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Trust, Reciprocity and Institutional Design: Lessons from Behavioural Economics

  • Pelligra, Vittorio


    (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

Trust and reciprocity are the bond of society (Locke), but economic agents are both self-interested and intrinsically untrustworthy. These assumptions impair severely economists' accounts of social relationships. The paper examines strategies to escape this paradox by enlarging our conception of rationality: the assumptions of self-interest and consequentialism are critically discussed as well as relational behavioural principles (e.g. trust and reciprocity). The implications of this enlarged kind of rationality are particularly important for agency theory. The paper analyses, within this framework, the working of two different kinds of incentive mechanisms, namely intra-personal and interpersonal, and discusses experimental results that emphasise the empirical relevance of the latter. Besides providing a more descriptively adequate picture of agency, such mechanisms have important normative implications. In this respect some of the conditions that affect the process of accumulation and erosion of trust and social capital are explored. The tension between rules and trust turns out to be not inescapable, though it calls for a changing in the designing logic of institutions and contracts. I shall discuss what are the changes needed in order to implement a trust-enhancing activity of institutional design.

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Paper provided by Associazione Italiana per la Cultura della Cooperazione e del Non Profit in its series AICCON Working Papers with number 37-2006.

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Length: 15 pages
Date of creation: 07 Dec 2006
Date of revision:
Handle: RePEc:ris:aiccon:2006_037
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  1. Ernst Fehr & John List, 2004. "The hidden costs and returns of incentives - trust and trustworthiness among ceos," Artefactual Field Experiments 00044, The Field Experiments Website.
  2. Robert Gibbons, 1998. "Incentives in Organizations," NBER Working Papers 6695, National Bureau of Economic Research, Inc.
  3. Barkema, Harry G, 1995. "Do Top Managers Work Harder When They Are Monitored?," Kyklos, Wiley Blackwell, vol. 48(1), pages 19-42.
  4. Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-55, September.
  5. Nelson, William Jr., 2002. "Equity or intention: it is the thought that counts," Journal of Economic Behavior & Organization, Elsevier, vol. 48(4), pages 423-430, August.
  6. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  7. Falk, Armin & Fehr, Ernst, 2002. "Psychological Foundations of Incentives," CEPR Discussion Papers 3185, C.E.P.R. Discussion Papers.
  8. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
  9. Pelligra Vittorio, 2002. "Rispondenza fiduciaria: principi e implicazioni per la progettazione istituzionale," Stato e mercato, Società editrice il Mulino, issue 2, pages 335-358.
  10. Bruno S. Frey & Iris Bohnet, 1999. "Social Distance and Other-Regarding Behavior in Dictator Games: Comment," American Economic Review, American Economic Association, vol. 89(1), pages 335-339, March.
  11. Michael Bacharach & Gerardo A. Guerra, 2001. "Is Trust Self-Fulfilling? An Experimental Study," Economics Series Working Papers 76, University of Oxford, Department of Economics.
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