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

Author

Listed:
  • Stenzel, Aurel
  • Requate, Till
  • Waichman, Israel

Abstract

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.

Suggested Citation

  • Stenzel, Aurel & Requate, Till & Waichman, Israel, 2025. "The efficacy of (self-)verification instruments in risky investments: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 240(C).
    • Handle: RePEc:eee:jeborg:v:240:y:2025:i:c:s0167268125004147
    DOI: 10.1016/j.jebo.2025.107297
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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services

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