Monday, September 22, 2008

Building trust

A fundamental building block of a developed economy is trust. You need trust to make transactions happen, to enforce contracts, to create a banking system, to use money. So how can you create trust?

Ernesto Reuben, Paola Sapienza and Luigi Zingales address this question with an interesting experiment: person A has $50 and can send it to person B. If this happens, person B obtains $150 and can chose to send any amount back to person A. If A trusts B to send more that $50 back, A should send $50 to B. If not, no transaction happens. The twist in this classic game here is that people playing B play twice. Once without any information, and once knowing that A expects something in return.

They conclude that people behave in a more trustworthy manner when more is expected from them. This is an important result. It shows that people need to be constantly reminded what we expect from them. For example politicians, bankers, plumbers and teachers.


Vilfredo said...

Building trust is more complicated than just being told what is expected from you. You need to show with your repeated actions that you can be trusted. Think of central bank credibility. To do this properly in a laboratory setting, you need more than two rounds.

James D said...

yeah thats right, need a long time to build trust but when we get it, its more easy get another