We analyze how two of the key tasks of (division) managers interact: the task to grow the business by creating new investment opportunities and the task to provide accurate information about these opportunities in the corporate budgeting process. We show how the interaction of these two tasks...

We study a model in which a CEO can entrench himself by hiding information from the board that would allow the board to conclude that he should be replaced. Assuming that even diligent monitoring by the board cannot fully overcome the information asymmetry vis-a-vis the CEO, we ask if there is a...

Future wage payments drive a wedge between total firm output and the output share received by the firm's owners, thus potentially distorting strategic decisions by the firm's owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we...

This paper considers the potential cost of subjective judgement and discretion in credit decisions. We show that subjectivity and discretion in the evaluation of borrowers create an incentive problem on the part of the lender. The lender's incentives to accept or reject a borrower depend only on...

This Paper adopts an optimal contracting approach to internal capital markets. We study the role of headquarters in contracting with outside investors, with a focus on whether headquarters eases or amplifies financing constraints compared to decentralized firms where individual project managers...

Hierarchy can function as an instrument to channel influence activities or power struggles in organizations. Contrary to what has frequently been argued, we show that multi-divisional organizations may involve lower influence costs than single-tier organizations, even though they offer more...

In an internal capital market, individual departments may compete for a share of the firm's budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more...

This paper provides a theory of integration based on the inability of parties to write comprehensive financial contracts. In our model, integration comes with both benefits and costs. On the one hand, integration entails liquidity spillovers from high- to low-return projects, implying that...

We analyze up- and downstream market structure and the choice of technology in a bilaterally oligopolistic industry. The distribution of industry profits between up- and downstream firms is determined by a procedure of bilateral negotiations, which is shown to generate the Shapley value....

This article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. Competition for scarce informed capital at the refinancing stage strengthens investors' bargaining positions. And yet, entrepreneurs'...