Information Structure and Organization Performance: Evidence from the Imperial Bureaucracy of China

Abstract

Differences in information between senders and receivers can result in inefficiency due to adverse selection or moral hazard. Therefore, one critical issue of organization design is how to induce truth-telling from the informed but biased agent by restructuring organizational forms. This study examines an important organizational form in terms of informational transmission - the direct and competitive communication structure - and estimates the causal effect of this information structure on organizational performance in a hierarchical organization. We exploit an institutional reform in the imperial bureaucracy of the Qing dynasty, which allowed multiple local officials to report to the emperor directly and independently. Taking advantage of the fact that the direct communication channel was unevenly introduced, we compare the prefectures affected by the reform with prefectures without experiencing the reform based on a difference-in-difference specification. This paper finds that the introduction of a direct communication structure significantly increased government assistance against natural disasters, a critical public good in the pre-modern society; and the increase of public goods provision was mainly attributed to the improvement of information transmission and competitive information supply triggered by the direct communication. Additionally, we find that the effectiveness of the direct communication structure was contingent on the competence of the receiver and could be debilitated by competition-induced information inflation. Furthermore, we find that the decision-maker could alleviate the information bias and resulting misallocation by strategically using the reports sent by more trustworthy informants. This research contributes to the literature by demonstrating that a flattening and competitive information structure could have a causal and conducive bearing on organizational performance.