This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm? That is, does the market get across-firm allocations right, so that the marginal return to investment in firm i is the same as the marginal return to investment in firm j? Second, do internal capital markets channel the right amount of money to individual projects within firms? That is, does the internal capital budgeting process get within-firm allocations right, so that the marginal return to investment in firm i's division A is the same as the marginal return to investment in firm i's division B? In addition to discussing the theoretical and empirical work that bears most directly on these questions, the essay also briefly sketches some of the implications of this work for broader issues in both macroeconomics and the theory of the firm.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8342.
Length: Date of creation: Jun 2001 Date of revision: Handle: RePEc:nbr:nberwo:8342
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
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