Robust Capital Budgeting

Yunzhi Hu, Fei Li, Hanqing Ye and Dihan Zou

Papers from arXiv.org

Abstract: We study capital budgeting when a manager privately knows project productivity and her empire-building benefits, while headquarters lacks credible priors. Headquarters minimizes maximum regret relative to informed investment. Without compensation, the optimal policy is a spending cap balancing empire-building overinvestment against profitable investment forgone. Compensation helps when empire-building incentives are weak. The optimal payment incentivizes restraint, declines with investment, and reaches zero at the spending cap, supporting greater managerial discretion. When empire-building incentives are strong, compensation cannot distinguish productive investment from biased expansion; therefore, a spending cap alone is optimal.

Date: 2026-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2610.14569 Latest version (application/pdf)

Related works:
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:arx:papers:2610.14569

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().