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Trust and Reciprocity, Empowerment and Transparency

Author

Listed:
  • Kiridaran Kanagaretnam
  • Stuart Mestelman
  • S. M. Khalid Nainar
  • Mohamed Shehata

Abstract

In a laboratory-controlled environment characterized by uncertainty and incomplete information we provide experimental evidence on the effects of transparency and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent) in a simple two-person investment game. We find that when principals are empowered by being able to punish agents who may not act in a way the principal believes is in the principal’s best interest, trust and investment increases over that which is realized in the absence of empowerment. We also find that when asymmetric or incomplete information characterizes the investment game the levels of trust (investment) are lower than when information is complete (the environment is transparent). In transparent environments the effect of empowerment is about the same regardless of whether empowerment is introduced or removed. However, in opaque environments, the loss of empowerment has a substantially greater negative effect on trust that the positive effect associated with the introduction of empowerment. While this environment is substantially abstracted from the naturally occurring environment, these results suggest that practical public policies designed to increase transparency in financial transactions are likely to have positive effects on investment. Furthermore, public policies designed to empower principals, such as the Say on Pay practices, are likely to increase investment while the limitation of the empowerment of principals with respect to their agents (consistent with deregulation) will have a much more dramatic negative impact on trust (and investment).

Suggested Citation

  • Kiridaran Kanagaretnam & Stuart Mestelman & S. M. Khalid Nainar & Mohamed Shehata, 2012. "Trust and Reciprocity, Empowerment and Transparency," Department of Economics Working Papers 2012-12, McMaster University.
  • Handle: RePEc:mcm:deptwp:2012-12
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2012-12.pdf
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    References listed on IDEAS

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    1. Anderhub, Vital & Engelmann, Dirk & Guth, Werner, 2002. "An experimental study of the repeated trust game with incomplete information," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 197-216, June.
    2. Iris Bohnet & Steffen Huck, 2004. "Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change," American Economic Review, American Economic Association, pages 362-366.
    3. Brandts, Jordi & Figueras, Neus, 2003. "An exploration of reputation formation in experimental games," Journal of Economic Behavior & Organization, Elsevier, pages 89-115.
    4. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-554, May.
    5. Giorgio Coricelli & Luis González Morales & Amelie Mahlstedt, 2006. "The Investment Game With Asymmetric Information," Metroeconomica, Wiley Blackwell, pages 13-30.
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    7. Lui, Steven S. & Ngo, Hang-yue & Hon, Alice H.Y., 2006. "Coercive strategy in interfirm cooperation: Mediating roles of interpersonal and interorganizational trust," Journal of Business Research, Elsevier, vol. 59(4), pages 466-474, April.
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    1. Weekly Roundup 193: A Curated Linkfest For The Smartest People On The Web!
      by Miguel in Simoleon Sense on 2012-11-22 00:53:28

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    Cited by:

    1. Habib, Khandker M. Nurul & Swait, Joffre & Salem, Sarah, 2014. "Using repeated cross-sectional travel surveys to enhance forecasting robustness: Accounting for changing mode preferences," Transportation Research Part A: Policy and Practice, Elsevier, vol. 67(C), pages 110-126.

    More about this item

    Keywords

    investment; empowerment; veto; trust; trustworthiness; reciprocity; say on pay;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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