Monitored by your friends, not your foes: Strategic ignorance and the delegation of real authority

Abstract

In this laboratory experiment we study the use of strategic ignorance to delegate real authority within a firm. A worker can gather information on investment projects, while a manager makes the implementation decision. The manager can monitor the worker.This allows her to exploit any information gathered by the worker, but also reduces the worker's incentives to gather information in the first place. Both e↵ects are influenced by the interest alignment between manager and worker. Our data confirm the prediction that optimal monitoring depends non-monotonically on the interest alignment between managers and workers. Managers also show some preferences for control that seem to be driven by loss aversion. We also find mild evidence for hidden benefits and costs of control. However, behavioral biases have only limited e↵ects on organizational outcomes. JEL: D20, D40, D63, D82, J30In a variety of strategic situations, more information may hurt an individual. The underlying intuition is that if it is commonly known that an individual gathers more information, this may change the behavior of other individuals. This change in behavior can be detrimental to the better informed individual. Consequently, rational individuals might stay ignorant for strategic reasons. One organizational issue where strategic ignorance is likely to play an important role is the e↵ective delegation of decision rights. This argument is developed in a pioneering contribution by Aghion and Tirole (1997) and explored further in Baker, Gibbons, and Murphy (1999). In Aghion and Tirole a worker fears to be overruled by his manager if the latter is well-informed about the consequences of some operational decisions. This fear thwarts the worker's incentives to gather information. An uninformed manager can credibly commit not to overrule, since she does not know the most appropriate operational decision.Realizing that his preferred decision will be implemented, the worker has stronger incentives to gather information. Strategic ignorance can thus be a crucial tool to delegate e↵ective control over decisions -called real authority -to lower level employees.The argument is compelling from a theoretical point of view, yet empirical evidence on the underlying strategic mechanism is scarce. Moreover, practitioners, the popular business press, and many studies on monetary incentives and control indeed suggest that Aghion and Tirole might ignore important behavioral biases of both managers and workers.Regarding managers, anecdotal evidence paints the picture that many individuals are overly reluctant to delegate decision rights. The negative consequence of such preferences for control are reflected in management advice like Manzoni andBarsoux (1998) andHerzberg (2003).Rather than emphasizing the perils of lost control, this management literature warns for the negative consequences of "micromanagement." The problem of excess centralization has been discussed at least since Williamson (1996, pp.150-151) who comments on the connection between managerial meddling...

Illusion of control and the pursuit of authority

“…Our experiment of course connects to the recent literature on preferences for control and the allocation of authority, see Falk & Kosfeld (2006), Fehr et al (2013), Bartling et al (2013), and Dominguez-Martinez, Sloof & von Siemens (2014). They find that the allocation of power as such affects behavior.…”

The Control Premium: A Preference for Payoff Autonomy

“…They were anonymously matched with another person, whom we called the participant's "Match," who had been assigned to take the other quiz. 7 Then they completed the protocol for either the Choice condition or for one of the three ambiguity variants of the Probability and Choice condition, all of which are described in the following subsections.…”

Self-Image and Willful Ignorance in Social Decisions

“…Other papers have explored ignorance as a commitment device in different contexts, for example in the presence of time-inconsistency (Carillo and Mariotti, 2000;Bénabou and Tirole, 2011). Ignorance may also be employed by managers to better provide incentives, either by maintaining subordinates' de facto authority and thus, their incentive to gather information about project quality (Aghion and Tirole, 1997;Domingues-Martinez et al, 2014) or by reducing moral hazard (Crémer, 1995). In addition, a growing theoretical and empirical literature in economics shows that people downplay negative feedback and are sometimes willing to pay not to receive any feedback at all (Köszegi, 1996;Möbius et al, 2011;Eil and Rao, 2011;Grossman and Owens, 2012).…”