Optimal Dynamic Capital Budgeting
© The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properti...
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| Format: | Article |
| Language: | English |
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Oxford University Press (OUP)
2021
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| Online Access: | https://hdl.handle.net/1721.1/135109 |
| _version_ | 1826196044539494400 |
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| author | Malenko, Andrey |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Malenko, Andrey |
| author_sort | Malenko, Andrey |
| collection | MIT |
| description | © The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects. |
| first_indexed | 2024-09-23T10:19:57Z |
| format | Article |
| id | mit-1721.1/135109 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T10:19:57Z |
| publishDate | 2021 |
| publisher | Oxford University Press (OUP) |
| record_format | dspace |
| spelling | mit-1721.1/1351092023-12-14T15:23:09Z Optimal Dynamic Capital Budgeting Malenko, Andrey Sloan School of Management © The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects. 2021-10-27T20:10:47Z 2021-10-27T20:10:47Z 2019 2021-04-09T17:25:40Z Article http://purl.org/eprint/type/JournalArticle https://hdl.handle.net/1721.1/135109 en 10.1093/RESTUD/RDY043 Review of Economic Studies Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press (OUP) SSRN |
| spellingShingle | Malenko, Andrey Optimal Dynamic Capital Budgeting |
| title | Optimal Dynamic Capital Budgeting |
| title_full | Optimal Dynamic Capital Budgeting |
| title_fullStr | Optimal Dynamic Capital Budgeting |
| title_full_unstemmed | Optimal Dynamic Capital Budgeting |
| title_short | Optimal Dynamic Capital Budgeting |
| title_sort | optimal dynamic capital budgeting |
| url | https://hdl.handle.net/1721.1/135109 |
| work_keys_str_mv | AT malenkoandrey optimaldynamiccapitalbudgeting |