TY  - JOUR
AU  - Scharfstein,David S.
AU  - Stein,Jeremy C.
TI  - The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5969
PY  - 1997
Y2  - March 1997
UR  - http://www.nber.org/papers/w5969
L1  - http://www.nber.org/papers/w5969.pdf
N1  - Author contact info:
David S. Scharfstein
Harvard Business School
Baker 239
Soldiers Field
Boston, MA 02163
Tel: 617/496-5067
Fax: 617/496-8443
E-Mail: dscharfstein@hbs.edu

Jeremy C. Stein
Federal Reserve Board of Governors
20th Street and Constitution Ave., N.W.
Washington, DC 20551
E-Mail: jeremy.c.stein@frb.gov
AB  - 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.
ER  -