This paper establishes a nexus between the established fields of constitutional political economy and macroeconomic capital theory. Constitutional political economy explores how legal and institutional structures emerge over time. The evolution of property rights has always been a central focus of this line of inquiry. Time preference is one of the most basic economic concepts. Theories of inte...

This chapter surveys the literature on the effects of behavioral biases on capital budgeting. A large body of the psychology literature finds that people tend to be overconfident and overly optimistic. Because of self-selection, firm managers tend to be even more affected by these biases than the general population. Indeed, the literature finds that biased managers overinvest their firm’s free ...

We examine optimal capital allocation and managerial compensation in a firm with two investment projects (divisions) each run by a risk-neutral manager who can provide (i) (unverifiable) information about project quality and (ii) (unverifiable) access to value-enhancing, but privately costly, resources. The optimal managerial compensation contract offers greater performance pay and a lower sala...