Trust and Social Preferences

Question 1

From econ POV, what is trust for?

Answer 1

A way of reducing cost of transactions; don’t need expensive legal contracts etc

Empirical evidence to suggest that countries whose citizens trust more are wealthier

Question 2

Outline the Simple Trust Game

Answer 2

Investor has x, can invest (T) or not; keeps x-T

T gets a return; T(1+r)

A second player (trustee) has to decide how to split T(1+r), keeps an amount Y

T effectively measures trust

Question 3

Outline the GT prediction for the Simple Trust Game

Answer 3

Trustee will keep all of the money, and so Investor won’t invest at all

Question 4

In reality people do invest money in STG, why?

Answer 4

1 - Subjects could be altruistic or inequality averse

2 - Trustees reciprocate the pro-cooperative intention signaled by Investor’s act of trust

Question 5

Outline the Involuntary Trust Game

Answer 5

Remove action ‘don’t trust’, everything else same as STG

Question 6

Outline results of McCabe, 2003

Answer 6

Comparison of STG with ITG

Most trustees choose to keep all the money