Building Trust: The Costs and Benefits of Gradualism
80 Pages Posted: 9 Feb 2019
Date Written: January 24, 2019
To study the development of trust, we examine a setting with an infinite horizon, uncertainty regarding the trustworthiness of receivers, and various levels of trust. In equilibrium, senders gradually increase trust levels with reciprocating receivers. We find strong experimental evidence of such gradualist strategies. However, comparing this setting to one in which trust is an all-or-nothing decision, we find --- in stark contrast to theory --- that the latter leads to more efficient outcomes. In a series of follow-up experiments, we highlight the role of homemade beliefs and identify circumstances in which gradual strategies are not only used but also more efficient.
Keywords: cooperation, trust, infinitely repeated games, gradualism, game theory, experiments
JEL Classification: C73, C91, C92, D82, D83
Suggested Citation: Suggested Citation