Trust under Request versus Trust with Threat

Abstract

We study the effects of request and threat on trust and trustworthy behavior in an investment game, both theoretically and experimentally. Consistent with the theoretical predictions, the experimental results show that the request mechanism is able to lift up the overall trust level, due to the joint work of a Request-fulfilling effect and an Expectation-raising effect, together with its failure to prevent the opportunists from succumbing to moral hazard. In comparison, the threat mechanism increases trust and trustworthiness to a higher level and performs quite well in a relatively long term. The option of threat can cause pecuniary loss in the presence of punitive execution (the Payoff-destructing effect), which partially counteracts the gains from investment expansions (the Trust-boosting effect). As a consequence, the request mechanism and the threat mechanism achieve similar positive results regarding efficiency, but a higher level of trade fairness is achieved under the threat mechanism.

Keywords: Trust, Reciprocity, Request, Threat

JEL Classification: C72, C91, D91