Inter-temporal cost allocation and investment decisions

Arbeitspapier

This paper considers the profit maximization problem of a firm that must make sunk investments in long-lived assets to produce output. It is shown that if per period accounting income is calculated by using a particular allocation rule for investment called the relative benefit and replacement cost (RBRC) rule, that, in a broad range of plausible circumstances, the fully optimal sequence of investments over time can be achieved simply by choosing a level of investment each period to maximize next period's accounting income. In the basic model, it is assumed that there is a single centralized decision maker so the role of the cost allocation rule is that it simplifies the seemingly-complex multi-period optimization problem by decomposing it into a series of simple single period problems. An extension to the basic model considers the case where shareholders delegate the investment decision to a better-informed manager. It is shown if accounting income based on the RBRC allocation rule is used as a performance measure for the manager, robust incentives are created for the manager to choose the profit maximizing level of investment regardless of the manager's own personal discount rate.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: CSIO Working Paper ; No. 0077

Klassifikation und Themen

• Klassifikation: Wirtschaft

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Rogerson, William P.
• Ereignis: Veröffentlichung
• (wer): Northwestern University, Center for the Study of Industrial Organization (CSIO)
• (wo): Evanston, IL
• (wann): 2006

Weitere Informationen

• Handle: http://hdl.handle.net/10419/38694
• Letzte Aktualisierung: 10.03.2025, 11:41 MEZ