Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games
31 Pages Posted: 7 May 2011 Last revised: 25 Jun 2014
Date Written: December 1, 2011
We design an experiment to examine welfare and behavior 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.
Keywords: financial intermediation, financial market transparency, pass through securities, multi-level trust games, experiments
JEL Classification: C72, C91, D72, G14, G21
Suggested Citation: Suggested Citation