[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/oup/restud/v86y2019i4p1747-1778..html
   My bibliography  Save this article

Optimal Dynamic Capital Budgeting

Author

Listed:
  • Andrey Malenko
Abstract
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.

Suggested Citation

  • Andrey Malenko, 2019. "Optimal Dynamic Capital Budgeting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(4), pages 1747-1778.
    • Handle: RePEc:oup:restud:v:86:y:2019:i:4:p:1747-1778.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/restud/rdy043
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xu, Su Xiu, 2021. "Overexploitation Risk in “Green Mountains and Clear Water”," Ecological Economics, Elsevier, vol. 179(C).
    2. Feng, Felix Zhiyu & Westerfield, Mark M., 2021. "Dynamic resource allocation with hidden volatility," Journal of Financial Economics, Elsevier, vol. 140(2), pages 560-581.
    3. Christoph Siemroth, 2024. "Ending Wasteful Year‐End Spending: On Optimal Budget Rules In Organizations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1163-1188, August.
    4. Kakhbod, Ali & Loginova, Uliana, 2023. "When does introducing verifiable communication choices improve welfare?," Journal of Economic Behavior & Organization, Elsevier, vol. 210(C), pages 139-162.
    5. Christoph Siemroth, 2022. "Dezemberfieber senken: Vermeidung von verschwenderischen Jahresendausgaben [Reducing “Dezemberfieber”: Wasteful Year-End Spending and a Solution]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 102(6), pages 461-464, June.
    6. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    7. Hoffmann, Florian & Pfeil, Sebastian, 2021. "Dynamic multitasking and managerial investment incentives," Journal of Financial Economics, Elsevier, vol. 142(2), pages 954-974.
    8. Chen, Yi, 2022. "Dynamic delegation with a persistent state," Theoretical Economics, Econometric Society, vol. 17(4), November.
    9. Rantakari, Heikki, 2023. "How to reward honesty?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 129-145.
    10. Xu, Su Xiu & Guo, Ren-Yong & Zhai, Yue & Feng, Jianghong & Ning, Yu, 2024. "Toward a positive compensation policy for rail transport via mechanism design: The case of China Railway Express," Transport Policy, Elsevier, vol. 146(C), pages 322-342.
    11. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    12. Ahmadzadeh, Amirreza, 2024. "Costly state verification with Limited Commitment," TSE Working Papers 24-1570, Toulouse School of Economics (TSE).
    13. Min Dai & Xavier Giroud & Wei Jiang & Neng Wang, 2020. "A q Theory of Internal Capital Markets," NBER Working Papers 27931, National Bureau of Economic Research, Inc.
    14. Guo, Yingni & Hörner, Johannes, 2020. "Dynamic Allocation without Money," TSE Working Papers 20-1133, Toulouse School of Economics (TSE).
    15. Yingni Guo & Johannes Hörner, 2021. "Dynamic Allocation without Money," Working Papers hal-03187506, HAL.
    16. Achim, Peter & Knoepfle, Jan, 2024. "Relational enforcement," Theoretical Economics, Econometric Society, vol. 19(2), May.
    17. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2020. "Agency conflicts and short- versus long-termism in corporate policies," Journal of Financial Economics, Elsevier, vol. 136(3), pages 718-742.

    More about this item

    Keywords

    Principal agent; Capital budgeting; Internal capital markets; Repeated interactions;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:86:y:2019:i:4:p:1747-1778.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/restud .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.