No. 42: Real effects of internal information allocation: Evidence from a field experiment

Abstract

The study examines the effects of changes in the allocation and precision of internal cost information on operational performance. We conduct a randomized field experiment at a medium-sized service company. In the experiment, unit managers receive previously unavailable information about the time resources consumed by individual activities. The information treatment increases both the volume of decision-useful information and the complexity of this information, i.e., the costs of information processing. In the short run, we document an overall decrease in efficiency over the experimental period. Consistent with the notion that short-term adjustment costs outweigh the benefits from improved decision-making, cross-sectional analyses suggest that this negative performance effect is entirely attributable to activities with high information asymmetries and units with low-ability team leaders. Over a longer time horizon, non-experimental evidence shows a catch-up effect across all units and activities. In particular, we observe learning effects for low-ability team leaders, which suggests that cost accounting experience can act as a substitute for ability. Overall, our results suggest that an increase in the volume and precision of internal cost information can generate long-term operational improvement but comes at the cost of short-term frictions from the processing of more complex information.