Abstract
In this paper we transfer the concept of the competitive hurdle rate (CHR) mechanism introduced by Baldenius et al. (Account Rev 82(4):837–867, 2007) into an agent-based model, and test its robustness with respect to an occurrence of errors in forecasting. We find that our CHR born mechanism is most robust for highly diversified investment alternatives and a limited amount of those projects in need of scarce financial support. For misforecasting both the cash flow time series and the managers’ individual efficiencies of operating investment projects, we find that this result reverses with an increasing extent of being wrong, so that a lower level of project heterogeneity appears to be more advantageous than a highly diversified investment landscape, i.e., if managers are really, really wrong about future economic development, the company fares better (or less worse, to be precise) if the investment alternatives are less dissimilar. This investigation allows to quantify the extent of error, when this comes about. Moreover, we provide policy advice for how an organization could design the framework of the CHR born mechanism so that forecasting errors, which inevitably occur, bring only minimal damage to the company.
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Notes
- 1.
Note that agency problems are excluded in the approach presented here. Thus, any deliberate misreporting by the departmental management can be ignored. Agents are incompetent but honest.
- 2.
According to Rogerson [14], the relative benefit depreciation schedule at time \(t\) is calculated according to: \(\frac{\hat{\chi }_{\mathit{it}}} {\sum _{\tau =1}^{T}{(1+r_{i}^{{\ast}})}^{-\tau }\hat{\chi }_{i\tau }}\).
- 3.
Note that the optimization problem of manager \(i\) results in \(\sum _{t=1}^{T} \frac{f(\pi _{\mathit{it}})} {{(1+r)}^{t}} \rightarrow \mathit{max}!\)
- 4.
Considering the limitation of financial resources, the central office’s optimization problem can be formalized as \(\sum _{t=1}^{T} \frac{\chi _{\mathit{it}}\rho _{i}} {{(1+r)}^{t}} -\kappa _{i} -\sum _{t=1}^{T} \frac{f(\pi _{\mathit{it}})} {{(1+r)}^{t}} \rightarrow \mathit{max}!\) for \(\sum _{i}^{n}I_{i} = 1\).
- 5.
The selection of the finally realized project, \(\beth \), is based on forecasted values, while the shareholder value maximizing project, \({i}^{{\ast}}\), is determined on the basis of undistorted values.
- 6.
Note that measured in absolute terms, the expected foregone NPV decreases.
- 7.
Notice that an error which is \(\geq \)1 would render the initial cash outlay to a cash inflow, which is far away from reality.
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Acknowledgements
A part of Doris A. Behrens’ work was carried out within the framework of the SOSIE project and was supported by Lakeside Labs GmbH. It was funded by the European Regional Development Fund (ERDF) and the Carinthian Economic Promotion Fund (KWF) under grant no. 20214/23793/35529.
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Leitner, S., Behrens, D.A. (2014). On the Robustness of Coordination Mechanisms for Investment Decisions Involving ‘Incompetent’ Agents. In: Leitner, S., Wall, F. (eds) Artificial Economics and Self Organization. Lecture Notes in Economics and Mathematical Systems, vol 669. Springer, Cham. https://doi.org/10.1007/978-3-319-00912-4_15
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