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Exercising Empowerment in an Investment Environment

Listed author(s):
  • Mohamed Gomaa
  • KiridaranKanagaretnam
  • Stuart Mestelman
  • Mohamed Shehata

Using data from a laboratory-controlled environment we analyze the decisions of principals to veto the allocations of grossed-up investments proposed by their agents in a modified trust game. We also analyze the changes in the surplus associated with the introduction of empowerment and the resulting increase in trust by principals. Using probit analysis, we find that the trust displayed by the principal and the trustworthiness of the agent are statistically significant variables in the likelihood that a principal will exercise a veto and that the notion of fairness is important in explaining these decisions. In addition, we analyze the surpluses before and after the exercise of vetoes and find that potential surpluses rise with the introduction of empowerment. However, actual gains in environments with empowerment are not different from those realized in environments in which principals are not empowered. This result is qualified by the recognition that the number of decision rounds that are played by the participants in this experiment may not be sufficient for the full effect of empowerment to be realized by the participants.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2014-13.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2014-13.

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Length: 28 pages
Date of creation: Oct 2014
Handle: RePEc:mcm:deptwp:2014-13
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  1. Hong, Kessely & Bohnet, Iris, 2007. "Status and distrust: The relevance of inequality and betrayal aversion," Journal of Economic Psychology, Elsevier, vol. 28(2), pages 197-213, April.
  2. Kanagaretnam, Kiridaran & Mestelman, Stuart & Nainar, S.M. Khalid & Shehata, Mohamed, 2010. "Trust and reciprocity with transparency and repeated interactions," Journal of Business Research, Elsevier, vol. 63(3), pages 241-247, March.
  3. Ernst Fehr, 2009. "On The Economics and Biology of Trust," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 235-266, 04-05.
  4. Cripps, Martin W. & Mailath, George J. & Samuelson, Larry, 2007. "Disappearing private reputations in long-run relationships," Journal of Economic Theory, Elsevier, vol. 134(1), pages 287-316, May.
  5. Iris Bohnet & Steffen Huck, 2004. "Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change," American Economic Review, American Economic Association, vol. 94(2), pages 362-366, May.
  6. Aimone, Jason A. & Houser, Daniel, 2013. "Harnessing the benefits of betrayal aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 1-8.
  7. Bohnet, Iris & Hermann, Benedikt & Zeckhauser, Richard, 2009. "Trust and the Reference Point for Trustworthiness in Gulf and Western Countries," Working Paper Series rwp09-015, Harvard University, John F. Kennedy School of Government.
  8. Kanagaretnam, Kiridaran & Mestelman, Stuart & Nainar, Khalid & Shehata, Mohamed, 2009. "The impact of social value orientation and risk attitudes on trust and reciprocity," Journal of Economic Psychology, Elsevier, vol. 30(3), pages 368-380, June.
  9. Fetchenhauer, Detlef & Dunning, David, 2012. "Betrayal aversion versus principled trustfulness—How to explain risk avoidance and risky choices in trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 534-541.
  10. Kanagaretnam, Kiridaran & Mestelman, Stuart & Nainar, S.M. Khalid & Shehata, Mohamed, 2014. "Transparency and empowerment in an investment environment," Journal of Business Research, Elsevier, vol. 67(9), pages 2030-2038.
  11. 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.
  12. Rohm, Andrew J. & Milne, George R., 2004. "Just what the doctor ordered: The role of information sensitivity and trust in reducing medical information privacy concern," Journal of Business Research, Elsevier, vol. 57(9), pages 1000-1011, September.
  13. Iris Bohnet & Benedikt Herrmann & Richard Zeckhauser, 2010. "Trust and the Reference Points for Trustworthiness in Gulf and Western Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 811-828.
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