Green with Envy: Implications for Corporate Investment Distortions
47 Pages Posted: 24 Sep 2003
We model agents whose preferences exhibit envy. An envious agent's utility is increasing in what he has and decreasing in what others have. With this setup we are able to provide a new perspective on the nature of investment distortions with centralized and decentralized capital budgeting systems. Centralized capital budgeting leads to corporate socialism in investments in multidivisional firms, whereas decentralized capital budgeting leads to overinvestment. Numerous additional testable predictions are also generated.
JEL Classification: G3, G31
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