Corruption, Norm Violation and Decay in Social Capital

The paper studies the interplay between corruption and social capital (measured as trust), using data from a lab experiment. Subjects play either a harassment bribery game or a strategically identical but differently framed ultimatum game, followed by a trust game. In a second experiment, the trust game is followed by the bribery game. Our experimental design allows us to examine whether subjects, who have been asked to pay a bribe, are less likely to trust and subjects, who have been trusted less in the first place, are more likely to demand bribe. Results suggest that a) there is a negative spillover effect of corruption on trust, but not vice-versa, and the effect increases with decrease in social appropriateness norm of the bribe demand; b) lower trust in the bribery game treatment is explained by lower expected return on trust; c) surprisingly, for both the bribery and the ultimatum game treatments, social appropriateness norm violation engenders the decay in trust through its adverse effect on belief about trustworthiness; d) belief about whether a bribe demand will be accepted or not predicts actual amount of bribe demanded.