The benefit and cost of winner-picking: Redistribution vs. Incentives

Abstract

A multi-divisional firm can engage in ”winner-picking” to redistribute scarce funds efficiently across divisions. But there is a conflict between rewarding winners (investing) and producing resources with which to reward winners (incentives). Managers in winning divisions are tempted to free-ride on resources produced by managers in loosing divisions whose incentives to produce resources, anticipating their loss, are also weakened. Corporate headquarter’s investment and incentive policies are therefore inextricably linked and have to be treated as jointly endogenous. The analysis links corporate strategy, compensation and the value of diversification to the characteristics of multi-divisional firms.