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

Anil Arya, John Fellingham, Jonathan Glover and K. Sivaramakrishnan
Management Science
Vol. 46, No. 2 (Feb., 2000), pp. 205-216
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/2634759
Page Count: 12
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Capital Budgeting, the Hold-Up Problem, and Information System Design
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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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