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

Author

Listed:
  • Anil Arya

    (Department of Accounting and MIS, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210-1144)

  • John Fellingham

    (Department of Accounting and MIS, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210-1144)

  • Jonathan Glover

    (GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • K. Sivaramakrishnan

    (Department of Accounting, Texas A...M University, College Station, Texas 77843-4353)

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).

Suggested Citation

  • Anil Arya & John Fellingham & Jonathan Glover & K. Sivaramakrishnan, 2000. "Capital Budgeting, the Hold-up Problem, and Information System Design," Management Science, INFORMS, vol. 46(2), pages 205-216, February.
  • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:2:p:205-216
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    File URL: http://dx.doi.org/10.1287/mnsc.46.2.205.11927
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    References listed on IDEAS

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    Cited by:

    1. Dutta, Sunil & Fan, Qintao, 2012. "Incentives for innovation and centralized versus delegated capital budgeting," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 592-611.
    2. Kim, Doyoung, 2006. "Capital budgeting for new projects: On the role of auditing in information acquisition," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 257-270, September.
    3. Pfeiffer, Thomas & Wagner, Joachim, 2007. "Internal markets or hierachies: Transfer prices or budgets?," Journal of Economics and Business, Elsevier, vol. 59(3), pages 241-255.
    4. Laux, Christian & Lóránth, Gyöngyi & Morrison, Alan, 2016. "The Adverse Effect of Information on Governance and Leverage," CEPR Discussion Papers 11345, C.E.P.R. Discussion Papers.
    5. Dikolli, Shane S. & Vaysman, Igor, 2006. "Information technology, organizational design, and transfer pricing," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 201-234, April.

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    Keywords

    capital budgeting; hold-up problem; slack;

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