Intertemporal Cost Allocation and Investment Decisions

Bibliographic Data

ID10182900
AuthorsWilliam P Rogerson (corresponding author)
Year2008
Volume116
Issue5
Pages931-950
Publication date2008-10-01
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/591909
OpenAlexW1965957190
LanguageEN
Citations received2
References cited16

This paper considers the profit-maximization problem of a firm that must make sunk investments in long-lived assets to produce output. It is shown that if per-period accounting income is calculated using a simple and natural allocation rule for investment, called the relative replacement cost (RRC) rule, under a broad range of plausible circumstances, the firm can choose the fully optimal sequence of investments over time simply by choosing a level of investment each period in order to maximize the next period's accounting income. Furthermore, in a model in which shareholders delegate the investment decision to a better-informed manager, it is shown that if accounting income based on the RRC allocation rule is used as a performance measure for the manager, robust incentives are created for the manager to choose the profit-maximizing sequence of investments, regardless of the manager's own personal discount rate or other aspects of the manager's personal preferences. (c) 2008 by The University of Chicago. All rights reserved

Business · Delegate · Economics · Incentive · Investment (military · Investment Decisions · Investment performance · Maximization · Microeconomics · Net profit · Production (economics · Profit (economics · Profit maximization · Return on investment · Shareholder · Auditing, Earnings Management, Governance · Capital Investment and Risk Analysis · Computer Science · Finance · Supply Chain and Inventory Management

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