The Persistent Power of Promises

Using a large-scale hybrid laboratory and online trust experiment with pre-play communication this paper investigates how the passage of time affects trust, trustworthiness, and cooperation. We provide evidence for the persistent power of communication. Even when three weeks pass between messages and actual choices and even when these choices are made outside of the lab, communication (predominantly through the use of promises) raises cooperation, trust, and trustworthiness by about 50 percent. Delays between the beginning of the interaction and the time to reciprocate neither substantially alter trust or trustworthiness nor affect how subjects choose to communicate

Promises and Expectations

We investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled laboratory experiment we show that exogenous variation of second-order expectations (promisors’ expectations about promisees’ expectations that the promise will be kept) leads to a significant change in promisor behavior. We provide clean evidence that a promisor’s aversion to disappointing a promisee’s expectation leads her to keep her promise. We propose a simple theory of lexicographic promise keeping that is supported by our results and nests the findings of previous contributions as special cases

The Persistent Power of Promises

This paper investigates how the passage of time affects trust, trustworthiness, and cooperation. We use a hybrid lab and online experiment to provide the first evidence for the persistent power of communication. Even when 3 weeks pass between messages and actual choices, communication raises cooperation, trust, and trustworthiness by about 50 percent. Lags between the beginning of the interaction and the time to respond do not substantially alter trust or trustworthiness. Our results further suggest that the findings of the large experimental literature on trust that focuses on laboratory scenarios in which subjects are forced to choose their actions immediately after communicating, may translate to more ecologically valid settings in which individuals choose actions outside the lab and long after they initially made promises

Common Ownership, Competition, and Top Management Incentives

Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades

Common Ownership, Competition, and Top Management Incentives

When one firm’s strategy affects other firms’ value, optimal executive incentives depend on whether shareholders have interests in only one or in multiple firms. Performance-sensitive contracts induce managerial effort to reduce costs, and lower costs induce higher output. Hence, greater managerial effort can lead to lower product prices and industry profits. Therefore, steep managerial incentives can be optimal for a single firm and at the same time violate the interests of common owners of several firms in the same industry. Empirically, managerial wealth is more sensitive to performance when a firm’s largest shareholders do not own large stakes in competitors

Understanding mechanisms underlying peer effects: evidence from a field experiment on financial decisions

Using a high‐stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice (“social learning”) and because his possession of the asset directly affects others' utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (i) receives no information about the first member, or (ii) is informed of the first member's desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that both social learning and social utility channels have statistically and economically significant effects on investment decisions. Evidence from a follow‐up survey reveals that social learning effects are greatest when the first (second) investor is financially sophisticated (financially unsophisticated); investors report updating their beliefs about asset quality after learning about their peer's revealed preference; and, they report motivations consistent with “keeping up with the Joneses” when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions

Interpersonal comparison, status and ambition in organizations

This paper shows that introducing status concerns into a tournament model has substantial implications for the provision of incentives. We emphasize the role of reference groups and determine the optimal number of winners and losers in tournaments. To compensate employees for the disutility of low status, a profit-maximizing employer may be reluctant to demote employees and instead reward workers through promotions. This rationalizes the prevalence of compensation systems which reward winners without explicitly identifying losers. Differences in ambition and ability affect contestants’ efforts and may result in inefficient promotion outcomes. We analyze how to mitigate these inefficiencies when managing a diverse workforce by using mixed and segregated tournament