Centralising or decentralising information: motivation and decision efficiency
Knowledge is power and power corrupts. If a principal\'s decision reveals private information about a project\'s payoff to the agent, the principal has an incentive to make inefficient decisions to induce effort. Therefore, it is better to commit to first-best decision making or allocate information to the agent if his incentives are sufficiently aligned with the principal\'s. This idea is tested in a model where coordination between two agents (divisions) is required. The result holds if the project\'s maximum payoff is not very low and not too high compared to the agents\' outside option. It is then better not to patronise agents, but rather let them select their next task on their own. This contradicts a literature on coordination that assumes that it is always optimal to allocate information to the principal if possible. However, if unfavourable states of the world are less likely, the opposite can also hold. It is then optimal to keep the agents in the dark about the state of the world, and the ability to deviate from the first-best decision rule benefits the principal.
Wed, May 31 2017 at 00:00 (CEST)