in low profit segments this article modifies and extends the scharfstein and stein 2000 model that explains sicm the major modification is to abstract from rent seeking behaviour a central ingredient that is used by most sicm models and has the side effect of overturning sicm when the underlying rent seeking game is slightly perturbed it is shown that when division managers private benefits are not exactly propotional to their division s production profit as assumed by scharfstein and stein 2000 sicm arises due to the ceo s incentive to extract gain from the trade of capital between his division managers by equalizing their marginal private benefits instead of accommodating rent seeking furthermore we show that diversification discounts exist increase in diversity and decrease in ceo ownership the results are robust to endogenizing the investors

internal competition for corporate resources and incentives in teams invoking thefree rider problem in teams many observersfind profit sharing in large organizations puzzling because it should have negligible incentive effects we show that a firm can be decomposed into two separate teams whose outputs can be observed thenprofit sharing combined with competition between these two teamsfor internal resourcesfrequently solves thefree rider problem using this result we endogenize thefirm s organizational structure and show that in the presence of economies of scale small firms tend to organize as unita y firms while largefirms choose the multidivisional organizationalform

does financial reform raise or reduce saving the effect of financial liberalization on private saving is theoretically ambiguous not only because the link between interest rate levels and saving is itself ambiguous but also because financial liberalization is a multidimensional and phased process sometimes involving reversals using principal components we construct 25 year time series indices of financial liberalization for each of eight developing countries chile ghana indonesia korea malaysia mexico turkey and zimbabwe these are employed in an econometric analysis of private saving in these countries our results cannot offer support for the hypothesis that financial liberalization will increase saving on the contrary the indications are that liberalization overall and in particular those elements that relax liquidity constraints may be associated with a fall in saving

executive effort and selection of risky projects this article examines the incentives of executives to adopt risky projects the agency problem considered is that of motivating the executive to expend effort to generate information about the profitability of projects and to select the best project conditional upon the information that his effort generates we show that the executive and the principal will not always agree regarding which project is best we provide conditions under which this conflict of interest leads from the principal s perspective to either an underinvestment or an overinvestment in risky projects

optimal dynamic capital budgeting 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

financing a portfolio of projects this article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems competition for scarce informed capital at the refinancing stage strengthens investors bargaining positions and yet entrepreneurs incentives may be improved because projects funded by investors with shallow pockets must have not only a positive net present value at the refinancing stage but one that is higher than that of competing portfolio projects our article may help understand provisions used in venture capital finance that limit a fund s initial capital and make it difficult to add more capital once the initial venture capital fund is raised jel g24 g31 venture capital finance takes place in an environment of severe informational asymmetries and incentive problems venture capitalists not only must assess the quality of investment proposals submitted to them for funding but once the initial funding has taken place they must also give the right incentives to the entrepreneurs and monitor the performance of the portfolio companies on an ongoing basis this article departs from most of the existing literature by explicitly recognizing that venture capitalists manage a portfolio of projects the need for portfolio management arises if the amount of capital both financial and human available to a venture capital fund is limited implying that venture capitalists must carefully choose which projects to allocate their scarce financial and human resources to 1 by staging their investments venture capitalists retain the right to deny capital infusions to particular

cities and cultures we investigate whether cultural diversity across us cities measured as the variety of native languages spoken by city residents is associated with any effect on their productivity diversity of cultures may imply diversity of production skills of abilities and of occupations that enhances the productive performance of a city on the other hand transaction costs and frictions across groups may hurt productivity similarly diversity in available goods and services can increase utility but distaste for or hostility to different cultural groups may decrease it using census data from 1970 to 1990 we find that wages and employment density of us born workers were systematically higher ceteris paribus in cities with richer linguistic diversity these positive correlations reveal a net positive effect of diversity on productivity that survives robustness checks and instrumental variable estimation this effect is found to be stronger for highly educated workers and for white workers we also show that better assimilated non native speakers i e those who speak english well and have been in the us for more than five years are most beneficial to the productivity of us born workers

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

a market test for discrimination in the english professional soccer leagues this chapter proposes a market test for racial discrimination in salary setting in english league soccer over the period 1978 93 using a balanced panel of 39 clubs if there is a competitive market for the services of players the wage bill of the club will reflect their productivity and hence the performance of the club in the league discrimination can be said to exist if clubs fielding an above average proportion of black players systematically outperform clubs with a below average proportion of black players after one controls for the wage bill statistically significant evidence of discrimination in this sense is found

the value of transparency in multidivisional firms we study internal incentives transparency and firm performance in multidivisional organizations two independent divisions of the same firm design internal incentives and decide whether to publicly disclose their performances in each division a risk neutral principal deals with a risk averse exclusive agent under moral hazard each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent we first study the determinants of the optimal principal agent contract with and without performance transparency then we show how effort spillovers affect the equilibrium communication behavior of each division both principals commit to disclose the performance of their agents in equilibrium when efforts are complements while no communication is the only equilibrium outcome when efforts are substitutes

the effects of coworker heterogeneity on firm level output assessing the impacts of cultural and language diversity in the national hockey league this paper uses data from the national hockey league nhl to consider the potential gains to firms from employing culturally diverse work teams it finds that the presence of foreign workers does increase firm level performance nhl teams that employed a higher proportion of european players performed better however the results also indicate that teams perform better when their european players come from the same country rather than being spread across many european countries when teams have players from a wide array of european countries integration costs associated with language and cultural differences may start to over ride any gains from diversity

intertemporal capital budgeting abstract this paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects consistent with field study evidence an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal the model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms

budget selection when agents compete abstract a principal selects a budget k of how many projects to fund within an organization and then consults n agents each of whom has private information about his own project s value after receiving cheap talk reports from the agents the principal decides which projects to implement subject to the budget and agents report on new i i d projects every period until the budget is exhausted when the budget is small relative to the number of agents each of whom are biased towards their own projects competition between agents degrades the quality of information conveyed in equilibrium and lowers the principal s payoff a larger budget induces less competition and therefore may be selected in order to extract more information from the agents even though this leads to some unprofitable projects being adopted in an extension i find that a policy of never allowing a funded agent to seek funding again increases payoffs compared to when the agent can always re seek funding

exporting creative and cultural products birthplace diversity matters this paper analyses the effect of birthplace diversity on exports of creative and cultural goods for 19 oecd countries over the period 1990 2010 by matching unesco s creative and cultural exports classification to trade and migration data we find a strong positive effect of birthplace diversity on the export of creative products in particular a 10 increase in the birthplace diversity index implies a 4 increase in creative goods exports these results are robust across several specifications and shed light on a potential new channel through which migrants can contribute to the host country s export performance it is interesting to note that only diversity of secondary and tertiary educated immigrants contributes to an increase in exports of creative and cultural goods an instrumental variables approach addresses the potential endogeneity problems and confirms our results

career duration in the nhl pushing and pulling on europeans abstractusing a panel of national hockey league players from 2000 through 2013 we analyse the determinants of career length in the league in our analysis we include both performance variables and nationality of origin to determine their importance in determining career length we find that european born players have shorter careers than north american born players holding performance constant and russian born players have even shorter careers than other europeans we further find that russian born players have even shorter careers than other players after the 2005 lockout these shorter careers are consistent with both exit discrimination against european and russian players who are pushed out of the league as well as voluntary exit by european and russian players who are pulled out of the league due to opportunities in their home countries

intersectoral financial flows in developing countries this paper is about financial flows in developing countries it reviews the evidence on who the borrowers and lenders are apart from collecting and summarizing available data from some seventeen countries the paper presents the results of an econometric analysis of the interactions between the net lending behaviour of the different sectors the paper is organized as follows section 2 clarifies some terms and in particular explains what a complete set of flow of funds accounts looks like section 3 provides an analytical framework for the consideration of flow of funds data section 4 reports the main data on sectoral surpluses and deficits and summarizes the empirical findings on their mutual interaction and on their determinants section 5 describes the typical pattern in developing countries of financial flows by instrument a summary and conclusion is presented in section 6

wage disparity and team productivity evidence from major league baseball using data describing baseball teams from 1985 to 1998 it is found that levine s levine d i 1991 cohesiveness productivity and wage dispersion journal of economic behavior and organization 15 237 255 team cohesiveness hypothesis is supported over ramaswamy and rowthorn s ramaswamy r rowthorn e 1991 efficiency wages and dispersion economica 58 501 514 danger potential hypothesis the implication is that teams with greater wage disparity experience a reduction in team performance 2000 elsevier science s a all rights reserved

on the flow of funds accounts and inter sectoral mobility of capital in india this study uses the flow of funds accounts framework and undertakes an in depth analysis of the inter sectoral mobility of capital in india unlike previous studies the fh model is estimated at th

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

decision processes agency problems and information an economic analysis of capital budgeting procedures corporations use a variety of processes to allocate capital this article studies the benefits and costs of several common budget procedures from the perspective of a model with agency and information problems processes that delegate aspects of the decision to the agent result in too many projects being approved while processes in which the principal retains the right to reject projects cause the agent to strategically distort his information about project quality we show how the choice of a decision process depends on these two costs and specifically on severity of the agency problem quality of information and project risk capital budgeting would be easy in a world without agency and information problems the decision maker would simply calculate a project s irr and compare it to the cost of capital but in the real world those providing the funds for investment must rely on self interested agents to identify projects and provide information on expected returns as a result the quality of capital allocation depends on how effective the decision process is in attenuating agency problems and bringing forth accurate information corporations employ a variety of decision procedures in practice some decisions are fully delegated to division and plant managers typically expansion of an existing plant some decisions require approval of headquarters typically construction of a new plant and other decisions require approval conditional on the nature of the proposal such as when projects requiring more than 1 million go to headquarters while smaller projects can be approved locally 1

savings investment and the corporation in the east asian miracle abstract the east asian countries have achieved a spectacular average rate of economic growth over the last 30 to 40 years with very substantial diversification and economic development korea for example managed to transform itself from being a largely agricultural society in 1960 to the point where it became the third country after the us and japan to export 256 k memory chips developed by its own firms it is no exaggeration to say that the post wwii development of east asia including japan is the most successful story of sustained economic growth in the history of mankind how does one account for this extraordinary economic success

globalisation and the market for team mates the globalisation of firms is explored at theoretical and empirical levels the idea is that a global firm is a multi cultural team the existence of a global firm is somewhat puzzling combining workers who have different cultures legal systems and languages imposes costs on the firm that would not be present were all workers to conform to one standard in order to offset the costs of cross cultural dealing there must be complementarities between the workers that are sufficiently important to overcome the costs the search for the best practice is analysed and empirical support from an examination of trading patterns is provided

team effects on compensation an application to salary determination in the national hockey league leo h kahane studies of salary determination largely model pay as a function of the attributes of the individual and the workplace i e employer size job characteristics and so forth this article empirically investigates an additional factor that may influence individual pay specifically coworker productivity data from professional sports are used to evaluate this question because both salary and teammate performance measures are readily available we find that team attributes have both direct effects on an individual s pay and indirect effects through altering the rates at which individual player productive characteristics are valued jel j31 l83 i introduction when complementary exists between labor inputs individual productivity may be poorly measured by treating the individual worker separately from the character of the organization or team within which he works namely individual productivity may vary when working in different settings to the extent that coworkers offer different degrees of assistance 1 if such complementary between human capital inputs is present say a team dynamic it suggests the possible existence of both team and individual effects on productivity and hence compensation empirical analysis of team effects has been hindered by the lack of data on individuals and their coworkers including managers one source though that contains much of this requisite information is data on professional sports teams in this article we exploit this unique attribute of professional sports data in order to empirically assess the effect of complementarities between labor inputs on individual compensation specifically we use a team sport setting to situate the worker in an organizational environment where we can observe the impact of coworkers on individual productivity thereby allowing us to examine the separate effects of individual and team productivity on salary determination the general question asked is whether individual attributes are valued or rewarded differently in different work environments or in our specific case on different teams this study will investigate these questions by empirically assessing the effects of coworker productivity that is the effects of the qual ity productivity of teammates on individual compensation although a number of different highly team oriented sports would serve our purpose such as basketball this particular study uses data from professional hockey to investigate team effects on compensation 2 the remainder of the article is organized as follows section ii outlines the empirical framework used to analyze the posited team effects and discusses some of the theoretical issues relating to team effects on compensation section iii describes the data used in the analysis section iv reports the empirical results and section v reports our conclusions and directions for further work ii team and coworker effects as noted above the goal of this study is to evaluate empirically whether average coworker attributes 1 affect individual salaries 2 affect the rate at which individual attributes are valued by the firm and 3 are complementary inputs to the attributes of individual team members the question arises though as to why we might expect on theoretical grounds that individual players would earn any part of the team s contribution the classic model of alchian and demsetz 1972 suggests that the capitalist manager will reap the returns from any incremental team output as the primary function of the manager is to discover complementarities between inputs and enhance organizational output by optimally combining resources and to monitor effort so as to reduce shirking as a result the manager will capture all of the returns that are not specific to the inputs in which case we would not expect to observe team effects on individual compensation yet although a manager acting as the residual claimant is one solution to the problem of reducing shirking in the context of complementary inputs whose effort is difficult to monitor other models suggest that it may be desirable to compensate team members based on the value of team output in order to provide optimal incentives for effort for example see akerlof 1982

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

cooperation in the budgeting process in this article i analyze the role of cooperation between firm divisions in the budgeting process i study a setting in which cooperation is a necessary condition for information sharing among division managers which in turn benefits the principal the results in this article can help reconcile the differing views between practitioners and academic researchers on the desirability of cooperation in the budgeting process the results also have implications for some common budgeting processes observed in practice including bundling budgeting and bottom up budgeting

the payoff to consistency in performance this study investigates whether firms are willing to pay higher wages to workers who demonstrate consistent performance than to those whose performance is more volatile a formal model reflects a production technology view assuming the law of diminishing marginal product this model suggests that a more consistent worker produces higher expected output and therefore receives a higher wage the test of the model uses data from the national basketball association the empirical data support the model players whose performances were more consistent than the performances of other players received higher wages on average jel d41 j31 m52 z20

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

the capital budgeting process incentives and information we study the capital allocation process within firms observed budgeting processes are explained as a response to decentralized information and incentive problems it is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low we also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer there is general agreement that investment decisions are the most important decisions made by corporations the choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well being of society as a whole it has been alleged that u s firms invest too little and tend to overemphasize short term results for example porter 1992 citing poterba and summers 1992 asserts that u s firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital to understand the investment behavior of firms one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm considerable attention has been paid to how firms raise external capital the fundamental insight in this area is the celebrated result of modigliani and miller mm that capital structure is irrelevant in the absence of capital market frictions accordingly in the three decades since their contribution research on how external capital is raised has focused on market frictions including information and incentive problems relatively little research has focused on the internal allocation process and its relationship to the organization of the firm modern finance theory prescribes allocating capital according to the net present value npv rule just as the mm result itself provides no theory of the arrangements under which

sunflower management and capital budgeting in organizations ideas are often delegated for evaluation as a means of efficiently aggregating multiple information signals however those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of abilities of those delegated the task of assessing these ideas this commingling of the assessment of the idea with that of the individual agent generates a tendency for the agent to ignore his or her own information and instead attempt to confirm the superior s prior belief we refer to this as sunflower management and examine its effects on capital budgeting practices

how should the cost of joint risk capital be allocated for performance measurement we consider the problem of allocating the cost of risk capital based on value at risk var for performance measurement in a decentralized organization with several divisions the focus of the analysis is on fair risk capital allocation schemes to this end we analyze several well known allocation schemes in the context of a model based on cooperative game theory using the core concept we provide theoretical evidence that two allocation schemes the beta method and the nucleolus method turn out to perform best in allocating the cost of risk capital a simulation study shows that another allocation method the cost gap method shows similar results however within an experiment we obtain empirical evidence that the core concept is of minor importance with respect to individually perceived fairness subjects tend to favor simple allocation rules such as the activity level method and the beta method in summary only the beta method can be considered to be fair both from a normative and a descriptive point of view

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies