A Note on the Properties of Aggregate Evaluation of Budget Proposals
20 Pages Posted: 13 Aug 2011 Last revised: 15 Aug 2011
Date Written: August 12, 2011
Abstract
Agency research on capital budgeting has demonstrated that a principal can reduce information rents by contracting on several investment projects in aggregate rather than on each investment project individually. We investigate the robustness of this result in a model that facilitates comparative statics. We find that the relative advantage of aggregation over individual evaluation is maximized for intermediate levels of expected profitability and intermediate levels of the variability of profitability. We also explore the effects of correlated project outcomes. We find that if aggregation is beneficial, its benefit is decreasing in the correlation between the projects’ profitability. Applications of our results are discussed.
Keywords: budgeting, performance evaluation
JEL Classification: M4
Suggested Citation: Suggested Citation
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