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3 Chapter 1 Introduction Elinor Ostrom and James Walker I magine the following decision situation involving two individuals . Individual 1 is endowed with $10.00. She can keep the entire sum or send some part of the $10 to individual 2, an anonymous counterpart. Individual 1 knows that any money sent to individual 2 will later be tripled in value. Furthermore, individual 2 knows that he will have the option of sending back to individual 1 some part of the tripled sum of money, a sum determined by individual 2. Imagine that this game is to be played only once and that both individuals know that all decisions will remain completely anonymous . How might individual 1 go about making a decision in this situation? Based on motivations rooted only in pecuniary payoffs from the game, the noncooperative game-theoretic equilibrium is for individual 1 to send no money to individual 2. Individual 1 would reason, by backward induction, that individual 2 would have no incentive to send any money back. Thus, individual 1 would send no money to individual 2. On the other hand, there would be obvious gains to both players if individual 1 were to trust individual 2 to return an amount at least as great as the sum she sends him. The joint gains would be as much as three times the original endowment to individual 1. What types of decisions will individuals make when they actually encounter this one-way game of trust? (see chapter 3, this volume). Joyce Berg, John Dickhaut, and Kevin McCabe (1995) conducted just such a study. Using a one-shot decision setting with double-blind experimental procedures to ensure complete anonymity, these researchers find that thirty of thirty-two subjects in the role of individual 1 sent money to their counterparts (in the role of individual 2) 4 Trust and Reciprocity ($5.36, on average). Of the thirty subjects in the role of individual 2 who received funds, eighteen returned more than $1.00 ($4.66, on average ), and eleven sent more than the original amount allocated by their partners. Interestingly, on average, those who sent at least $5.00 received an average return in excess of the amount they sent; those who sent less than $5.00 received a negative net-average return. In other words, those individuals in the first position who trusted their counterparts more were more likely than those who were less trusting to leave the game with more wealth than they had entered with. In a follow-up study, Nancy Buchan, Rachel Croson, and Eric Johnson (1999) implement the experimental decision setting of Berg, Dickhaut , and McCabe (1995) in a cross-national design. They investigate the same game with 188 subjects from China, Japan, Korea, and the United States. They find no pure country effects in terms of the amount sent by subjects in the role of individual 1 (on average, 67 percent of the endowment) or in the amount returned (on average, 31 percent of the amount received). The researchers examine several other potential explanatory variables, in addition to country effects, including culture (based on survey data in which questions relate to an individual’s attitude toward group versus individual outcomes), social distance (manipulated experimentally), and communication (manipulated experimentally). Culture, in the form of subjects’ showing a greater orientation toward group outcomes, significantly and positively affects the amounts sent and returned.1 The opportunity to communicate information about one’s self and learn something about the other person with whom a subject is paired also had a positive effect on the amounts sent. Buchan, Croson, and Johnson find that “trusters prosper.” “Subjects who sent above-average amounts to their partners took home greater wealth than did subjects who sent only average amounts or less” (Buchan, Croson, and Johnson 1999, 22). In a third study, John Dickhaut and colleagues (1997) examine the impact of allowing individual 2 to build a reputation by adding a publicly announced second round to the basic structure of the first (Berg, Dickhaut, and McCabe) experiment, in which the individual continued to play with the same counterpart. According to standard noncooperative game theory, the existence of this second round should make no difference in the behavior of individuals in the first round. Dickhaut and colleagues wanted to ascertain whether individuals in the position of individual 2 would act even more trustworthy than those who had participated in the first study to assure those in the position of individual 1 that they could...

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