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arXiv · 2610.14569

Robust Capital Budgeting

Yunzhi Hu·Fei Li·Hanqing Ye·Dihan Zou
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Abstract

We study capital budgeting when a manager privately knows project productivity and her empire-building benefits, while headquarters lacks credible priors. Headquarters minimizes maximum regret relative to informed investment. Without compensation, the optimal policy is a spending cap balancing empire-building overinvestment against profitable investment forgone. Compensation helps when empire-building incentives are weak. The optimal payment incentivizes restraint, declines with investment, and reaches zero at the spending cap, supporting greater managerial discretion. When empire-building incentives are strong, compensation cannot distinguish productive investment from biased expansion; therefore, a spending cap alone is optimal.

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Yunzhi Hu, Fei Li, Hanqing Ye, Dihan Zou. 2026-10-10. Robust Capital Budgeting. https://arxiv.org/abs/2610.14569

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