On the value of influence activities for capital budgeting

This paper shows that a capital budgeting process in which the division manager is required to engage in personally costly influence activities prior to a project approval has beneficial incentive effects: it provides the manager with incentives to acquire costly information about project prospects and helps to elicit the revelation of the acquired information. As a consequence, imposing influence costs on the manager can lead to improved capital allocations. The optimal level of influence costs, chosen by the firm, trades off ex ante incentives for information acquisition against efficient use of the acquired information ex post.