Sunflower Management and Capital Budgeting

Tinbergen Institute Working Paper No. 2002-059/2

39 Pages Posted: 12 Nov 2002

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Date Written: May 22, 2002

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

Suggested Citation

Boot, Arnoud W. A. and Thakor, Anjan V. and Milbourn, Todd T., Sunflower Management and Capital Budgeting (May 22, 2002). Tinbergen Institute Working Paper No. 2002-059/2, Available at SSRN: https://ssrn.com/abstract=321601 or http://dx.doi.org/10.2139/ssrn.321601

Arnoud W. A. Boot (Contact Author)

University of Amsterdam - Amsterdam Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Tinbergen Institute ( email )

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Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

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St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

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