Capital (Mis)Allocation and Incentive Misalignment

Alexander Schramm (), Alexander Schwemmer () and Jan Schymik

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study how managerial incentives affect the allocation of capital inside firms. To identify the effect of incentives on investment decisions we use a within-firm estimator that exploits variation across capital goods and a US accounting reform as an exogenous shock to managers' short-termist incentives. Our evidence shows that capital (mis)allocation within firms can be amplified by short-termist incentives. More short-term incentives cause a shift in investment expenditures away from durables towards more short-lived capital goods, effectively shortening the durability of firms' capital stocks. To study the economic implications of this within-firm misallocation channel, we then build a model of firm investments with incentive frictions that we calibrate to the US economy. We show that even moderate increases in short-termist incentives, such as those around the accounting reform, may cause substantial inefficiencies. These inefficiencies lead to large within-firm spreads in the marginal products of capital goods, causing long-run declines in output and real wages.

Keywords: Corporate investment; Firm dynamics; Capital reallocation; Short-term incentives (search for similar items in EconPapers)
JEL-codes: D24 D25 E22 G31 L23 (search for similar items in EconPapers)
Pages: 76
Date: 2021-01
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-fdg, nep-mac and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2021_260

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