The Upside of Sugarcoating: Inaccurate Performance Reporting and Exploration in Organizations

In this paper, we study how information asymmetries and specifically the opportunity to inaccurately report performance feedback in decentralized organizational structures influences exploration. In many organizations, exploration is characterized by a two-staged process, where a higher-level decision-maker selects a lower-level unit to engage in exploration efforts, and a lower-level unit reports back a performance outcome. Such decentralized structures are also prone to information asymmetries, which are generally seen as undesirable, and aimed to be reduced through monitoring. In this study, we provide experimental evidence that information asymmetries are not always undesirable for organizations and that monitoring can hinder exploration efforts in organizations. The key results from our two experimental studies are that, first, lower-level units that take advantage of information asymmetries and report performance outcomes inaccurately, explore more and experiment more with risky solutions. Second, at the higher level, monitoring, and the revelation of inaccurate reporting leads to the avoidance of particular units, less exploration and foregone gains of exploration in this domain. This is important as it enlarges our understanding on how decentralized structures can foster exploration – against the intuition – information asymmetries can be beneficial, and managers may rather accept them than trying to reduce them. These insights are particularly relevant considering recent interest in ‘flatter’ organizational structures with more decision-making authority to lower-level units and less control.