Exercising Empowerment in an Investment Environment

Using data from a laboratory-controlled environment we analyze the decisions of principals to veto the allocations of grossed-up investments proposed by their agents in a modified trust game. We also analyze the changes in the surplus associated with the introduction of empowerment and the resulting increase in trust by principals. Using probit analysis, we find that the trust displayed by the principal and the trustworthiness of the agent are statistically significant variables in the likelihood that a principal will exercise a veto and that the notion of fairness is important in explaining these decisions. In addition, we analyze the surpluses before and after the exercise of vetoes and find that potential surpluses rise with the introduction of empowerment. However, actual gains in environments with empowerment are not different from those realized in environments in which principals are not empowered. This result is qualified by the recognition that the number of decision rounds that are played by the participants in this experiment may not be sufficient for the full effect of empowerment to be realized by the participants.