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Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games

  • Thomas A. Rietz

    (Henry B. Tippie College of Business, University of Iowa)

  • Roman M. Sheremeta

    ()

    (Argyros School of Business and Economics, Chapman University)

  • Timothy W. Shields

    ()

    (Argyros School of Business and Economics, Chapman University)

  • Vernon L. Smith

    (Economic Science Institute, Chapman University)

We design an experiment to examine welfare and behavior in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an Investor invests via an Intermediary who lends to a Borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transparency of exchanges between non-adjacent parties. We find transparency of the exchanges between the investor and intermediary does not significantly affect welfare. However, transparency regarding exchanges between the intermediary and borrower promotes trust on the part of the investor, increasing welfare. Further, this has asymmetric effects: borrowers and intermediaries achieve greater welfare benefits than investors. We discuss implications for what specific aspects of financial market transparency may facilitate more efficiency.

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File URL: http://www.chapman.edu/ESI/wp/Sheremeta-Shields-Trust_Intermediary.pdf
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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 11-03.

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Length: 33 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:chu:wpaper:11-03
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