Trust and Reciprocity, Empowerment and Transparency
AbstractIn a laboratory-controlled environment characterized by uncertainty and incomplete information we provide experimental evidence on the effects of transparency and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent) in a simple two-person investment game. We find that when principals are empowered by being able to punish agents who may not act in a way the principal believes is in the principal’s best interest, trust and investment increases over that which is realized in the absence of empowerment. We also find that when asymmetric or incomplete information characterizes the investment game the levels of trust (investment) are lower than when information is complete (the environment is transparent). In transparent environments the effect of empowerment is about the same regardless of whether empowerment is introduced or removed. However, in opaque environments, the loss of empowerment has a substantially greater negative effect on trust that the positive effect associated with the introduction of empowerment. While this environment is substantially abstracted from the naturally occurring environment, these results suggest that practical public policies designed to increase transparency in financial transactions are likely to have positive effects on investment. Furthermore, public policies designed to empower principals, such as the Say on Pay practices, are likely to increase investment while the limitation of the empowerment of principals with respect to their agents (consistent with deregulation) will have a much more dramatic negative impact on trust (and investment).
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Bibliographic InfoPaper provided by McMaster University in its series Department of Economics Working Papers with number 2012-12.
Length: 38 pages
Date of creation: Oct 2012
Date of revision:
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More information through EDIRC
investment; empowerment; veto; trust; trustworthiness; reciprocity; say on pay;
Find related papers by JEL classification:
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-11 (All new papers)
- NEP-CBE-2012-11-11 (Cognitive & Behavioural Economics)
- NEP-CTA-2012-11-11 (Contract Theory & Applications)
- NEP-EVO-2012-11-11 (Evolutionary Economics)
- NEP-EXP-2012-11-11 (Experimental Economics)
- NEP-SOC-2012-11-11 (Social Norms & Social Capital)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Weekly Roundup 193: A Curated Linkfest For The Smartest People On The Web!
by Miguel in Simoleon Sense on 2012-11-21 18:53:28
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