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Social Norms and Trust among Strangers

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  • Huan Xie

    ()
    (Concordia University)

  • Yong-Ju Lee

    ()
    (Samsung Research Institute of Finance)

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Abstract

We study the development of a social norm of trust and reciprocity among strangers in the infinitely repeated binary trust games. Players are anonymous and interact at randomly determined times. Following Kandori (1992), we show that the social norm of trust and reciprocity can be sustained in a sequential equilibrium when self-interested community members employ the contagious strategy. In order to provide the investors with proper incentives to follow the contagious strategy, the sufficient condition requires that there should exist an outside option for the investors and the payoff from the outside option should converge to the payoff from trust and reciprocity when the community size goes to infinity. We further show that this sufficient condition is also a necessary condition to sustain any sequential equilibrium in which the trustees employ the contagious strategy. Our results imply that the extension of the contagious equilibrium from the Prisoner's dilemma game to other classes of games such as trust game is very limited.

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Bibliographic Info

Paper provided by Concordia University, Department of Economics in its series Working Papers with number 08006.

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Length: 37 pages
Date of creation: Sep 2008
Date of revision: May 2011
Handle: RePEc:crd:wpaper:08006

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Keywords: Trust and Reciprocity; Infinitely Repeated Game; Random Matching; Contagious Strategy; Sequential Equilibrium;

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  1. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  2. Glen Ellison, 2010. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Levine's Working Paper Archive 631, David K. Levine.
  3. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  4. Duffy, John & Ochs, Jack, 2009. "Cooperative behavior and the frequency of social interaction," Games and Economic Behavior, Elsevier, vol. 66(2), pages 785-812, July.
  5. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  6. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  7. Parikshit Ghosh & Debraj Ray, 1995. "Cooperation in Community Interaction Without Information Flows," Boston University - Institute for Economic Development 64, Boston University, Institute for Economic Development.
  8. Gabriele Camera & Marco Casari, 2009. "Cooperation among Strangers under the Shadow of the Future," American Economic Review, American Economic Association, vol. 99(3), pages 979-1005, June.
  9. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
  10. Tirole, Jean, 1994. ""A Theory of Collective Reputations" with Applications to the Persistence of Corruption and to Firm Quality," IDEI Working Papers 38, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1995. "Social Norms and Random Matching Games," Games and Economic Behavior, Elsevier, vol. 9(1), pages 79-109, April.
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