The value and motivating mechanism of transparency in organizations

The question how transparency in organizations affects performance has received considerable interest from researchers in management, psychology, and organization science. The widely held view is that transparency benefits organizational performance, because it reduces employee uncertainty. However, causal empirical evidence on the value of transparency and its motivating mechanism is still scarce. In this paper, we report the findings from an experiment, in which an agent has only probabilistic beliefs about the true state of nature and needs to choose costly effort that benefits the principal. The true state relates to his fixed-wage, which can either be high or low. The principal needs to decide whether to create Informative Transparency by disclosing the true state to the agent via a costly, fixed-form message. Our results show a considerable value of transparency: even if transparency involves the disclosure of 'bad news' (the low state), effort almost doubles relative to non-disclosure. Looking at the motivating mechanism, we do not find that transparency motivates primarily because it reduces uncertainty for the agent. Instead, we find that Uninformative Transparency that merely involves communication of already known facts is equally effective. Many principals, however, misperceive the value of transparency and disclose information too restrictively.