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Efficiency in the Trust Game: an Experimental Study of Preplay Contracting

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  • Juergen Bracht
  • Nick Feltovich

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Abstract

We use a human-subjects experiment to test the effects of a simple mechanism designed to increase cooperation and efficiency in the trust game. In the equilibrium of the standard trust game, the investor does not invest, foreseeing that the allocator would have kept all of the returns from investment. Our mechanism adds a preplay escrow stage, in which the allocator places an amount (possibly zero) into escrow, to be forfeited if he keeps the proceeds of investment for himself. In the experiment, we vary the amounts that can be put into escrow. Our baseline treatment has no escrow. In a second treatment, only low escrow choices are possible, so the equilibrium is unaffected. In our third treatment, there is an escrow amount high enough that, in equilibrium, investment and sharing of the proceeds will occur. Two additional treatments mirror our second and third, except that in these, the escrow amount is randomly chosen and imposed on the allocator. We find that the high escrow amount, when chosen, does lead to the predicted efficient result. Contrary to the equilibrium prediction, we also find substantial investment in both the baseline and “low-escrow” treatments, leading to markedly higher efficiency than predicted (albeit well below that when the high amount is chosen). Over time, however, cooperation and efficiency after low or zero escrow amounts decline. We find only weak evidence for “crowding-out”, which predicts that given a low or zero amount placed into escrow in non-baseline treatments, investment and efficiency would actually be lower than in the baseline. We also find that initially, investment is more likely after allocators place the maximum possible amount into escrow – as if this action by allocators is being (mistakenly) read by investors as a signal that allocators plan to share. All of these results are seen when escrow choices are imposed as well as when they are voluntary.

Suggested Citation

  • Juergen Bracht & Nick Feltovich, 2006. "Efficiency in the Trust Game: an Experimental Study of Preplay Contracting," The Centre for Market and Public Organisation 06/154, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:06/154
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp154.pdf
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    References listed on IDEAS

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    1. Falkinger, Josef, 1996. "Efficient private provision of public goods by rewarding deviations from average," Journal of Public Economics, Elsevier, vol. 62(3), pages 413-422, November.
    2. Engle-Warnick, Jim & Slonim, Robert L., 2004. "The evolution of strategies in a repeated trust game," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 553-573, December.
    3. Eckel, Catherine C. & Wilson, Rick K., 2004. "Is trust a risky decision?," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 447-465, December.
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    Cited by:

    1. Maroš Servátka & Steven Tucker & Radovan Vadovič, 2011. "Building Trust—One Gift at a Time," Games, MDPI, Open Access Journal, vol. 2(4), pages 1-22, September.
    2. Galiani, Sebastian & Torrens, Gustavo & Yanguas, Maria Lucia, 2014. "The Political Coase Theorem: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 103(C), pages 17-38.
    3. Juergen, Bracht, 2010. "Contracting in the trust game," MPRA Paper 24136, University Library of Munich, Germany.
    4. Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
    5. James Andreoni, 2017. "Satisfaction Guaranteed: When Moral Hazard meets Moral Preferences," NBER Working Papers 23352, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    experiment; trust game; incentives; signal; crowding out;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values

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