Capital allocation within a firm

This chapter is concerned with decisions involving the allocation of resources for capital expenditures by a firm. Such capital investment is crucial for a firm since the amount of the investment determines in the long run whether the firm is expanding or contracting. The process has been studied extensively by economists with the objective of deriving an investment function for the economy as a whole under the assumption that management is making decisions in accordance with a profit-maximizing model. One exception to this statement is the book by Bower (1970), which contains an empirical study of the allocation of resources to capital expenditures within firms.