A Difficulty with Oaths: On Trust, Trustworthiness, and Signalling
AbstractIn the wake of the Enron and Worldcom financial scandals that rocked Wall Street in 2002, the US government’s financial regulatory body, the Security and Exchange Commission (SEC) took the unprecedented step in June 2002 of requiring that the chief executives and chief financial officers of America’s 947 biggest companies to swear on oath that their company results and financial reports were to the best of their knowledge accurate. The one-off order was quickly followed by the passing of the Sarbanes-Oxely act, which will require many more CEOs and CFOs to certify their company reports and financial statements at regular intervals. In this paper we apply a simple signalling model to examine whether or not this type of institutional signal of trustworthiness is always efficient. We find that in the presence of signalling costs, the separating equilibrium can be socially inefficient as well as causing a general loss of trust.
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Bibliographic InfoPaper provided by Berkeley Electronic Press in its series German Working Papers in Law and Economics with number 2003-1-1055.
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asymmetric information; institutional signals; oaths; risk; trust;
Other versions of this item:
- Matthew Braham & Friedel Bolle, 2006. "A difficulty with oaths: On trust, trustworthiness, and signalling," European Journal of Law and Economics, Springer, vol. 22(3), pages 219-232, November.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
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