Delegation of Decision Rights and Inertia in Capital Reallocation

Abstract

In this paper, we investigate the antecedents of inertia in capital allocation decisions in organizations. Despite the importance of flexible capital reallocation, empirical evidence points to remarkably high levels of stability in these decisions. Adopting a behavioral perspective, we focus on information processing demands faced by boundedly rational decision makers as a driver of such inertia. In particular, we argue that centralization of decision rights, which increases the information processing demands on relevant decision makers, results in an increased inertia in capital reallocations. To empirically test our proposition and explore the causal effect of centralization on reallocation flexibility, we take advantage of an exogenous variation in decision rights among municipalities located in the state of Illinois in the US. Our findings indicate that the delegation of decision rights for capital allocation significantly decreases inertia in reallocation decisions. Additional analyses further provide evidence that a likely mechanism explaining our findings is that of decentralization reducing information processing load on relevant decision makers.

Keywords: Capital reallocation; information processing, organizational structure, inertia, fuzzy regression discontinuity design