Trust

• Some measure of trust is essential for carrying

out transactions where all possible
contingencies cannot be specified
• Trust reduces transactions costs & alleviates
need for formal institutions, enforcement of
property rights and contracts
• Contracts that may not be enforceable might be
undertaken in the presence of mutual trust and
reciprocity
 leads to increased efficiency … or not
• Scene from the 1996 movie Jerry Maguire
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 Trust
• Trust in government officials makes policy
announcements more credible
• Promises by central bankers (not to raise
interest rates) are heeded
 individuals adopt appropriate horizons in
making investment decisions
• Informal credit markets depend on trust
www.kiva.org/
• Trust can enable poor to access much needed
loans

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 Trust in Consumption

• Trust in goods and services we consume

• Advertisers make bold claims about
properties of their goods & services
• Credence goods: in some cases these
claims cannot easily be verified (e.g.,
organic produce) or at all (e.g., anti-aging
creams, after-life)

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 Trust

• Fukuyama (1995) argues that differences in the

level of trust among citizens might explain
differences in countries’ levels of development
• Knack and Keefer (QJE 1997) examine this
hypothesis more closely
• They examine the relationship between trust and
economic growth in 29 market economies
• How do they measure trust?

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 Trust
• World Values Survey from 29 market economies
– 21 in 1981
– 28 in 1990-91
• Trust measured by asking “Generally speaking,
would you say that most people can be trusted,
or that you can’t be too careful in dealing with
people?”
• Trust measured by percentage of people who
said “most people can be trusted”
– Overall mean 35.8% (Don’t know responses deleted)

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 Trust
• strong correlation between rates of growth & fractions
of citizens who said they generally trust people

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 Trust
• skepticism about measure of trust:
1. hypothetical question (not observed behavior)
2. single question (rather than set of questions) with
“yes” or “no” response
3. “don’t know” responses not included
 could differ substantially across countries

• Experiments that measure trust overcome all of these

concerns (and introduce others?)

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 The Trust Game
Berg, Dickhaut and McCabe (GEB 1995)
• Player 1 and 2 are endowed with $10.
• Player 1 decides how much of her $10 to
transfer to player 2.
• Experimenter triples any amount sent.
• Player 2 is informed about 1’s transfer & decides
how much of the tripled transfer to send back.
• Unique subgame perfect equilibrium (using
backward induction):
– Player 2 sends back nothing.
– Player 1 sends nothing.

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Trust Game played once

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 Twice Repeated Trust Game
John Dickhaut, Kevin McCabe et al. (2008) “Trust, Reciprocity, And
Interpersonal History: Fool Me Once, Shame on You, Fool Me Twice, Shame
on Me”.

• Pair of subjects play the trust game twice

• Players maintain same role as Player 1 (truster) or
Player 2 (trustee) in both periods of play
• At the end of period 1, Player 1 observes how
much Player 2 sent back (interpersonal history)
• Player 1 again receives $10 at beginning of each
round & decides again in period 2 how much to
send to Player 2 and how much to keep

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Period 1 Results – high levels of trust are reciprocated

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Period 2 Results – continued high levels of trust
– trust not reciprocated

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Period 2 Results  period 1 trustworthiness strategic
 Player 1 fooled into thinking it was genuine

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 Totals for Both Periods
• overall, only highest level of trust profitable

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