The economics of apologies: Theory, experiment, and application
Apologies are a previously understudied social institution integral in the maintenance of social relationships. Their application ranges from corporate culture to political systems to legal settings. This paper formulates a game theoretic signaling model using rational agents with two-dimensional type that is general enough to encompass a broad class of games where apologies can be used. I characterize the equilibrium and establish an existence result that extends single-crossing. The theory is then tested using a novel variant of the trust game experiment confirming all predictions. I use these findings to assess the use of apologies in medical malpractice litigation and estimate that state legislation that exempts apologies from being entered as evidence in court reduces the number of medical malpractice cases by 43%.