Theft, Gift-Giving, and Trustworthiness: Honesty is its Own Reward in Rural Paraguay

Abstract

Rural areas of developing countries often lack effective legal enforcement. However, villagers who know each other well and interact repeatedly may use implicit contracts to minimize crime. I construct a dynamic limited-commitment model in which a thief cannot credibly commit to forego stealing from his fellow villagers but may be induced to limit his stealing by the promise of future gifts from his potential victim. Using a unique survey from rural Paraguay which combines traditional data on production with information on theft, gifts, and trust, as well as with experiments measuring risk aversion and trustworthiness, I test whether the data is consistent with predictions from the dynamic model. The results provide evidence that, in contrast with predictions from a one-period model with an anonymous thief, farmers do implicitly contract with one another to limit theft. Farmers who have more close family members in their village give fewer gifts, and farmers with plots which are more difficult to steal from give fewer gifts, experience less theft, and trust more. Giving increases when trust is lower and the threat of theft is greater.

Keywords: Trust, trustworthiness, limited-commitment, theft, Paraguay

JEL Classification: C73, C93, D1, K4, O1, O12