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Trust and trustworthiness in experimental organizations

Giuseppe Danese (gd@giuseppedaneseecon.com) and Luigi Mittone

No 1501, CEEL Working Papers from Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia

Abstract: In this paper we discuss two instruments through which corporate law attempts to promote trust and trustworthiness in business organizations: (i) monitoring of the manager by a principal, as in the agency approach; (ii) moral suasion, as in the approach according to which managers are �fiduciaries�. We present the results of a laboratory experiment designed to investigate the effectiveness of these two instruments in promoting: (i) profitable, but at the same time risky, entrustments of assets to a manager from a group of investors earning their endowment through real effort; (ii) a higher payback for those investors who entrust more assets to the manager. The first is a measure of trust of the investors in the manager, while the second is a measure of the manager�s trustworthiness. We find that moral suasion increases the investors� trust. Monitoring also increases the investors� trust, but only in the case in which the manager is not aware of the experimental identity of his/her principal. The manager is trustworthy up to a certain degree, regardless of the governance structure of the organization and of the accuracy with which she observes each investor�s entrustment. Finally, we find a modest positive effect of noise on trust, but no strong effect of noise on effort or trustworthiness.

JEL-codes: C92 K22 L21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-hrm and nep-soc
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