The Value of Top-Down Communication for Organizational Performance

Abstract

Economists have recently started to theoretically analyse the performance implications of transparency in organisations where the principal has private information. An important finding in this literature is that the principal may want to partly withhold information from the agent, and to expose him to uncertainty about the true state of nature. In this paper, we report empirical evidence that such uncertainty exposure is more detrimental to agent effort than previously thought. We design an experiment, in which an agent has only probabilistic beliefs about the true state of nature and needs to choose costly effort that benefits the principal. The true state relates to his fixed-wage, which can either be high or low. Prior to effort choice, the principal can create full transparency by disclosing the true state to the agent via costly communication. Our results show that principals should always create full transparency: even if this requires her to disclose 'bad news' (the low state), effort increases by 47 percent relative to non-disclosure. We show that the value of transparency extends beyond positive effects of the personal communication involved. However, half the principals misperceive this value and disclose information too restrictively, thereby foregoing 30 percent of their potential profits. To help overcome this misperception, we provide evidence on agents' various motivations to reward even the disclosure of bad news.