Sunflower Management and Capital Budgeting

Abstract

In organizations, it is often necessary to engage in costly delegation of ideas; such delegation seeks to efficiently aggregate multiple information signals. What this paper shows is that those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of the abilities of those who are delegated the task of assessing these ideas. This commingling of the assessment of the idea with that of the individual agent generates a tendency for the agent to ignore his own information and instead attempt to confirm the superior's prior belief. We refer to this as sunflower management. Beyond characterizing the effects of sunflower management on the delegation process, our analysis also allows us to extract implications of sunflower management for the use of centralized versus decentralized capital budgeting systems, and to explain why firms may overinvest capital even when managers have no innate preference for "empire building".

Keywords: Capital budgeting

JEL Classification: G31