Advanced Search
MyIDEAS: Login

Capital Rationing and Organizational Slack in Capital Budgeting

Contents:

Author Info

  • Rick Antle

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

  • Gary D. Eppen

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

Registered author(s):

    Abstract

    This paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm, each with his or her own objectives and decisions. The facts of interest are: 1. The existence of organizational slack. 2. The "rationing" of resources within organizations. 3. The stated "cut off rate" for accepting capital projects in firms is often greater than the market rate of interest. Organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned. Resource rationing is defined as the under-allocation of resources; i.e., an increase in the amount allocated would generate revenues in excess of its costs. Rationing and slack are both manifestations of ex post inefficiencies. An LP model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present. The optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital, thus inducing rationing in some states of the world. Typically, resources are optimally allocated such that slack exists in other states. The optimal allocation policy trades off these two inefficiencies.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mnsc.31.2.163
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 31 (1985)
    Issue (Month): 2 (February)
    Pages: 163-174

    as in new window
    Handle: RePEc:inm:ormnsc:v:31:y:1985:i:2:p:163-174

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: capital budgeting; capital rationing; organizational slack; agency theory;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

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

    Cited by:
    This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:31:y:1985:i:2:p:163-174. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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