Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games

Abstract

We design an experiment to examine behavior and welfare in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an investor invests via an intermediary who lends to a borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transparency of exchanges between non-adjacent parties. We find transparency of the exchanges between the investor and intermediary does not significantly affect welfare. However, transparency regarding exchanges between the intermediary and borrower promotes trust on the part of the investor, increasing welfare. Further, this has asymmetric effects: borrowers and intermediaries achieve greater welfare benefits than investors. We discuss implications for what specific aspects of financial market transparency may facilitate more efficiency.JEL Classifications: C72, C91, D72, G14, G21

Facing Your Opponents: Social Identification and Information Feedback in Contests

“…Politicians are required, by the Federal Election Campaign Act enacted in 1971 and revised in 1974, to disclose their campaign contributions and expenditures (Potter, 1999). 2 In market settings, researchers show that greater transparency can generate trust and improve welfare (Rietz et al, 2012), but at the same time forced disclosure can hurt the disclosing party and can be used by buyers to obtain concessional prices (Thomas and Wilson, 2002; Cason and Plott, 2005). The impact of these diverse information settings on behavior in competitive contest environments is highly relevant but has not been studied to date partly because confounding factors in the field make traditional empirical analysis untenable.…”

The Impact of the Reformation on the Economic Development of Western Europe

“…Similarly, Luigi Guiso and co-authors (2003) used the World Value Survey to show that Protestants have higher levels of trust and are less willing to break the law. Given that trust has been shown to have a causal and positive effect on economic development (Knack and Keefer, 1997;Glaeser et al, 2000;Zak and Knack, 2001;Tabellini, 2010;Algan and Cahuc, 2013) and cooperation (La Porta et al, 1997;Burnham et al, 2000;Rietz et al, 2013), we can conclude that trust is one of the causal pathways connecting Protestantism to long-run economic success.…”

Transparency, asymmetric information and cooperation

“…An example of such a policy is the regulation of advanced financial markets (Vishwanath and Kaufmann 2001), where transparency decreases trading costs and increases liquidity of exchanged securities (Kim et al 2014;Boone and White 2015). The link between transparency and efficiency has also been inquired experimentally, for example in terms of welfare, where it has been seen that as information disclosure increases, so does the level of social welfare (Rietz et al 2013). However, the link between transparency and behaviour in a competitive setting has not yet been explored.…”

“…Information is important both for knowing better the environment in which one is operating in order to make accurate decisions, and for trusting (or not) the other agents. As Rietz et al (2013) show experimentally transparency-implemented in terms of information that each player has about the others' actions-affects social welfare through enhancing individual trust. In particular, the more information a player has about the others' decisions, the more she trusts the others.…”