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Costly Inspection and Money Burning in Internal Capital Markets

Author

Listed:
  • Rohit Patel

    (Northwestern University)

  • Can Urgun

    (Princeton University)

Abstract

Bureaucracy and influence activities consume a great deal of managers’ time and effort in an organization. These activities are surplus destroying in the sense that they produce no direct output or information. This paper suggests a positive role for these activities. We develop a model for allocation in internal capital markets that takes a mechanism design perspective and incorporates both costly inspection and money burning (e.g. bureaucracy, influence activities) as tools for the headquarters to pursue optimal allocations. We find that the optimal mechanism deploys both the instruments of costly inspection and money burning, often at the same time on an agent.

Suggested Citation

  • Rohit Patel & Can Urgun, 2021. "Costly Inspection and Money Burning in Internal Capital Markets," Working Papers 2021-29, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2021-29
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    File URL: https://scholar.princeton.edu/sites/default/files/inspectionmodelshort.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    costly verification; money burning; capital budgeting; investment; bureaucracy; influence activities;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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