The efficacy of (self-)verification instruments in risky investments: An experiment

To deal with information asymmetry, investors and firms currently rely on expensive verification processes. However, new technologies enable firms to share information at a much lower cost. We employ a sender-receiver game to model risky investments, in which firms may misreport their type to an investor. We then experimentally test the effectiveness of (self-)verification instruments against a pure trust-based scenario. We find that firms deceive considerably less, and investors trust more than expected, even in the baseline treatment without (self-)verification. Investors’ expected payoffs are higher under self-verification than in the baseline. Yet, the availability of a low-cost self-verification technology does not fully eliminate the information asymmetry. Our findings could be explained by models that consider intrinsic costs of lying and altruistic preferences.