A Laboratory Investigation of Verification and Reputation Formation in a Repeated Joint Investment Setting

Posted: 19 Jun 2000

See all articles by Steven T. Schwartz

Steven T. Schwartz

SUNY at Binghamton - School of Management

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: April 2000

Abstract

Two managers invest funds in either a division-specific or common project. Managers are privately informed of their own division-specific return ratio and issue forecasts to their partner. Experimental parameter values are chosen such that: (1) investment in the division-specific project constitutes a strictly dominated strategy and (2) socially efficient investment requires truthful forecasts and dictates that (only) the manager with the lower rate of return invest in the common project. This creates a role for ex post verification, the main manipulation in the experiment. In addition, random and continuous pairing of subjects are used. With randomly pairing settings, verification significantly increases honest forecasting and efficiency. With continuous pairings, verification improves coordination of investment strategies, but has only a muted effect on efficiency. Even without verification, continuous pairings increases efficiency. These results indicate that verification and repeated pairings act as substitutes in improving forecast quality and efficiency.

Key words: Experimental economics; Verification; Reputation; Cooperation

JEL Classification: M40, M46, G31, C91

Suggested Citation

Schwartz, Steven T. and Young, Richard A., A Laboratory Investigation of Verification and Reputation Formation in a Repeated Joint Investment Setting (April 2000). Available at SSRN: https://ssrn.com/abstract=229673

Steven T. Schwartz

SUNY at Binghamton - School of Management ( email )

Binghamton, NY 13902-6015
United States
607-777-2102 (Phone)

Richard A. Young (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-0889 (Phone)
614-292-2118 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,151
PlumX Metrics