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Robust Capital Budgeting

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Listed:
  • Yunzhi Hu
  • Fei Li
  • Hanqing Ye
  • Dihan Zou

Abstract

We study capital budgeting when a manager privately knows project productivity and her empire-building benefits, while headquarters lacks credible priors. Headquarters minimizes maximum regret relative to informed investment. Without compensation, the optimal policy is a spending cap balancing empire-building overinvestment against profitable investment forgone. Compensation helps when empire-building incentives are weak. The optimal payment incentivizes restraint, declines with investment, and reaches zero at the spending cap, supporting greater managerial discretion. When empire-building incentives are strong, compensation cannot distinguish productive investment from biased expansion; therefore, a spending cap alone is optimal.

Suggested Citation

  • Yunzhi Hu & Fei Li & Hanqing Ye & Dihan Zou, 2026. "Robust Capital Budgeting," Papers 2610.14569, arXiv.org.
    • Handle: RePEc:arx:papers:2610.14569
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    References listed on IDEAS

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    1. Bernardo, Antonio E. & Cai, Hongbin & Luo, Jiang, 2001. "Capital budgeting and compensation with asymmetric information and moral hazard," Journal of Financial Economics, Elsevier, vol. 61(3), pages 311-344, September.
    2. Alexander Frankel, 2014. "Aligned Delegation," American Economic Review, American Economic Association, vol. 104(1), pages 66-83, January.
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