Watch Your Words: An Experimental Study on Communication and the Opportunity Cost of Delegation
University of Verona, Working Paper Series 18/2017
54 Pages Posted: 20 Dec 2017 Last revised: 21 May 2018
Date Written: December 5, 2017
Communication has been shown to play a positive role in promoting trust, yet there is no evidence on how sensitive this result is to the size of the gains from cooperation. To investigate this issue, we adopt an experimental design in which an agent can send a free form message to a principal, before the latter makes a delegation choice, by selecting whether or not to allow the agent to decide how to share a given sum between the two of them. We allow the opportunity cost of delegation to vary, and find that communication increases the principal’s beliefs on the amount that the agent will choose to transfer, only when this cost is high to start with, therefore attenuating the effect of the size of the opportunity cost of delegation on the principal’s choice. We find evidence of deception, but in some circumstances the agent is overoptimistic about her ability to deceive. Indeed, in the presence of lower opportunity costs of delegation, we document an illusion effect: the agent uses non-precise promises and incorrectly expects these to exert positive effects on the principal’s beliefs and propensity to delegate.
Keywords: Communication, Promises, Trust, Delegation, Lost-Wallet Game, Language Precision
JEL Classification: C7, C9, D9
Suggested Citation: Suggested Citation