Information Acquisition, Resource Allocation and Managerial Incentives

A manager's compensation contract and the level of resources available to him jointly influence his incentives to acquire information about different investment alternatives as well as his resource allocate decisions. We show that the optimal compensation contract induces investment allocations that are more aggressive than the first-best allocation conditional on available information. The optimal level of resources may be set above or below the first-best level, depending on whether desired total investment increases or decreases with information. Both types of equilibrium investment distortions are used to motivate information acquisition by the manager. Finally, we show that choice of the level of resources can be delegated to the manager without any loss in efficiency through appropriately linking managerial compensation to the level of resources requested.