Delegation of Decision Rights and Inertia in Capital Reallocation

51 Pages Posted: 23 Mar 2022 Last revised: 9 Dec 2022

See all articles by Nauman Asghar

Nauman Asghar

HEC Paris

Tomasz Obloj

Indiana University - Kelley School of Business - Management & Entrepreneurship

Date Written: January 21, 2022

Abstract

In this paper, we investigate the antecedents of inertia in capital allocation decisions in organizations. Despite the importance of flexible capital reallocation, empirical evidence points to remarkably high levels of stability in these decisions. Adopting a behavioral perspective, we focus on information processing demands faced by boundedly rational decision makers as a driver of such inertia. In particular, we argue that centralization of decision rights, which increases the information processing demands on relevant decision makers, results in an increased inertia in capital reallocations. To empirically test our proposition and explore the causal effect of centralization on reallocation flexibility, we take advantage of an exogenous variation in decision rights among municipalities located in the state of Illinois in the US. Our findings indicate that the delegation of decision rights for capital allocation significantly decreases inertia in reallocation decisions. Additional analyses further provide evidence that a likely mechanism explaining our findings is that of decentralization reducing information processing load on relevant decision makers.

Keywords: Capital reallocation; information processing, organizational structure, inertia, fuzzy regression discontinuity design

Suggested Citation

Asghar, Nauman and Obloj, Tomasz, Delegation of Decision Rights and Inertia in Capital Reallocation (January 21, 2022). HEC Paris Research Paper No. SPE-2022-1453, Available at SSRN: https://ssrn.com/abstract=4014546 or http://dx.doi.org/10.2139/ssrn.4014546

Nauman Asghar (Contact Author)

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Tomasz Obloj

Indiana University - Kelley School of Business - Management & Entrepreneurship ( email )

Bloomington, IN 47405
United States

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