Building Trust: The Costs and Benefits of Gradualism

Abstract

We examine the prevalence of gradualist strategies and their effect on trust-building and economic gains in a setting with an infinite horizon, asymmetric information regarding the trustworthiness of receivers, and various levels of trust. The theoretical literature suggests that gradualist strategies mitigate asymmetric information problems and foster trust-building. However, we theoretically and experimentally show that gradualism sometimes reduces joint payoffs relative to a simple "binary" setting in which trust is an all-or-nothing decision. In a series of experiments, we vary the degree of asymmetric information as well as the economic returns to trusting behavior, and we delineate circumstances under which gradualism may promote or curb efficiency.

Keywords: cooperation, trust, infinitely repeated games, gradualism, game theory, experiments

JEL Classification: C73, C91, C92, D82, D83