Incentives for innovation and centralized versus delegated capital budgeting

Sunil Dutta, Qintao Fan

Research output: Contribution to journalArticlepeer-review


We study a setting wherein a divisional manager undertakes personally costly effort to improve the profitability of an investment project. The manager's choice of innovation effort is subject to a holdup problem because of the ex post opportunism on the part of headquarters. We analyze and contrast the performance of centralized and delegated forms of investment decision-making. We find that delegation improves the manager's innovation incentives. We identify conditions for each of the two organizational forms to emerge as the optimal choice, and relate these conditions to characteristics of firms' investment opportunity sets.

Original languageEnglish (US)
Pages (from-to)592-611
Number of pages20
JournalJournal of Accounting and Economics
Issue number3
StatePublished - Jun 2012


  • Capital budgeting
  • Centralization
  • Delegation
  • Holdup problem
  • Innovation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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