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...

If shareholders are prone to excessive risk-taking, delegating the project choice to a manager with conflicting interests may reduce the agency cost of debt. The extent to which this delegation is credible, however, depends on the shareholders' ability to commit not to overrule the manager's...

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'...

We consider an imperfectly competitive loan market in which a local (e.g., relationship) lender has valuable soft, albeit private, information, which gives her a competitive advantage vis-a-vis distant transaction lenders who provide arm's-length financing based on hard, publicly available...

This paper considers the joint optimal design of CEOs' on-the-job compensation and severance pay in a general optimal contracting framework. We obtain a novel argument for high-powered, non-linear CEO compensation such as bonus schemes and option grants that is different from existing arguments...

We examine the role of optimal security design when lenders make inefficient accept or reject decisions after screening projects. Lenders may be either quot;too conservativequot;, in which case they reject positive-NPV projects. Or they may be quot;too aggressivequot;, in which case they accept...

We study optimal financial contracting for centralized and decentralized firms. Under centralized contracting headquarters raises funds on behalf of multiple projects and subsequently allocates the funds on the firm's internal capital market. Under decentralized contracting each project raises...