Delegated Information Acquisition and Capital Budgeting: On the Separation of Project Evaluation and Project Management

Abstract

The paper analyses the question who should be provided with incentives to acquire and reveal information about the quality of an investment proposal: the divisional manager, who derives private benefits of control from the project and therefore prefers to carry out the project, or the capital budgeting department, which has no personal interests in the decision? Interestingly, private benefits of control may reduce the expected costs of the incentive system. The relative advantage of project evaluation by the manager increases (i) when it is possible to observe a signal for the quality of the project even when it has been rejected and (ii) when the sensitivity of the manager's private benefits of control to the project's quality increases. It decreases when the manager has to exert to increase the quality of the proposed project.

Keywords: capital budgeting, information acquisition, task assignment

JEL Classification: G31, D82, J33