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
Date Written: May 3, 2019
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: Suggested Citation