Costly Inspection and Money Burning in Internal Capital Markets

43 Pages Posted: 20 Mar 2018

Date Written: April 23, 2017

Abstract

Bureaucracy and influence activities consume a great deal of managers’ time and effort in an organization. These activities are surplus destroying in the sense that they produce no direct output or information. This paper suggests a positive role for these activities. We develop a model for allocation in internal capital markets that takes a mechanism design perspective and incorporates both costly inspection and money burning (e.g. bureaucracy, influence activities) as tools for the headquarters to pursue optimal allocations. We find that the optimal mechanism deploys both the instruments of costly inspection and money burning, often at the same time on an agent.

Keywords: costly verification, money burning, capital budgeting, investment, bureaucracy, influence activities

JEL Classification: C72, D73, G31

Suggested Citation

Patel, Rohit and Urgun, Can, Costly Inspection and Money Burning in Internal Capital Markets (April 23, 2017). Available at SSRN: https://ssrn.com/abstract=3144149 or http://dx.doi.org/10.2139/ssrn.3144149

Rohit Patel (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Evanston, IL
United States

Can Urgun

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States

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