Communicating Trustworthiness

Abstract:     
We investigate the dynamic process of building trust in bilateral social interactions in the context of a repeated game with two-sided incomplete information. Our particular interest regards mutual communication of trustworthiness. The underlying stage-game resembles properties of a ''Continuous Prisoner's Dilemma'' with a continuous action space and the possibility of stealing the opponent's investment. The continuous investment variable corresponds to co-operation and is interpreted as individual level of trust while the defective action is interpreted as \emph{break of trust} which terminates the partnership. Players can be of two different types/discount factors. We demonstrate that there exist two distinctive extensions of the Prisoner's Dilemma to continuous action spaces differing in the incentives to invest if both parties co-operate.

We then study efficient mutual communication of trustworthiness for both incentive structures in a unified framework and characterize the Pareto frontier of types' payoffs. Efficient equilibria display a typical pattern consisting of three phases.

First, in the Communication Phase information about the respective opponent's type is transmitted, after which in the Adjustment Phase stakes grow over time until in the Established Phase partners behave stationary as under complete information. Efficient communication of trustworthiness takes two forms depending on incentives. We further characterize rapid trust enhancement where the adjustment phase vanishes. Efficient adjustment of stakes is governed by the impatience of the low type.

There are cases where all players do strictly better than in a corresponding game with complete information. Conceptually, trust formation itself may be valuable instead of costly.

Number of Pages in PDF File: 45

Keywords: trust, gradualism, repeated games, incomplete information

JEL Classification: C72, D82, D83

working papers series