On the Benefits of Withholding Knowledge in Organizations

Transferring knowledge to an agent makes him more successful or productive, which is beneficial for the principal. However, knowledge transfer also increases the agent’s outside option. I identify two reasons for withholding knowledge — to reduce labor costs within a principal–agent relationship, and to weaken the agent in case of a separation. Moreover, the role of synergy is discussed both for building up a principal–agent relationship and for transferring knowledge. While synergy is decisive for knowledge transfer, cooperation between the principal and agent may even take place in the absence of synergy. Furthermore, I analyze whether the principal is more likely to transfer knowledge to a more able or to a less able agent. Finally, the advantages and disadvantages of a noncompetition clause are briefly discussed.