Soliciting Advice: Active versus Passive Principals

Abstract

An uninformed principal elicits recommendations from privately informed agents regarding the quality of their projects, and may then further investigate the proposals. Although valuable by itself, the principal’s ability to acquire further information generally crowds out soft information, and may even worsen organizational performance. Further, the impact of further investigations on the precision of soft information is non-monotone. Activist principals are preferred over passive principals if they are always sufficiently involved. Principals that engage in selective involvement are most harmful to the organization (JEL C72, D82, D83).