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A Difficulty with Oaths: On Trust, Trustworthiness, and Signalling

  • Friedel Bolle

    (Europa-Universität Viadrina)

  • Matthew Braham

    (University of Hamburg)

In 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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Paper provided by Berkeley Electronic Press in its series German Working Papers in Law and Economics with number 2003-1-1055.

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Handle: RePEc:bep:dewple:2003-1-1055
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  1. Winand Emons, 2001. "Perjury versus Truth-Revelation: Quantity or Quality of Testimony," Diskussionsschriften dp0103, Universitaet Bern, Departement Volkswirtschaft.
  2. Chatterjee, K. & Samuelson, L., 1989. "Perfect Equilibria In Simultaneous- Offers Bargaining," Papers 12-87-3, Pennsylvania State - Department of Economics.
  3. Carmichael, H Lorne & MacLeod, W Bentley, 1997. "Gift Giving and the Evolution of Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 485-509, August.
  4. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  5. Basu, Kaushik, 2003. "Prelude to Political Economy: A Study of the Social and Political Foundations of Economics," OUP Catalogue, Oxford University Press, number 9780199261857, March.
  6. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  7. Friedel Bolle, 2001. "Why to Buy Your Darling Flowers: On Cooperation and Exploitation," Theory and Decision, Springer, vol. 50(1), pages 1-28, February.
  8. Akerlof, George A, 1976. "The Economics of Caste and of the Rat Race and Other Woeful Tales," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 599-617, November.
  9. Coleman, James S, 1991. "Constructed Organization: First Principles," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 7-23, Special I.
  10. Basu, Kaushik, 1989. "A Theory of Association: Social Status, Prices and Markets," Oxford Economic Papers, Oxford University Press, vol. 41(4), pages 653-71, October.
  11. Coleman, James S, 1984. "Introducing Social Structure into Economic Analysis," American Economic Review, American Economic Association, vol. 74(2), pages 84-88, May.
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