Why Less Informed Managers May Be Better Leaders

Abstract

Unlike the textbook model of a top manager being an omniscient planner, coordinator and monitor, the real life managers suffer from discontinuity, lack of systematic information collection and limited time for analysis and reflection. Why do not business leaders set up their organizations in the way that would allow themselves to make informed choices based on thorough analysis? We argue that in some situations top managers may benefit from being less informed. In our model, additional information raises ex post flexibility of the decision-makers which may undermine the ex ante incentives of their subordinates to make specific investments. The subordinates expect less informed leaders to be more committed to the original strategy which increases the returns to the strategy-specific investments. We show that this effect is more likely to take place in more predictable environments. We also show that less informed leaders attract stronger subordinates. Finally, we discuss how the effect of information depends on the structure of the labor market.

Keywords: leadership, commitment, organizational structure, information

JEL Classification: D29, D82, L29