Markets Assessing Decision Makers and Decision Makers Impressing Markets: a Lab Experiment

Tinbergen Institute Discussion Paper 2018-070/VII

46 Pages Posted: 26 Sep 2018 Last revised: 22 Jun 2019

See all articles by Sander Renes

Sander Renes

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); University of Mannheim - SFB 884 Political Economy of Reforms

Bauke Visser

Erasmus University Rotterdam - Department of Economics; Tinbergen Institute Rotterdam (TIR)

Date Written: May 3, 2019

Abstract

We experimentally investigate (i) whether markets accurately assess the ability of decision makers when these decision makers benefit from positive assessments and (ii) how decision makers use a costly decision and cheap-talk statements to impress markets. We focus on committees of decision makers to use their conversations as a source of information about their beliefs on the relationship between committee actions and assessments. We find that reputation concerns greatly reduce the amount of useful information markets can rely on. Markets realize this and make assessments less dependent on actual decisions and statements when assessments matter to decision makers. Within treatments, markets use the available information about ability quite efficiently. Reputation concerns make the modal cheap-talk strategy uninformative about ability. In a treatment without statements, committees turn to the decision on the project, a costly signal, to impress. Thus, distorted decisions are more frequent in the absence of the cheap-talk channel.

Keywords: reputation concerns, market assessments, committees, cheaptalk, united front, experiment

JEL Classification: C91, D71, D83, D84, L14

Suggested Citation

Renes, Sander and Visser, Bauke, Markets Assessing Decision Makers and Decision Makers Impressing Markets: a Lab Experiment (May 3, 2019). Tinbergen Institute Discussion Paper 2018-070/VII, Available at SSRN: https://ssrn.com/abstract=3243007 or http://dx.doi.org/10.2139/ssrn.3243007

Sander Renes (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

University of Mannheim - SFB 884 Political Economy of Reforms ( email )

L13, 17
Mannheim, 68131
Germany

HOME PAGE: http://www.sanderrenes.com

Bauke Visser

Erasmus University Rotterdam - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+ 31 (0)10 40 81449 (81441) (Phone)
+ 31 (0)10 40 89149 (Fax)

Tinbergen Institute Rotterdam (TIR)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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