We examine the effect of competition for scarce corporate financial resources on managers' incentives to generate profitable investment opportunities. Operating an active internal capital market is unambiguously beneficial only if divisions have the same level of financial resources and the same...

I examine a principal-agent model with multiple projects where a risk-neutral manager is protected by limited liability. The analysis has several interesting implications: (i) incentive problems are shown to be a natural source of economies of scope, as combining multiple projects under the...