Contracting in the Trust Game

Abstract

We present a simple mechanism that can be implemented in a simple experiment. In a modified trust game, the allocator can offer to pay the investor to cooperate. The mechanism is successful at implementing efficient outcomes: participants manage to achieve an efficient outcome, when this is possible, two-thirds of the time. While these results are encouraging, we find evidence that both concerns for fairness and motivation crowding out distort the incentives presented in the mechanism.

Keywords: compensation mechanism, side payment, trust game, signaling, crowding out, concerns for equity taste for cooperation

JEL Classification: C92, D62, H42