Incentives for Innovation and Centralized versus Delegated Capital Budgeting

52 Pages Posted: 18 Aug 2011 Last revised: 2 Jul 2014

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Qintao Fan

University of Oregon, Lundquist School of Business

Date Written: January 6, 2012

Abstract

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

Dutta, Sunil and Fan, Qintao, Incentives for Innovation and Centralized versus Delegated Capital Budgeting (January 6, 2012). Available at SSRN: https://ssrn.com/abstract=1910171 or http://dx.doi.org/10.2139/ssrn.1910171

Sunil Dutta

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Qintao Fan (Contact Author)

University of Oregon, Lundquist School of Business ( email )

Lillis Business Complex
#374
Eugene, OR 97403
United States
5143464865 (Phone)

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