Unprincipled Principals: Strategic Communication and Firm Performance

Extant research in the principal-agent paradigm has analyzed implications of upstream strategic communication from the agent to the principal. In contrast, this study examines implications of downstream strategic communication in organizations. Central to our theory is the idea that while strategic communication by the principal provides her insurance to hedge against information asymmetry vis-a-vis the agent, it can also reduce the agent’s willingness to exert effort. We find that relative to the case of transparent communication, strategic communication reduces the region over which the agent exerts effort and lowers firm performance. The results shed light on the limits of authority in organizations and the micro-foundations of firm performance.