Fool Me Once: An Experiment on Credibility and Leadership
55 Pages Posted: 31 Aug 2016
Date Written: August 15, 2016
We study a situation in which a leader tries to induce followers to invest in a joint venture. This venture has three key properties: (1) returns are uncertain, (2) investments are complements, so investment is generally only profitable when the followers coordinate on investing, and (3) investment is often more beneficial for the leader than the followers. The leader has private information about the investment’s return and can facilitate successful coordination through cheap-talk recommendation. We study the extent to which leaders in such situations possess “social credibility” defined as the ability to coordinate followers’ behaviors with their statements. In an experiment, we find that leaders manage social credibility by forgoing potentially profitable requests for investment in order to make it more likely that subsequent recommendations to invest are followed. We identify factors that affect the persistence of social credibility.
Keywords: Leadership, Coordination, Complementary Investment, Experiment
JEL Classification: C72, C92, D82
Suggested Citation: Suggested Citation