What do internal capital markets do? Redistribution vs. incentives

Axel Gautier () and Florian Heider

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper we explain the apparent diversification discount of conglomerates without assuming inefficent-cross subsidisation through internal capital markets. Instead we assume that an internal capital market efficiently redistributes scare resources across a conglomerates divisions between successive production periods. The need for redistribution arises from the fact that resources may sometimes be produced by divisions which happen to be succesful in an earlier production stage but which do not have the best investment opportunities in future production stages. In contrast to the existing literature we consider explicitly the incentive problem between corporate headquarter and divisional managers using a standard Moral-Hazard framework. We show that although a complete incentive contract can be written bi-laterally between headquarter and divisional managers, the redistribution of resources across divisions creates additional agency costs in a conglomerate. Moreover, assuming that no complete contract can govern interim redistribution policy by the headquarter, we show how the agency problem with divisional mangers constrains headquarters interim redistribution to be ex ante inefficient.

JEL-codes: G31 G34 L23 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2001-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/25062/ Open access version. (application/pdf)

Related works:
Working Paper: What do internal capital markets do ? Redistribution vs. incentives (2001)
Working Paper: What Do Internal Capital Markets Do? Redistribution vs. Incentives (2001)
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:ehl:lserod:25062

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().