The Centre Cannot Know: Decision Rights, Specific Knowledge, and the Ratings Pull in Corporate Well-Being Investment

Abstract Corporate investment in employee well-being is usually analysed as a problem of motive. Someone is assumed to want too little of it: shareholders discount it, managers divert it, boards tolerate its absence. This paper argues that the more consequential problem is positional rather than motivational. The knowledge needed to choose a well-being intervention well is local, tacit and costly to transmit. The authority to fund it sits several levels above the people who hold that knowledge. A simple model of the assignment decision shows that delegation is efficient exactly when the variance in local fit that the corporate centre cannot recover exceeds the squared private benefit the delegated manager extracts. The paper then identifies a mechanism that moves this threshold in one direction only. External well-being and labour ratings credit spending that is standardised, documented and attributable at the level of the firm. Such spending is far easier to authorise at the centre than in the unit. Ratings therefore raise the return to centralised well-being investment without raising the return to well-matched investment, and pull authority upward, away from the knowledge. The rating improves while the match deteriorates. The argument converts a remedy proposed in the corporate responsibility literature into the source of a distinct distortion, states the conditions under which that distortion can be told apart from gaming, isomorphism and symbolic adoption, and specifies what remains identified when the quantity of interest is not. JEL classification: D23; D91; M14; L21; G34