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Reciprocity and the Paradox of Trust in psychological game theory

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  • Isoni, Andrea
  • Sugden, Robert

Abstract

Rabin's psychological game-theoretic model of ‘fairness’ has been the starting point for a literature about preferences for reciprocity. In this literature, reciprocity is modelled by defining an individual's ‘kindness’ or ‘unkindness’ in terms of the consequences of his actions for others, and assuming a motivation to reward (punish) other people's kindness (unkindness). Contrary to intuition, this form of reciprocity cannot explain mutually beneficial trust and trustworthiness in a simple Trust Game. We formalise and offer a diagnosis of this ‘Paradox of Trust’. We distinguish between two kinds of reciprocity. Rabin's concept of reciprocal kindness is a psychologically plausible motivation, and the paradox is an informative result about the implications of this motivation. However, trust is better understood in terms of reciprocal cooperation – the motivation to play one's part in mutually beneficial practices, conditional on others playing their parts. We show that a theory of reciprocal cooperation can avoid the paradox.

Suggested Citation

  • Isoni, Andrea & Sugden, Robert, 2019. "Reciprocity and the Paradox of Trust in psychological game theory," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 219-227.
  • Handle: RePEc:eee:jeborg:v:167:y:2019:i:c:p:219-227
    DOI: 10.1016/j.jebo.2018.04.015
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    Keywords

    Reciprocity; Paradox of Trust; Kindness; Cooperation; Psychological game theory; Mutual benefit;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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