Managerial Performance Evaluation with Residual Income - Limited Investment Budget and Npv-Maximization

32 Pages Posted: 28 Jan 2004

See all articles by Alwine Mohnen

Alwine Mohnen

TUM School of Management; IZA Institute of Labor Economics

Date Written: December 18, 2003

Abstract

If the investment budget is limited, not all profitable projects can be realized. Then the principal desires the agent to select the NPV-maximizing set of projects. Residual income does not solve this problem if the agent is impatient. Even the relative benefit cost allocation scheme proposed by Rogerson does not provide a solution. In this paper we show how this goal can be achieved under the same information structure as in Rogerson (1997) or Reichelstein (1997). The result can be interpreted as an annuity benefit cost allocation scheme. Periodic shifts of the cash flows are used, which lead to a performance measure reflecting the NPV-ranking in each period.

Keywords: Investment Incentives, Residual Income, NPV-Maximization, Limited Investment Budget

JEL Classification: M41, M52, M21

Suggested Citation

Mohnen, Alwine, Managerial Performance Evaluation with Residual Income - Limited Investment Budget and Npv-Maximization (December 18, 2003). Available at SSRN: https://ssrn.com/abstract=481203 or http://dx.doi.org/10.2139/ssrn.481203

Alwine Mohnen (Contact Author)

TUM School of Management ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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