The Impact of Empowering Investors on Trust and Trustworthiness

This paper uses laboratory mechanism design in an investment environment to examine the impact of empowering investors with the right to veto the investee’s profit distribution decision on the level of trust and trustworthiness. One of the key findings is that the empowerment of investors through both costless and costly vetoes significantly increases trust by over 30% in both cases. Interestingly, we observe a comparable pattern when the power to veto is removed. Analyses of veto decisions indicate that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are largely driven by unfair responses, consistent with the theory on inequity aversion.Empowerment; Veto; Investment; Trust; Trustworthiness; Reciprocity

The Impact of Social Value Orientation and Risk Attitudes on Trust and Reciprocity

Prior experimental studies provide evidence that the levels of trust and reciprocity are highly susceptible to individuals’ preferences towards payoffs, prior experience, capacity to learn more about personal characteristics of each other and social distance. The objective of this study is to examine whether social value orientation as developed by Griesinger and Livingstone (1973) and Liebrand (1984) and risk preferences can help to account for the variability of trust and trustworthiness. We use the Berg et al. (1995) investment game to generate indices of trust and reciprocity. Prior to their participation in the investment game, all subjects participated in two other games. One is used to measure their social value orientation (a measure of other regarding behavior) and the second to measure risk attitudes. These variables are introduced as treatments in the analysis of the trust and reciprocity data. In addition to these preference related variables, gender is introduced to capture any differences between men and women which may not be encompassed by value orientation and risk attitudes. The statistical analysis indicates that the social value orientation measure significantly accounts for variation in trust and reciprocity. As well, the level of trust exhibited by an investor significantly affects the reciprocity of the responders and this measure of trust interacts with social value orientation. Individuals who are highly pro-social reciprocate more as the sender’s trust increases, while those who are highly pro-self reciprocate less as the sender’s trust increases. For this sample of participants, the gender variable does not capture any differences in the behavior of men and women that is not already reflected by the differences captured by their value orientations. Risk attitudes do not significantly account for variation in trusting behavior, except for the case where individuals have neither strongly pro-social nor pro-self social value orientations. In this case, more riskseeking individuals are more trusting.Trust, Reciprocity, Social Value Orientation, Risk Attitudes, Gender

The evaluation of the Canadian BAX contract in managing short-term interest rate exposure

Purpose – The purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short-term interest rate exposure. Design/methodology/approach – The paper adopts GARCH methodology to model the time-varying nature of the volatility of prices in the context of hedging and presents a time-varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments. Findings – The key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor. Originality/value – The paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short-term interest rate exposure for both domestic and international investors.

The impact of social value orientation and risk attitudes on trust and reciprocity

Prior experimental studies provide evidence that the levels of trust and reciprocity are highly susceptible to individuals' preferences towards payoffs, prior experience, capacity to learn more about personal characteristics of each other and social distance. The objective of this study is to examine whether social value orientation as developed by Griesinger and Livingston [Griesinger, D. W., & Livingston Jr., J. W. (1973). Toward a model of interpersonal motivation in experimental games. Behavioral Science, 18, 173-188] and Liebrand [Liebrand, W. B. G. (1984). The effect of social motives, communication and group size on behavior in an n-person multi-stage mixed-motive game. European Journal of Social Psychology, 14, 239-264] and risk preferences can help to account for the variability of trust and trustworthiness. We use the Berg, Dickhaut and McCabe [Berg, J., Dickhaut, J., & McCabe, K. (1995). Trust, reciprocity, and social history. Games and Economic Behavior, 10, 122-142] investment game to generate indices of trust and reciprocity. Prior to their participation in the investment game, all subjects participated in two other games. One is used to measure their social value orientation (a measure of other regarding behavior) and the second to measure risk attitudes. These variables are introduced as treatments in the analysis of the trust and reciprocity data. In addition to these preference related variables, gender is introduced to capture any differences between men and women which may not be encompassed by value orientation and risk attitudes. The statistical analysis indicates that the social value orientation measure significantly accounts for variation in trust and reciprocity. As well, the level of trust exhibited by an investor significantly affects the reciprocity of the responders and this measure of trust interacts with social value orientation. Individuals who are highly pro-social reciprocate more as the sender's trust increases, while those who are highly pro-self reciprocate less as the sender's trust increases. For this sample of participants, the gender variable does not capture any differences in the behavior of men and women that is not already reflected by the differences captured by their value orientations. Risk attitudes do not significantly account for variation in trusting behavior, except for the case where individuals have neither strongly pro-social nor pro-self social value orientations. In this case, more risk-seeking individuals are more trusting.Trust Reciprocity Social values Risk analysis

Trust and reciprocity with transparency and repeated interactions

This paper uses data from a controlled laboratory environment to study the impact of transparency (i.e., complete information versus incomplete information) and repeated interactions on the level of trust and trustworthiness (reciprocity) in an investment game setting. The key findings of the study are that transparency (complete information) significantly increases trusting behavior in one-shot interactions. This result persists in repeated interactions. Further, transparency appears important for trustworthiness in one-shot interactions. In addition, repeated interaction increases trust and reciprocity with or without transparency. These results suggest that transparency is important in building trust in business environments such as alliances and joint ventures which are loosely connected organizational forms that bring together otherwise independent firms. It also provides support for the Sarbanes-Oxley Act of 2002 (SOX) and similar legislation elsewhere which attempt to regain investors' trust in corporate management and financial markets by stipulating enhanced disclosures.Transparency Trust Reciprocity Repeated interaction Business alliances SOX