Managerial Incentives and Capital Management

Bengt Holmstrom and Joan Ricart i Costa

The Quarterly Journal of Economics, 1986, vol. 101, issue 4, 835-860

Abstract: The paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors. A model, based on learning about managerial talent, is developed to study second-best contractual remedies. We show that the optimal wage contract is an option of the value of the manager's human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager's resulting incentive to overinvest. Rationing is strictly superior to price decentralization, offering one reason for the prevalence of centralized capital budgeting procedures.

Date: 1986
References: Add references at CitEc
Citations: View citations in EconPapers (196)

Downloads: (external link)
http://hdl.handle.net/10.2307/1884180 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Managerial Incentives and Capital Management (1984)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:101:y:1986:i:4:p:835-860.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().