Trust in third parties

Independent decision makers are appointed to promote trust by shielding investors from rent appropriation efforts of insiders. We conduct experiments to show how the appointment procedures for such third parties influence the trust of investors and the actual distributions of returns on investment. We find that when the third party is randomly assigned, investments significantly increase in response to positive returns on investment. Investments are similarly high when insiders select anonymous third parties. However, a simple one-sided reputation mechanism between the third party and the insider (but not the investor) diminishes trust and eliminates the benefits of a supposedly independent third party. In a second experiment we show that the trust of investors, evidenced by their investment level, surprisingly does not depend on whether the decision to delegate to an independent third party or not is taken by insiders themselves or exogenously imposed by a random device.