Limited Internal Budget and Divisions’ Collusion
نویسنده
چکیده
In this paper, we consider a dynamic model in which a firm’s headquarters (HQ) allocates the limited capital budget into two divisions which are privately informed of their investment opportunities, having an overstating incentive. The vertical communication between HQ and each division is based on a contract, while the horizontal communication between divisions is collusive to overstate. The main finding is that (i) if the divisions’ incentive to overstate is not very small, then the optimal budget allocation is asymmetric and assigns a division to a favored position in contracts, and (ii) if HQ is sufficiently patient, then it may choose to condition its asymmetric budget allocation on an inter-divisional exchange of favors (collusion) along the equilibrium path, which enhances the efficiency of truthful revelation. †Jean-Baptiste (Finance and Economics, Columbia University) and Lee (Economics and Social Sciences, Singapore Management University). Lee gratefully acknowledges Singapore Management University research fund.
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