Transparency, Empowerment, Disempowerment and Trust in an Investment Environment

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 we provide experimental evidence on the effects of transparency (complete over incomplete information) and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent). We implement 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 regardless of the degree of transparency. 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 than 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 ultimately, investment).

Keywords: Investment; Empowerment; Disempowerment; Veto; Trust; Reciprocity; Say-on-Pay (search for similar items in EconPapers)
JEL-codes: C7 C9 D3 D8 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-06, Revised 2013-10
New Economics Papers: this item is included in 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 (2)

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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2013-09

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