Incentives for Innovation and Centralized versus Delegated Capital Budgeting
52 Pages Posted: 18 Aug 2011 Last revised: 2 Jul 2014
Date Written: January 6, 2012
We study a setting wherein a divisional manager undertakes personally costly effort to improve the profitability of an investment project. The manager’s choice of innovation effort is subject to a holdup problem because of the ex post opportunism on the part of headquarters. We analyze and contrast the performance of centralized and delegated forms of investment decision-making. We find that delegation improves the manager’s innovation incentives. We identify conditions for each of the two organizational forms to emerge as the optimal choice, and relate these conditions to characteristics of firms’ investment opportunity sets.
Keywords: capital budgeting, centralization, delegation, holdup problem, innovation
JEL Classification: D82, G34, G31, G32, L22
Suggested Citation: Suggested Citation