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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Thomas A. Rietz & Roman M. Sheremeta & Timothy W. Shields & Vernon L. Smith, 2011. "Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games," Working Papers 11-03, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:11-03
    as

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    References listed on IDEAS

    as
    1. Buchner, Susanne & Gonzalez, Luis G. & Guth, Werner & Levati, M. Vittoria, 2004. "Incentive contracts versus trust in three-person ultimatum games: an experimental study," European Journal of Political Economy, Elsevier, vol. 20(3), pages 673-694, September.
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    7. Roman M. Sheremeta & Jingjing Zhang, 2014. "Three-Player Trust Game With Insider Communication," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 576-591, April.
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    10. Mary L. Rigdon & Kevin A. McCabe & Vernon L. Smith, 2007. "Sustaining Cooperation in Trust Games," Economic Journal, Royal Economic Society, vol. 117(522), pages 991-1007, July.
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    Cited by:

    1. Bogliacino, Francesco & Grimalda, Gianluca & Jimenez, Laura, 2017. "Consultative Democracy & Trust," MPRA Paper 82138, University Library of Munich, Germany.
    2. repec:kap:expeco:v:20:y:2017:i:2:d:10.1007_s10683-016-9488-x is not listed on IDEAS
    3. Jingnan (Cecilia) Chen & Daniel Houser, 2013. "Promises and Lies: An Experiment on Detecting Deception," Working Papers 1038, George Mason University, Interdisciplinary Center for Economic Science, revised Feb 2013.
    4. Shakun D. Mago & Anya C. Savikhin & Roman M. Sheremeta, 2012. "Facing Your Opponents: Social identification and information feedback in contests," Working Papers 12-15, Chapman University, Economic Science Institute.
    5. repec:eee:streco:v:44:y:2018:i:c:p:55-67 is not listed on IDEAS

    More about this item

    Keywords

    financial intermediation; financial market transparency; pass through securities; multi-level trust games; experiments;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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