Incentives, Capital Budgeting, and Organizational Structure

22 Pages Posted: 15 Nov 2013

See all articles by Adolfo de Motta

Adolfo de Motta

McGill University - Desautels Faculty of Management

Jaime Ortega

Universidad Carlos III de Madrid

Date Written: Winter 2013

Abstract

Divisional managers compete for financial resources in what is often referred to as an internal capital market. They also have a common interest in maximizing corporate profits, as this determines the resources available to the firm as a whole. Both goals are powerful motivators but can at times conflict: while the amount of resources available to the firm depends on corporate performance, divisional funding depends upon the division's performance relative to the rest. We propose a model in which organizational form is endogenous, divisions compete for corporate resources, and managers have implicit incentives. We show that organizational design can help companies influence their divisional managers' potentially conflicting goals. Our analysis relates the firm's organizational structure to the source of incentives (external vs. internal), the nature of the incentives (competition vs. cooperation), the level of corporate diversification, the development of the capital market, and to industry and firm characteristics.

Suggested Citation

de Motta, Adolfo and Ortega, Jaime, Incentives, Capital Budgeting, and Organizational Structure (Winter 2013). Journal of Economics & Management Strategy, Vol. 22, Issue 4, pp. 810-831, 2013, Available at SSRN: https://ssrn.com/abstract=2354746 or http://dx.doi.org/10.1111/jems.12033

Adolfo De Motta (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Jaime Ortega

Universidad Carlos III de Madrid ( email )

Despacho 6.10
Calle Madrid 126
Getafe, Madrid 28903
Spain
+34 91 624-9612 (Phone)
+34 91 624-9607 (Fax)

HOME PAGE: http://www.uc3m.es/uc3m/dpto/EMP/profesor/iortega.htm

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