Template-Type: ReDIF-Paper 1.0
Title: Capital (Mis)Allocation and Incentive Misalignment
Author-Name: Alexander Schramm
Author-Email: alexander.schramm@econ.lmu.de
Author-Name: Alexander Schwemmer
Author-Email: alexander.schwemmer@econ.lmu.de
Author-Name: Jan Schymik
Author-Email: jschymik@mail.uni-mannheim.de

Classification-JEL: E22, G31, D24, D25, L23
Keywords: Corporate investment; Firm dynamics; Capital reallocation; Short-term incentives

Abstract: We study how managerial incentives affect the allocation of capital inside firms. To identify the effect of incentives on investment decisions we use a within-firm estimator that exploits variation across capital goods and a US accounting reform as an exogenous shock to managers' short-termist incentives. Our evidence shows that capital (mis)allocation within firms can be amplified by short-termist incentives. More short-term incentives cause a shift in investment expenditures away from durables towards more short-lived capital goods, effectively shortening the durability of firms' capital stocks. To study the economic implications of this within-firm misallocation channel, we then build a model of firm investments with incentive frictions that we calibrate to the US economy. We show that even moderate increases in short-termist incentives, such as those around the accounting reform, may cause substantial inefficiencies. These inefficiencies lead to large within-firm spreads in the marginal products of capital goods, causing long-run declines in output and real wages.

Note: 
Length: 76
Creation-Date: 2021-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp260
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2021_260