Strategic Use of Trust
University of Canterbury - New Zealand Experimental Economics Laboratory
Steven James Tucker
University of Waikato Management School - Economics
Instituto Tecnológico Autónomo de México (ITAM)
October 20, 2008
University of Canterbury Working Paper
While most of the previous literature interprets trust as an action, we adopt a view that trust is represented by a belief that the other party will return a fair share. The agent's action is then a commitment device that signals this belief. In this paper we propose and test a conjecture that economic agents use trust strategically. That is, the agents have incentives to inflate the perceived level of trust (the signal) in order to induce a more favorable outcome for themselves. In the experiment we study the behavior of subjects in a modified investment game which is played sequentially and simultaneously. While the sequential treatment allows for strategic use of trust, in the simultaneous treatment the first mover's action is not observed and hence does not signal her belief. In line with our prediction we find that first movers send significantly more in the sequential treatment than in simultaneous. Moreover, second movers reward trusting action, but only if it is maximal. We also find that signaling with trust enhances welfare.
Number of Pages in PDF File: 41
Keywords: Experimental economics, Trust, Beliefs
JEL Classification: C70, C91working papers series
Date posted: May 14, 2008 ; Last revised: October 28, 2008
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