Innovation, endogenous overinvestment, and incentive pay

  • We analyze how two key managerial tasks interact: that of growing the business through creating new investment opportunities and that of providing accurate information about these opportunities in the corporate budgeting process. We show how this interaction endogenously biases managers toward overinvesting in their own projects. This bias is exacerbated if managers compete for limited resources in an internal capital market, which provides us with a novel theory of the boundaries of the firm. Finally, managers of more risky and less profitable divisions should obtain steeper incentives to facilitate efficient investment decisions.

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Author:Roman InderstORCiDGND, Manuel Klein
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 33
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (33)
Document Type:Working Paper
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2009/12/08
GND Keyword:Kostenplanung; Planungsrechnung; Unternehmenswachstum; Investition; Finanzplanung; Budgetierung
Published in: RAND Journal of Economics. Vol. 38, No. 4, pp. 881–904
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht