Capital budgeting, the hold-up problem, and information system design

In this article, we explore the connection between information system desig n and incentives for project search. The choice of an information system af fects the level of managerial slack that is generated during project implem entation. Whether slack is beneficial or costly to an organization has been the subject of debate. Ln our model of the hold-up problem in capital budg eting, there are both costs and benefits to having managerial slack. The co st of slack is the consumption of perquisites by the manager. The benefit o f slack is that it can serve as a motivational tool. The possibility of inc reasing his slack may encourage a self-interested manager to conduct a more diligent search for a profitable project. To trade off the costs and benef its of slack in our model, an optimal information system sometimes incorpor ates coarse information, late information, and a mix of monitored and self- reported information. These features are familiar to accountants. Accountin g incorporates both verified (monitored) and unverified (self-reported) inf ormation and provides information that is aggregated (coarse) and historica l (late).