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.