NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment

David S. Scharfstein, Jeremy C. Stein

NBER Working Paper No. 5969
Issued in March 1997
NBER Program(s):   CF

We develop a model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. In an effort to stop rent-seeking, corporate headquarters will be effectively forced into paying bribes to some division managers. And because headquarters is itself an agent of outside investors, the bribes may take the form not of cash, but rather of preferential capital budgeting allocations. One interesting feature of our model is a kind of socialism' in internal capital allocation, whereby weaker divisions tend to get subsidized by stronger ones.

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Document Object Identifier (DOI): 10.3386/w5969

Published: Scharfstein, David S. and Jeremy C. Stein. "The Dark Side Of Internal Capital Markets: Divisional Rent-Seeking And Inefficient Investment," Journal of Finance, 2000, v55(6,Dec), 2537-2564. citation courtesy of

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