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Transparency, efficiency and the distribution of economic welfare in pass-through investment trust games
Journal article   Peer reviewed

Transparency, efficiency and the distribution of economic welfare in pass-through investment trust games

Thomas A. Rietz, Roman M. Sheremeta, Timothy W. Shields and Vernon L. Smith
Journal of economic behavior & organization, Vol.94, pp.257-267
10/01/2013
DOI: 10.1016/j.jebo.2012.09.019
url
https://digitalcommons.chapman.edu/esi_pubs/66View
Open Access

Abstract

► A multi-level trust game represents a pass through investment in an intermediated market. ► Transparency between the investor and intermediary does not affect trust or welfare. ► Transparency between the intermediary and borrower promotes trust and increases welfare. ► Borrowers and intermediaries achieve greater welfare benefits than investors. 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.
 Experiments Financial intermediation Financial market transparency Multi-level trust games Pass through securities

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