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A difficulty with oaths: On trust, trustworthiness, and signalling

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Abstract

In the wake of the Enron and Worldcom financial scandals that rocked Wall Street in 2002, the US government’s financial regulatory body, the Security and Exchange Commission (SEC) took the unprecedented step in June 2002 of requiring that the chief executives and chief financial officers of America’s 947 biggest companies to swear on oath that their company results and financial reports were to the best of their knowledge accurate. The one-off order was quickly followed by the passing of the Sarbanes-Oxely act, which will require many more CEOs and CFOs to certify their company reports and financial statements at regular intervals. In this paper we apply a simple signalling model to examine whether or not this type of institutional signal of trustworthiness is always efficient. We find that in the presence of signalling costs, the separating equilibrium can be socially inefficient as well as causing a general loss of trust.

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Authors and Affiliations

  1. Institute of SocioEconomics (IAW), University of Hamburg, Von-Melle-Park 5, 20146, Hamburg, Germany

    Matthew Braham

  2. Faculty of Economics, Europa-Universität Viadrina (Oder), Postfach 1786, 15207 Frankfurt (Oder), Germany

    Friedel Bolle

Authors
  1. Matthew Braham
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  2. Friedel Bolle
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Corresponding author

Correspondence to Matthew Braham.

Additional information

JEL classificationC72. D81. D82. K22

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Braham, M., Bolle, F. A difficulty with oaths: On trust, trustworthiness, and signalling. Eur J Law Econ 22, 219–232 (2006). https://doi.org/10.1007/s10657-006-0448-3

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  • DOI: https://doi.org/10.1007/s10657-006-0448-3

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