On the efficiency of hurdle rate-based coordination mechanisms

Stephan Leitner and D.A. Behrens

Mathematical and Computer Modelling of Dynamical Systems, 2015, vol. 21, issue 5, 413-431

Abstract: Financial resources are scarce, which is why corporate capital budgeting needs to employ efficient allocation mechanisms. This paper conceptually transforms the idea behind a hurdle rate-based coordination mechanism from an agency model into a computational model of a multi-divisional corporation with both heterogeneous departments and heterogeneous investment opportunities competing for the same source of funding. On the basis of our results, we reason that for heterogeneous investment opportunities a recurrent use of a hurdle rate-based coordination mechanism can work efficiently only if intra-organizational communication is assumed to be absent. We show that, if only a single investment opportunity can be carried into execution due to scarce financial resources, the heterogeneity of the competing investment opportunities positively affects the departments’ pay-offs, while the number of proposed investment projects negatively impacts departmental utilities derived from a residual income. The latter is why our results support the assumption that an emergence of cooperation is to be expected as soon as departments can establish interdepartmental communication, rendering a hurdle rate-based coordination mechanism inefficient.

Date: 2015
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/13873954.2014.973885

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