IDEAS home Printed from https://ideas.repec.org/a/spr/cejnor/v23y2015i1p251-278.html
   My bibliography  Save this article

On the fault (in)tolerance of coordination mechanisms for distributed investment decisions

Author

Listed:
  • Stephan Leitner

    ()

  • Doris Behrens

    ()

Abstract

The efficient allocation of scarce financial resources lies at the core of financial management. Whenever humans are involved in the allocation process, it would be reasonable to consider abilities, in order to assure efficiency. For the context of coordinating investment decisions, the competitive hurdle rate (CHR) mechanism (Baldenius et al. in Account Rev 82(4):837–867, 2007 ) is well established for allocating resources. This mechanism is derived from an agency model, which, as is the nature of agency models, assumes agents as being fully competent. We employ the agentization approach (Guerrero and Axtell in Emergent results of artificial economics, Lect Notes Econ Math, vol 652. Springer, Berlin, pp 139–150, 2011 ) and transfer the logic behind the CHR mechanism into a simulation model, and account for individual incapabilities by adding errors in forecasting the initial cash outlay, the cash flow time series, and the departments’ ability to operate projects. We show that increasing the number of project proposals, and decreasing the investment alternatives diversity (in terms of their profitability only), significantly decreases the fault tolerance of our CHR mechanism. For misforecasting cash outlays, this finding is independent from the error’s dimension, while for larger errors in forecasting cash flows, and the departmental ability, the impact of diversity reverses. On the basis of our results, we provide decision support on how to increase the robustness of the CHR mechanism with respect to errors. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Stephan Leitner & Doris Behrens, 2015. "On the fault (in)tolerance of coordination mechanisms for distributed investment decisions," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(1), pages 251-278, March.
  • Handle: RePEc:spr:cejnor:v:23:y:2015:i:1:p:251-278
    DOI: 10.1007/s10100-013-0333-4
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10100-013-0333-4
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Schall, Lawrence D & Sundem, Gary L & Geijsbeek, William R, Jr, 1978. "Survey and Analysis of Capital Budgeting Methods," Journal of Finance, American Finance Association, vol. 33(1), pages 281-287, March.
    2. William P. Rogerson, 2008. "Intertemporal Cost Allocation and Investment Decisions," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 931-950, October.
    3. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    4. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    5. Ma, Tieju & Nakamori, Yoshiteru, 2005. "Agent-based modeling on technological innovation as an evolutionary process," European Journal of Operational Research, Elsevier, vol. 166(3), pages 741-755, November.
    6. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-795, August.
    7. Oded Stark & Doris Behrens, 2010. "An evolutionary edge of knowing less (or: On the ‘curse’ of global information)," Journal of Evolutionary Economics, Springer, vol. 20(1), pages 77-94, January.
    8. Robert Axtell, 2007. "What economic agents do: How cognition and interaction lead to emergence and complexity," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 20(2), pages 105-122, September.
    9. Franklin M. Fisher, 1989. "Games Economists Play: A Noncooperative View," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 113-124, Spring.
    10. repec:spr:lnecms:978-3-642-33209-8 is not listed on IDEAS
    11. Herbert A. Simon, 1991. "Organizations and Markets," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 25-44, Spring.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. repec:taf:nmcmxx:v:21:y:2015:i:5:p:413-431 is not listed on IDEAS
    2. Leitner, Stephan & Rausch, Alexandra & Behrens, Doris A., 2017. "Distributed investment decisions and forecasting errors: An analysis based on a multi-agent simulation model," European Journal of Operational Research, Elsevier, vol. 258(1), pages 279-294.
    3. 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.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:cejnor:v:23:y:2015:i:1:p:251-278. 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: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.