Trust and Trustworthiness Reputations in an Investment Game
(with Gary Charness and Chun-lei Yang)
Abstract: Trust is an essential component of good social outcomes and effective economic performance. This is particularly true in environments such as the Prisoner¡¯s Dilemma or standard public-goods games, where the equilibrium in a one-shot case involves strictly uncooperative behavior. Evolutionary biologists have developed the notion of indirect reciprocity, whereby favorable or unfavorable actions by one person towards a second person are rewarded or punished by a third party. In this view, indirect reciprocity is a strategic notion based on reputation and is sustainable in an evolutionary sense. In this paper, we study the effect of different reputation systems. In the History of Return treatment, we make information available to the first mover in a binary ¡®trust¡¯ game about the past behavior of the responder as a responder. In the novel History of Trust treatment, we alternatively make information available about the behavior of the responder as a first mover. We find an identical and substantial increase in ¡®trust¡¯ for both of these reputation systems in comparison to the baseline no-information treatment, even though ¡®trustworthiness¡¯ is relatively low in the History of Trust treatment. Thus, people still find it worthwhile to invest in reputation as someone who is willing to trust, even though the immediate payoff for trusting is poor.