Watch your words: An experimental study on communication and the opportunity cost of delegation

Abstract

We investigate how the opportunity cost of delegation influences the impact of communication on trust, trustworthiness and communication style. To do this, we adopt a modified trust game in which the trustee may send a message to the trustor, before the latter chooses whether to delegate decision rights to the former. Our analysis shows that, only when the opportunity cost of delegation is high does communication have a positive effect on the beliefs (first and second order) relative to the amount the trustor will receive if he chooses to delegate, as well on the trustee's beliefs on the probability of delegation occurring. This implies that the incentives to use communication to increase trust are greater when the opportunity cost of delegation is higher, even if it does not affect the decision to delegate and is associated with deception. Regarding communication style, our analysis shows that non-precise promises are used more frequently when the opportunity cost of delegation is low, and the trustor has less to lose from delegating. We also document an “illusion effect” whereby trustees erroneously expect non-precise promises to have an impact on the beliefs of trustors.