FEDERAL RESERVE BANK OF CHICAGO

Authority often relies on information whose collection and transmission by subordinates its very exercise discourages. Using unique loan-approval data, we study how the allocation of authority affects the production, transmission, and strategic use of subjective intelligence in investment decisions. Exploiting the exogenous variation in branch-headquarters distance, we find that the center is more likely to delegate authority, the further away line units are. Consistent with economic theory, more autonomous branches produce more soft information; conversely, the more information they produce, the more real authority they enjoy. We also identify incentives to strategically use soft information in response to local competition as a further channel through which the delegation of authority affects investment success. Our findings provide strong evidence that the optimal allocation of authority helps to overcome distance-related obstacles to corporate-decision making.