Transparency, Empowerment, Disempowerment and Trust in an Investment Environment
AbstractIn a laboratory-controlled environment we provide experimental evidence on the effects of transparency (complete over incomplete information) and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent). We implement 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 regardless of the degree of transparency. 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 than 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 ultimately, investment).
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Bibliographic InfoPaper provided by McMaster University in its series Department of Economics Working Papers with number 2013-09.
Length: 35 pages
Date of creation: Jun 2013
Date of revision: Oct 2013
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More information through EDIRC
Investment; Empowerment; Disempowerment; Veto; Trust; Reciprocity; Say-on-Pay;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D3 - Microeconomics - - Distribution
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-CTA-2013-07-15 (Contract Theory & Applications)
- NEP-EVO-2013-07-15 (Evolutionary Economics)
- NEP-EXP-2013-07-15 (Experimental Economics)
- NEP-SOC-2013-07-15 (Social Norms & Social Capital)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- G. Coricelli & L.G. Morales & A. Mahlstedt, .
"The investment game with asymmetric information,"
Papers on Strategic Interaction
2003-29, Max Planck Institute of Economics, Strategic Interaction Group.
- Denis, Diane K., 2012. "Mandatory clawback provisions, information disclosure, and the regulation of securities markets," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 197-200.
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