The impact of empowering investors on trust and trustworthiness

This paper uses a controlled laboratory environment and a two-person investment game in a multi-period setting to examine the impact of empowering investors with the right to veto the investee’s profit distribution on trust and trustworthiness. Two forms of vetoes are tested: the first is costly for the investor to implement and the second is costless. 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. To control for a treatment sequence effect, we conducted the experiment in a reverse order. We observe a comparable loss in trust when the power to veto is removed. Further analysis of veto decisions indicates that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are mainly driven by unfair responses, consistent with the notion that most vetoes are cast by investors whose trust has been betrayed.