The Benefit and Cost of Winner-Picking: Redistribution versus Incentives

Axel Gautier () and Florian Heider

Journal of Institutional and Theoretical Economics (JITE), 2009, vol. 165, issue 4, 622-649

Abstract: This paper examines the agency cost of winner-picking in multidivision firms and uses explicit incentive contracts to analyze the interaction between corporate headquarters´ investment and incentive policies. Winner-picking, i.e., the efficient reallocation of scarce resources in an internal capital market, adds an extra layer of noise to the moral-hazard problem of incentivizing division managers to produce the resources that can then be redistributed. In particular, division managers with strong future investment opportunities anticipate that headquarters will bail them out should they fail to produce enough resources themselves. This reduces incentives to create the resources in the first place, with possible consequences for the optimal investment policy.

JEL-codes: G31 L25 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (9)

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