Building Trust: The Costs and Benefits of Gradualism
89 Pages Posted: 9 Feb 2019 Last revised: 14 Sep 2019
Date Written: September 12, 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. We identify the role of (empirically justified) prosociality and homemade beliefs as the driving force of this result and develop a behavioral framework explaining under which conditions gradualism is likely to lead to higher trust and efficiency levels in comparison to an all-or-nothing trust decision. Results of the baseline and a series of follow-up experiments corroborate the predictions of our framework and clearly identify circumstances in which it is behaviorally optimal to start small.
Keywords: cooperation, trust, infinitely repeated games, gradualism, game theory, experiments
JEL Classification: C73, C91, C92, D82, D83
Suggested Citation: Suggested Citation