Capital budgeting, the hold-up problem, and information system design

Capital budgeting, the hold-up problem, and information system design

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Article ID: iaor200150
Country: United States
Volume: 46
Issue: 2
Start Page Number: 205
End Page Number: 216
Publication Date: Feb 2000
Journal: Management Science
Authors: , , ,
Keywords: management, allocation: resources
Abstract:

In this article, we explore the connection between information system design and incentives for project search. The choice of an information system affects the level of managerial slack that is generated during project implementation. Whether slack is beneficial or costly to an organization has been the subject of debate. In our model of the hold-up problem in capital budgeting, there are both costs and benefits to having managerial slack. The cost of slack is the consumption of perquisites by the manager. The benefit of slack is that it can serve as a motivational tool. The possibility of increasing his slack may encourage a self-interested manager to conduct a more diligent search for a profitable project. To trade off the costs and benefits of slack in our model, an optimal information system sometimes incorporates coarse information, late information, and a mix of monitored and self-reported information. These features are familiar to accountants. Accounting incorporates both verified (monitored) and unverified (self-reported) information and provides information that is aggregated (coarse) and historical (late).

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