Information Acquisition, Resource Allocation and Managerial Incentives

42 Pages Posted: 19 Feb 2012 Last revised: 19 Jan 2015

See all articles by Oguzhan Ozbas

Oguzhan Ozbas

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Heikki Rantakari

University of Rochester - Simon Business School

Date Written: January 2015

Abstract

A manager's compensation contract and the level of resources available to him jointly influence his incentives to acquire information about different investment alternatives as well as his resource allocate decisions. We show that the optimal compensation contract induces investment allocations that are more aggressive than the first-best allocation conditional on available information. The optimal level of resources may be set above or below the first-best level, depending on whether desired total investment increases or decreases with information. Both types of equilibrium investment distortions are used to motivate information acquisition by the manager. Finally, we show that choice of the level of resources can be delegated to the manager without any loss in efficiency through appropriately linking managerial compensation to the level of resources requested.

Keywords: resource allocation, information, incentives

JEL Classification: D2, D8, G3

Suggested Citation

Ozbas, Oguzhan and Rantakari, Heikki, Information Acquisition, Resource Allocation and Managerial Incentives (January 2015). Available at SSRN: https://ssrn.com/abstract=2007595 or http://dx.doi.org/10.2139/ssrn.2007595

Oguzhan Ozbas

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)

Heikki Rantakari (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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