Information Sharing and Incentives in Organizations

We consider an organization whose profits depend on its adaptive ability, that is how well it can anticipate, and prepare for, an unknown random shock expected to hit the organization at some point in the future. We examine optimal information flows between a worker and a manager charged with estimating the shock and taking appropriate adaptive action for the organization. The manager may possess private information about the random shock and must decide whether to divulge it to the worker. We show that the manager may find it optimal to conceal her information from the worker because information sharing may weaken the worker's incentives. Moreover, the manager faces a time-inconsistency problem, which leads her to conceal her information more often than she would if she could commit to an information sharing policy. We build on these results to address issues related to managerial ability and authority in organizations.