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The Dynamic Interplay of Inequality and Trust - An Experimental Study

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  • Ben Greiner

    ()
    (Harvard Business School)

  • Axel Ockenfels

    ()
    (University of Cologne, Department of Economics)

  • Peter Werner

    ()
    (University of Cologne, Department of Economics)

Abstract

We study the interplay of inequality and trust in a dynamic game, where trust increases efficiency and thus allows higher growth of the experimental economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable. The difference seems partly due to the fact that equal start positions increase subjects' inclination to condition their trust decisions on wealth comparisons, whereas conditional trust is much less prevalent with unequal initial endowments. As a result, with respect to efficiency, the initially more unequal economy fares worse in the short run but better in the long run, and the disparity of wealth distributions across economies mitigates over time.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 08-026.

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Length: 27 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:hbs:wpaper:08-026

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Keywords: inequality; trust; growth; laboratory experiments;

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Citations

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Cited by:
  1. Vladimír Gazda & Marek Gróf & Július Horváth & Matúš Kubák & Tomáš Rosival, 2012. "Agent based model of a simple economy," Journal of Economic Interaction and Coordination, Springer, vol. 7(2), pages 209-221, October.
  2. Xiao, Erte & Bicchieri, Cristina, 2008. "When Equality Trumps Reciprocity: Evidence from a Laboratory Experiment," MPRA Paper 9375, University Library of Munich, Germany.
  3. Bergh, Andreas & Bjørnskov, Christian, 2013. "Trust, Welfare States and Income Equality: What Causes What?," Working Paper Series 994, Research Institute of Industrial Economics.
  4. Xiao, Erte & Bicchieri, Cristina, 2010. "When equality trumps reciprocity," Journal of Economic Psychology, Elsevier, vol. 31(3), pages 456-470, June.

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