Managerial Use of an Information System

Abstract:     
This paper studies the influence of a manager's pre-decision use of an information system on the central office's decision to provide such a system in the first place. At the outset, the manager is ignorant about the cost of an investment project. Higher effort when using the information system raises the probability that the manager is informed at the stage of the investment proposal. Then, the central office must make the project approval decision without knowing whether it faces an informed or an ignorant manager.

We derive three new results. First, we compare the central office's hurdle rates in the cases with and without a potentially ignorant manager. We show that the central office imposes a higher hurdle rate if the manager might be ignorant. Second, if the expected net present value is high (low), the manager's effort when using the information system is higher (lower) than in the First Best solution. Third, the central office strategically provides no information system if the expected net present value of the investment project exceeds a cutoff value such that even an ignorant manager's investment proposal would be approved.

Keywords: capital budgeting, managerial slack, hold-up, use of an information system

JEL Classifications: D8, M4

Working Paper Series