IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v46y2000i2p205-216.html
   My bibliography  Save this article

Capital Budgeting, the Hold-up Problem, and Information System Design

Author

Listed:
  • Anil Arya

    (Department of Accounting and MIS, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210-1144)

  • John Fellingham

    (Department of Accounting and MIS, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210-1144)

  • Jonathan Glover

    (GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • K. Sivaramakrishnan

    (Department of Accounting, Texas A...M University, College Station, Texas 77843-4353)

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).

Suggested Citation

  • Anil Arya & John Fellingham & Jonathan Glover & K. Sivaramakrishnan, 2000. "Capital Budgeting, the Hold-up Problem, and Information System Design," Management Science, INFORMS, vol. 46(2), pages 205-216, February.
    • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:2:p:205-216
    DOI: 10.1287/mnsc.46.2.205.11927
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.46.2.205.11927
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.46.2.205.11927?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Antle, R & Fellingham, J, 1995. "Information rents and preferences among information systems in a model of resource allocation," Journal of Accounting Research, Wiley Blackwell, vol. 33, pages 41-58.
    2. Mookherjee, D & Reichelstein, S, 1997. "Budgeting and hierarchical control," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 129-155.
    3. Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
    4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    5. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    6. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    7. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
    8. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    9. Jacques Crémer, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 275-295.
    10. Sappington, David E. M., 1986. "Commitment to regulatory bureaucracy," Information Economics and Policy, Elsevier, vol. 2(4), pages 243-258, December.
    11. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
    12. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    13. Baiman, S & Rajan, MV, 1995. "Centralization delegation, and shared responsibility the assignment of capital investment decision rights," Journal of Accounting Research, Wiley Blackwell, vol. 33, pages 135-164.
    14. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-1753, November.
    15. Harvey Leibenstein, 1969. "Organizational or Frictional Equilibria, X-Efficiency, and the Rate of Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(4), pages 600-623.
    16. Ijiri, Yuji, 1983. "On the accountability-based conceptual framework of accounting," Journal of Accounting and Public Policy, Elsevier, vol. 2(2), pages 75-81.
    17. Demski, Joel S. & Sappington, David E. M., 1986. "On the timing of information release," Information Economics and Policy, Elsevier, vol. 2(4), pages 307-316, December.
    18. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
    19. Tracy R. Lewis & David E.M. Sappington, 1991. "Incentives for Monitoring Quality," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 370-384, Autumn.
    20. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter.
    21. Murugappa Krishnan & Lars-Hendrick Roller, 1993. "Preemptive Investment with Resalable Capacity," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 479-502, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anil Arya & Ram N. V. Ramanan, 2023. "Endogenizing Discretion in Disclosures," Management Science, INFORMS, vol. 69(6), pages 3730-3747, June.
    2. Katrin Weiskirchner-Merten, 2020. "Interdependence, participation, and coordination in the budgeting process," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 247-274, April.
    3. Church, Bryan K. & Kuang, Xi (Jason) & Liu, Yuebing (Sarah), 2019. "The effects of measurement basis and slack benefits on honesty in budget reporting," Accounting, Organizations and Society, Elsevier, vol. 72(C), pages 74-84.
    4. Dutta, Sunil & Fan, Qintao, 2012. "Incentives for innovation and centralized versus delegated capital budgeting," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 592-611.
    5. Kim, Doyoung, 2006. "Capital budgeting for new projects: On the role of auditing in information acquisition," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 257-270, September.
    6. Hui Chen & Thomas Pfeiffer, 2024. "Myopic capital market concerns and investment incentives in business alliances," Review of Accounting Studies, Springer, vol. 29(3), pages 2518-2550, September.
    7. Pfeiffer, Thomas & Wagner, Joachim, 2007. "Internal markets or hierachies: Transfer prices or budgets?," Journal of Economics and Business, Elsevier, vol. 59(3), pages 241-255.
    8. Lóránth, Gyöngyi & Morrison, Alan & Laux, Christian, 2016. "The Adverse Effect of Information on Governance and Leverage," CEPR Discussion Papers 11345, C.E.P.R. Discussion Papers.
    9. Maussen, Sophie & Cardinaels, Eddy & Hoozée, Sophie, 2024. "Costing system design and honesty in managerial reporting: An experimental examination of multi-agent budget and capacity reporting," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    10. R. Lynn Hannan & Frederick W. Rankin & Kristy L. Towry, 2006. "The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 885-918, December.
    11. Christian Laux & Gyöngyi Lóránth & Alan D. Morrison, 2018. "The Adverse Effect of Information on Governance and Leverage," Management Science, INFORMS, vol. 64(4), pages 1510-1527, April.
    12. Qintao Fan & Wei Li, 2018. "Leading indicator variables and managerial incentives in a dynamic agency setting," Review of Accounting Studies, Springer, vol. 23(4), pages 1715-1753, December.
    13. Xiaojing Meng & Jie Joyce Tian, 2020. "Board Expertise and Executive Incentives," Management Science, INFORMS, vol. 66(11), pages 5448-5464, November.
    14. Dikolli, Shane S. & Vaysman, Igor, 2006. "Information technology, organizational design, and transfer pricing," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 201-234, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dutta, Sunil & Fan, Qintao, 2012. "Incentives for innovation and centralized versus delegated capital budgeting," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 592-611.
    2. Madhav V. Rajan & Stefan Reichelstein, 2004. "ANNIVERSARY ARTICLE: A Perspective on ÜAsymmetric Information, Incentives and Intrafirm Resource AllocationÝ," Management Science, INFORMS, vol. 50(12), pages 1615-1623, December.
    3. Kim, Doyoung, 2006. "Capital budgeting for new projects: On the role of auditing in information acquisition," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 257-270, September.
    4. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    5. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers.
    6. Malcomson James M, 2009. "Principal and Expert Agent," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-36, May.
    7. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    8. Xiaojing Meng & Jie Joyce Tian, 2020. "Board Expertise and Executive Incentives," Management Science, INFORMS, vol. 66(11), pages 5448-5464, November.
    9. Martin Besfamille, 2000. "Fiscal federalism, local public works and corruption," CREPP Working Papers 0001, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
    10. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    11. Sunil Dutta & Stefan Reichelstein, 2000. "Controlling Investment Decisions: Hurdle Rates and Intertemporal Cost Allocation," CESifo Working Paper Series 354, CESifo.
    12. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    13. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    14. Grüner, Hans Peter & Schulte, Elisabeth, 2010. "Speed and quality of collective decision making: Incentives for information provision," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 734-747, December.
    15. Khalil, Fahad & Lawarree, Jacques, 2001. "Catching the agent on the wrong foot: ex post choice of monitoring," Journal of Public Economics, Elsevier, vol. 82(3), pages 327-347, December.
    16. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2000. "A Theory of Supervision with Endogenous Transaction Costs," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 231-263, November.
    17. Harris, Milton & Raviv, Artur, 1998. "Capital budgeting and delegation," Journal of Financial Economics, Elsevier, vol. 50(3), pages 259-289, December.
    18. Dirk Höring & Helmut Gründl & Sebastian Schlütter, 2016. "Impediments to Communication in Financial Institutions: Implications for the Risk Management Organization," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 193-224, September.
    19. Hans Peter Grüner, 2010. "Speed and Quality of Collective Decision Making: Incentives for Information Provision," Post-Print hal-00911831, HAL.
    20. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:46:y:2000:i:2:p:205-216. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.