Trust and Reciprocity, Empowerment and Transparency

Kiridaran Kanagaretnam, Stuart Mestelman, S. M. Khalid Nainar and Mohamed Shehata

Department of Economics Working Papers from McMaster University

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).

Keywords: investment; empowerment; veto; trust; trustworthiness; reciprocity; say on pay (search for similar items in EconPapers)
JEL-codes: C70 C91 D63 D81 D82 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2012-10
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-evo, nep-exp and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2012-12

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