Trust, Reciprocity and Rules
Economic Inquiry, 24 October 2017, Forthcoming
36 Pages Posted: 8 Sep 2011 Last revised: 29 Dec 2017
Date Written: July 19, 2017
Many economic interactions rely on trust, which is sometimes violated. The fallout from business fraud and other malfeasance shows serious economic consequences of trust violations. Simple rules mandating minimum standards are attractive because they prevent the most egregious trust violations. However, such rules may undermine more trusting and reciprocal (trustworthy) behavior that otherwise would have occurred and, thus, lead to worse outcomes. We use an experimental trust game to test the efficacy of exogenously imposed minimum standard rules. Rules fail to increase trust and reciprocity, leading to lower economic welfare. Although sufficiently restrictive rules restore welfare, trust and reciprocity never return. The pattern of results is consistent with participants who are not only concerned with payoffs, but also use the game to learn about trust and trustworthiness of others.
Keywords: trust, reciprocity, minimum standards, experiment
JEL Classification: C72, C90, D63, D64, L51
Suggested Citation: Suggested Citation