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On the efficiency of hurdle rate-based coordination mechanisms

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  • S. Leitner
  • D.A. Behrens

Abstract

Financial resources are scarce, which is why corporate capital budgeting needs to employ efficient allocation mechanisms. This paper conceptually transforms the idea behind a hurdle rate-based coordination mechanism from an agency model into a computational model of a multi-divisional corporation with both heterogeneous departments and heterogeneous investment opportunities competing for the same source of funding. On the basis of our results, we reason that for heterogeneous investment opportunities a recurrent use of a hurdle rate-based coordination mechanism can work efficiently only if intra-organizational communication is assumed to be absent. We show that, if only a single investment opportunity can be carried into execution due to scarce financial resources, the heterogeneity of the competing investment opportunities positively affects the departments’ pay-offs, while the number of proposed investment projects negatively impacts departmental utilities derived from a residual income. The latter is why our results support the assumption that an emergence of cooperation is to be expected as soon as departments can establish interdepartmental communication, rendering a hurdle rate-based coordination mechanism inefficient.

Suggested Citation

  • S. Leitner & D.A. Behrens, 2015. "On the efficiency of hurdle rate-based coordination mechanisms," Mathematical and Computer Modelling of Dynamical Systems, Taylor & Francis Journals, vol. 21(5), pages 413-431, September.
  • Handle: RePEc:taf:nmcmxx:v:21:y:2015:i:5:p:413-431
    DOI: 10.1080/13873954.2014.973885
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    3. Patrick Reinwald & Stephan Leitner & Friederike Wall, 2021. "Limited intelligence and performance-based compensation: An agent-based model of the hidden action problem," Papers 2107.03764, arXiv.org.
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    7. Stephan Leitner & Friederike Wall, 2015. "Simulation-based research in management accounting and control: an illustrative overview," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(2), pages 105-129, August.

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