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.