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Trust, Transparency, and Complexity

Author

Listed:
  • Richard T
  • Robert C
  • Lauren Cohen

Abstract

This paper develops a theory that generates an equilibrium relationship between product complexity, transparency, and trust in firms. Complexity, transparency, and the evolution of trust are all endogenous, and equilibrium transparency is nonmonotonic. The least-trusted firms choose the lowest product complexity, remain opaque, and substitute ex ante third-party verification for information disclosure and trust. Firms with an intermediate level of trust choose an intermediate level of complexity and transparency through disclosure, with more trusted firms choosing greater complexity and lower transparency. The most-trusted firms choose maximum complexity while remaining opaque, eschewing both verification and disclosure.

Suggested Citation

  • Richard T & Robert C & Lauren Cohen, 2023. "Trust, Transparency, and Complexity," The Review of Financial Studies, Society for Financial Studies, vol. 36(8), pages 3213-3256.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:8:p:3213-3256.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad011
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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