Watch Your Words: An Experimental Study on Communication and the Opportunity Cost of Delegation

Abstract

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 a trustee can send a free form message to a trustor, before the latter makes a delegation choice, by selecting whether or not to allow the trustee 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 the trustee makes use of non-precise promises prevalently when the opportunity cost of delegation is low. Moreover, communication increases the trustor’s beliefs on the amount that the trustee will choose to transfer, only when this cost is high to start with. This attenuates the effect of the size of the opportunity cost of delegation on the trustor’s choice. We also find evidence of deception, but in some circumstances the trustee is overoptimistic about her ability to deceive. Indeed, in the presence of lower opportunity costs of delegation, we document an illusion effect: a trustee using non-precise promises incorrectly expects these to exert a positive effect on the trustor’s beliefs and propensity to delegate.